Frontline claims competitive breakeven costs

Dec 02 2016


Frontline Ltd generated net income of $5.5 mill in the third quarter of 2016, compared with $14.3 mill in the previous quarter.

Net income adjusted for certain non-cash charges was $16.6 mill for 3Q16. These non-cash charges consisted of a loss on the cancellation and sale of newbuildings and vessels of $2.7 mill, a vessel impairment loss of $8.9 mill relating to three vessels leased from Ship Finance, an impairment loss on shares of $0.3 mill, a mark to market gain on derivatives of $0.9 mill and a non-controlling interest expense of $0.1 mill.

Net income in the 2Q16 included a vessel impairment loss of $25.5 mill, an impairment loss on shares of $4.6 mill, a mark to market loss on derivatives of $4.2 mill and a non-controlling interest expense of $0.2 mill.

Total ship operating expenses of $30.8 mill in 3Q16 were $1.7 mill lower than the previous quarter primarily due to a $4 mill decrease in drydocking costs (no vessels were dry docked in the third quarter compared with two vessels in the prior quarter), which was partially offset by an increase in running costs. 

For the first nine months of this year, Frontline generated a net income $98.7 mill, compared with $96.1 mill in the same period of 2015. The net income adjusted for certain non-cash charges was $154.7 mill. These were a loss on the cancellation and sale of newbuildings and vessels of $2.7 mill, a vessel impairment loss of $34.4 mill, an impairment loss on shares of $7.2 mill, a mark to market loss on derivatives of $11.4 mill and a non-controlling interest expense of $0.4 mill.

Net income for the nine months of this year reflected the combined results of Frontline and Frontline 2012, while the net income for the nine months of 2015 related to Frontline 2012 only.

As of November, 2016, the company estimated that the average daily cash breakeven rates for the remainder of 2016 will be about $21,200, $17,300 and $15,300 for its owned and leased VLCCs, Suezmaxes and LR2s, respectively. Frontline claimed that these rates were highly competitive. 

Frontline secured bank financing of up to $870 mill to partially finance all of the company’s newbuilding contracts. Five of the six MRs, which the company had agreed to sell in June, 2016, were delivered to their buyer in the third quarter. The last vessel was delivered in November.

Robert Hvide Macleod, Frontline Management CEO, commented: “While the summer is typically a slower period in the tanker markets, seasonal weakness was more pronounced this year as supply disruptions, easing refinery margins and inventory drawdowns led to reduced oil flows and a slowdown in tanker demand. In addition, the global fleet expanded as newbuilding vessels were delivered from shipyards.

“We believe that our performance in the third quarter against this market backdrop, further highlights Frontline’s competitive position in the market and efficient operations. Frontline’s low cash breakeven rates, large commercial scale, and historically successful access to capital are significant differentiators that support our leading position in the tanker market,” he said.

CFO Inger Klemp, added: “We are pleased to have secured bank financing of up to $870 mill to partially finance all of the company’s 16 newbuilding contracts and the four vessels, which were delivered during the third quarter. We consider the terms achieved highly attractive, enabling us to maintain our low cash breakeven levels.”

Frontline claimed that it has a positive long term outlook on the tanker market, although it expects periods of market weakness as further newbuildings are delivered. There has been very limited ordering in 2016, a trend supported by the expected contraction in global shipyard capacity and the limited availability of capital to finance new orders. These factors were expected to lead to slippage in the current orderbook and in delivery delays. 

The company also believed that any prolonged period of market weakness will lead to vessel scrapping, as older vessels are increasingly difficult to operate and face more off hire and higher drydocking costs in order to pass special surveys. In addition, oil price contango may lead to older vessels being chartered to store crude oil on a permanent basis and not return to the trading market.

All factors considered, Frontline believed that the tanker market will begin to balance as vessels are absorbed into the global fleet and older vessels retire from trading. In the meantime, the company expects that periods of market weakness will inevitably create attractive opportunities to acquire assets at historically low prices.

In a conversation with analysts, Macleod said that the earnings in 3Q16 were healthy given the relatively weak market conditions during the quarter. “Our results underscore both the benefits of our low cash breakeven levels as well as Frontline's earnings potential,” he said.

 



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