Frontline Reports Strongest 3Q

 

* Frontline achieved net income attributable to the Company of $17.4 million, or $0.09 per share, for the third quarter of 2015 and net income attributable to the Company of $65.9 million, or $0.42 per share, for the nine months ended September 30, 2015.
 * The long-term charters for the 1995-built Suezmax tankers, Front Glory and Front Splendour, were terminated in September and October, respectively.  The Company received compensation payments of $2.2 million and $1.3 million, respectively, for the termination of the charters.
 * In November, the Company agreed to terminate the long-term charter for the 1998-built Suezmax tanker, Mindanao.  The charter is expected to terminate in the fourth quarter of 2015.  The Company expects to receive a compensation payment of approximately $3.3 million for the termination of the charter.
 * In July 2015, the Company and Frontline 2012 Ltd entered into an agreement and plan of merger. Shareholder meetings of each of Frontline and Frontline 2012 will be held on November 30, 2015 to vote to approve the Merger Agreement.
 * Assuming shareholder approval and completion of the merger, the Board of Directors of Frontline has recommended implementing a dividend strategy to distribute quarterly dividends to shareholders equal to or close to EPS adjusted for non recurring items. The timing and amount of dividends is at the discretion of the Board of Directors. The first dividend for the merged company is expected to be declared and paid in December 2015.
 * November 23, 2015 Frontline entered into an agreement to purchase two 157,500 dwt Suezmax tanker newbuilding contracts from Golden Ocean Group Limited at a purchase price of $55 million per vessel. The newbuilding contracts are with New Times Shipbuilding Co. Ltd. in China and the vessels are expected to be delivered in the first quarter of 2017.
 
Robert Hvide Macleod, Chief Executive Officer of Frontline Management AS commented, "We are very pleased to report our strongest third quarter since 2008 with net income attributable to the Company of $17.4 million, or $0.09 per share.

"The strength of the tanker market was driven primarily by high demand for low priced oil, a dynamic which continued from the second quarter. The high demand for oil has led to congestion in key ports around the world, which creates more demand for tanker vessels.  Also of note, ballast speeds increased during the third quarter, returning to normal levels.  We believe that this is a strong sign that capacity is being absorbed.  Indeed, current fleet utilization is at levels not seen since 2009.

"The average daily time charter equivalents ("TCEs") earned through a combination of spot and time charters in the third quarter by the Company's VLCCs and Suezmax tankers were $45,600 and $28,100, respectively. Several of our tankers were fixed for positioning voyages in the third quarter, which reduced average TCEs.  The positioning voyages were made to strategically position the vessels ahead of the fourth quarter, which in the past has yielded seasonally higher rates.

"For our vessels employed in the spot market, we have covered 80% of our VLCC operating days in the fourth quarter at TCE rates of approximately $68,500 and 88% of our Suezmax operating days at TCE rates of approximately $42,500.  Rates for vessels on time charters are naturally at lower levels than those that can be achieved on a spot basis in this strong market." 

Fleet Development

As of September 30, 2015, Frontline's fleet consisted of 14 VLCC and eight Suezmax tankers with an aggregate carrying capacity of 5.4 million dwt.  Of these, two Suezmax tankers are owned by the Company and the remaining 20 vessels are chartered in from third parties. Additionally, the Company has 6 VLCCs, eight Suezmax tankers, 10 LR2 Aframax tankers, and 15 MR2 Handysize tankers under commercial management.

The majority of the Company's leased vessels are leased from Ship Finance International Ltd. ("Ship Finance") under long term charter agreements.  In June 2015, the Company and Ship Finance agreed to amend the long term charter agreements on 12 VLCCs and five Suezmaxes for the remaining average charter period of 7.7 years.  Under the new agreement, which took effect July 1, 2015, the daily time charter rates for VLCCs and Suezmaxes were decreased to $20,000 and $15,000, respectively.  Daily operating expenses payable by Ship Finance for all vessels were increased from $6,500 to $9,000.  In connection with the decrease in daily time charter rates and the increase in daily operating expenses, the Company and Ship Finance agreed to revise the profit split above the daily time charter rates to 50%/50%, and 55 million shares of Frontline were issued to Ship Finance. Please refer to Form 6-K filed by the Company with the Securities and Exchange Commission on June 1, 2015 for further details on the amended charter structure.

In August 2015, the Company agreed with Ship Finance to terminate the long term charter for the 1995-built Suezmax tanker Front Glory. The charter with Ship Finance terminated in September. The Company received a compensation payment of $2.2 million from Ship Finance for the termination of the charter.

In September 2015, the Company agreed with Ship Finance to terminate the long term charter for the 1995-built Suezmax tanker Front Splendour, which has surveys due at the end of this year. The charter with Ship Finance terminated in October. The Company received a compensation payment of $1.3 million from Ship Finance for the termination of the charter.

In November 2015, the Company agreed with Ship Finance to terminate the long term charter for the 1998-built Suezmax tanker Mindanao. The charter with Ship Finance is expected to terminate in the fourth quarter of 2015. The Company will receive a compensation payment of approximately $3.3 million from Ship Finance for the termination of the charter.

After giving effect to these terminations, the vessels on charter from Ship Finance will be reduced to 12 VLCCs and two Suezmax tankers.

November 23, 2015 Frontline entered into an agreement to purchase two 157,500 dwt Suezmax tanker newbuilding contracts from Golden Ocean Group Limited at a purchase price of $55 million per vessel. The newbuilding contracts are with New Times Shipbuilding Co. Ltd. in China and the vessels are expected to be delivered in the first quarter of 2017.

The Market

World oil supply currently is at its highest level ever at nearly 97 million barrels per day.  This, along with a strong demand for inexpensive crude oil, has led to the tanker fleet surpassing 85% utilization, the highest level seen in many years and a sign of a healthy market, assuming continuation of these levels of demand.  Increasing eastbound cargoes and new refinery projects in Asia are keeping tonne miles high, a trend the Company believes will continue.  Additionally, forced storage of oil on tankers due to a high supply of cargoes is contributing to a strong market.

The average rate for VLCCs trading on a standard 'TD3' voyage between the Arabian Gulf and Japan in the third quarter of 2015 was WS 55, or a daily time charter equivalents ("TCEs") of $58,002, and the average rate for a Suezmax trading on a standard 'TD20' voyage between West Africa and Rotterdam in the third quarter of 2015 was WS 73, or a TCE of $35,274. These average rates were slightly lower than the rates in the previous quarter.

The VLCC fleet totalled 645 vessels at the end of the quarter, and the Suezmax fleet totalled 450 vessels.  The order book for tankers represents approximately 17% of the tanker fleet, although a relatively small portion of the order book is expected to be delivered within the next six to twelve months.  Given the strength of the market, only a limited amount of scrapping activity has occurred.

Corporate update

On July 2, 2015, Frontline and Frontline 2012 Ltd. ("Frontline 2012") announced that they have entered into an agreement and plan of merger (the "Merger Agreement"), pursuant to which the two companies have agreed to enter into a merger transaction, with Frontline 2012 becoming a wholly-owned subsidiary of Frontline. Frontline filed a registration statement with the United States Securities and Exchange Commission ("SEC") on August 24, 2015 covering the common shares to be issued by Frontline to Frontline 2012's shareholders in the merger.  The registration statement was declared effective by the SEC on November 9, 2015. The shareholders' meetings of each of Frontline and Frontline 2012 are scheduled to be held November 30, 2015. Assuming approval by the shareholders of Frontline and Frontline 2012, the transaction will be accounted for as a business combination using the acquisition method of accounting under the provisions of ASC 805, with Frontline 2012 selected as the accounting acquirer under this guidance.

Third Quarter and Nine Months 2015 Results 
 
The Company generated net income attributable to the Company of $17.4 million, or $0.09 per share, in the third quarter, compared with net income attributable to the Company of $17.4 million, or $0.11 per share, for the previous quarter. The Company recorded a gain of $1.8 million in the third quarter from the termination of the lease for the Front Glory.

The TCEs earned in the spot and period market in the third quarter by the Company's VLCCs and Suezmax tankers were $45,600 and $28,100, respectively, compared with $50,600 and $33,800 in the previous quarter. The spot earnings for the Company's VLCCs and Suezmax vessels were $49,100 and $28,700, respectively compared with $53,600 and $38,000 in the preceding quarter.

Total operating expenses in the third quarter were in line with the previous quarter. Dry docking costs fell by $2.2 million compared with the previous quarter.  Two vessels were dry docked in the third quarter compared with four in the previous quarter.

Contingent rental expense represents amounts accrued following changes to the charter parties related to the four vessels leased from German limited partnerships and the vessels leased from Ship Finance. Contingent rental expense in the third quarter includes $16.6 million attributable to the amended lease agreements with Ship Finance, which took effect on July 1, 2015.

Net income attributable to the Company was $65.9 million, or $0.42 per share, for the nine months ended September 30, 2015. The average daily TCEs earned by the Company's VLCCs and Suezmax tankers in the spot and period market in the nine months ended September 30, 2015 were $48,500 and $31,700, respectively, compared with $23,800 and $19,300, respectively, in the nine months ended September 30, 2014. The spot earnings for the Company's VLCCs and Suezmax vessels were $51,600 and $34,000, respectively, in the nine months ended September 30, 2015 compared with $23,000 and $19,700, respectively, in the nine months ended September 30, 2014.

The Company estimates that average daily total cash cost breakeven rates for the remainder of 2015 will be approximately $27,700 and $22,100 for the Company's VLCCs and Suezmax tankers, respectively.

Strategy and Outlook

The shareholders' meetings of each of Frontline and Frontline 2012 to vote on the announced Merger Agreement are scheduled to be held on November 30, 2015.

Assuming shareholder approval and completion of the merger, Frontline together with its subsidiary Frontline 2012 (together, the "Surviving Company") will have a fleet of approximately 90 vessels, including vessels on commercial management, vessels on time charter in and newbuildings due for delivery in the next 24 months.  With a large modern fleet, a strong balance sheet and attractive cash break even rates, the Company believes that the Surviving Company should be equally well positioned to generate significant free cash in a strong market and to sustain a weak market.  The Company believes the Surviving Company will be well positioned to grow through acquisition and consolidation opportunities.

Assuming shareholder approval and completion of the merger, the Board of Directors of Frontline has recommended implementing a dividend strategy to distribute quarterly dividends to shareholders equal to or close to EPS adjusted for non recurring items. The timing and amount of dividends is at the discretion of the Board of Directors. The first dividend for the merged company is expected to be declared and paid in December 2015.