Weak TCEs hit Frontline’s bottom line

Nov 24 2017

Frontline has reported a net loss of $24.1 mill for the third quarter of 2017, compared with a net loss of $19.4 mill in the second quarter.

The loss was primarily due to the weak average daily spot TCE earnings and a $5.8 mill loss on the termination of the charter of ‘Front Ardenne’.


The adjusted net loss was $23.1 mill for 3Q17, compared to $14.2 mill in 2Q17. These non-cash items consisted of a loss on the termination of the long-term charter of ‘Front Ardenne’, net of termination payment due, of $1.2 mill, and a gain on derivatives of $0.2 mill.


Total ship operating expenses of $34.2 mill in the period were $3.4 mill lower than in the second quarter, primarily due to the drydocking of four vessels in 2Q17.


For the first nine months of this year, Frontline generated a net loss of $16.4 mill, compared with a net income of $98.7 mill in the same period of 2016. The adjusted net loss was $9.4 mill, compared with a net income of $154.4 mill during the same period last year.


These non-cash items consisted of a vessel impairment loss of $21.2 mill on four vessels leased from Ship Finance, a net loss on derivatives of $3.1 mill, a loss on the termination of the long-term charters of ‘Front Scilla’, ‘Front Brabant’ and ‘Front Ardenne’ net of termination payment due, of $3.3 mill, offset by a gain on the termination of the long-term charter of ‘Front Century’ of $20.6 mill.


As of November, 2017, Frontline estimated that the average daily cash breakeven rates for the remainder of 2017 will be around $21,600, $17,700 and $15,700 for its owned and leased VLCCs, Suezmaxes and LR2/Aframaxes, respectively. The said that it believed these rates to be highly competitive.


Growth in crude tanker tonne/mile demand is forecast to remain strong, the company said, due to increasing underlying demand for crude oil from areas that are geographically apart from incremental sources of supply. In addition, global crude inventories are declining after reaching peak levels last year and the oil market is showing signs of recalibrating.


However, the current crude oil tanker rate environment does not presently reflect that strong demand. This is mainly due to the increases in the size of the global crude oil tanker fleet over the last two years, which is expected to continue into next year.


There has been some new contracting activity this year, including vessels ordered by Frontline, but orders are limited and have been placed by large, industrial owners as part of organic fleet renewal programmes. It is important to remember that over 20% of the crude oil tanker fleet is nearing scrapping age, the company stressed.


The longer the current market conditions persist, the greater the likelihood that owners will scrap vessels, particularly if the alternative is an impending costly drydocking. Older vessels are also more difficult to charter at attractive rates, as many charterers and terminal operators place age restrictions on the vessels.


Frontline said it had a positive long-term view of the market, believing the market is at the bottom of the cycle, and this is reflected in rates and asset prices.


Since the start of 2016, Frontline has grown its fleet on water by around 2.5 mill dwt and as a result, lowered the average age for the fleet from 8.1 years to 5.4 years. This has also had the effect of reducing average daily vessel operating expenses and cash breakeven rates.


Robert Hvide Macleod, Frontline Management CEO, commented: “The impact of the significant fleet growth over the last two years was felt across the industry and is reflected in our results for the third quarter. Indeed, the rate environment presented in the quarter was the weakest we have experienced since 2013.


“During this time, we showed commercial discipline by not accepting unreasonably low offers from charterers. This resulted in extended waiting time, particularly on our VLCC's, and impacted our average TCE earnings. We continue to take proactive steps to increase the earnings potential of our fleet, as demonstrated by reducing the average age of our fleet from 8.1 to 5.4 years since 2016.


“We believe we are well positioned to continue to execute our strategy over a long term horizon with the goal of returning value to shareholders,” he said.


CFO Inger Klemp, added: “Frontline is proactively focused on establishing and maintaining low cash break-even rates, as we grow our fleet and the financing of our current newbuilding programme has been completed on terms which support Frontline's low cash break-even levels.”


Later, in a conference call to analysts, Macleod said that the global market for crude oil tankers remains too fragmented and needs to be consolidated.

He also said that the market for crude tankers would remain weak until the second half of 2018.


“The tanker market is highly fragmented with many owners who have one or two vessels,” Macleod said. “It would be good to see the fleet sitting in fewer hands.”


He explained that limited financing options for small shipowners, as well as more stringent environmental regulations, could be catalysts for consolidation.


While demand for oil transportation is rising as winter approaches in the northern hemisphere, the outlook remains bleak for the early months of next year, as more newbuildings are expected to be delivered.


More than 20% of the VLCC fleet could be recycled in coming years, however, as their age and inefficient fuel consumption make them obsolete. “We expect vessel scrapping to accelerate through 2018,” Macleod said. “It is the scrapping that will determine the longer term outlook for tankers.”


The rise in oil prices, which have more than doubled since early 2016, was also seen as positive for the sector. “It’s a real sign that demand for oil is strong, we can have confidence in demand growing,” he said. “We’ll be very well positioned when the market recovers.”  

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