Frontline Management Discusses Q2 2012 Results - Earnings Call Transcript

Frontline (FRO)

Q2 2012 Earnings Call

August 29, 2012 9:00 am ET

Executives

Jens Martin Jensen - Chief Executive Officer of Frontline Management As

Inger M. Klemp - Chief Financial Officer and Chief Financial Officer of Frontline Management AS

Analysts

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Fotis Giannakoulis - Morgan Stanley, Research Division

Herman Hildan - RS Platou Markets AS, Research Division

Joshua Katzeff - Deutsche Bank AG, Research Division

Michael Webber - Wells Fargo Securities, LLC, Research Division

Martin Korsvold - Pareto Securities AS, Research Division

David E. Beard - Iberia Capital Partners, Research Division

Randy Laufman - Imperial Capital, LLC, Research Division

Presentation

Operator

Good day, and welcome to the Frontline Q2 2012 Results Presentation Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to CEO, Mr. Jens Martin Jensen. Please go ahead, sir.

Jens Martin Jensen

Thank you. Good morning, good afternoon, and welcome to our Q2 2012 presentation. We will follow our usual program for the presentation with Inger going through the second quarter highlights and main transactions, financial review of the quarter and a brief update of our newbuilding program. After that, I will follow up with some market comments on what we saw in the second quarter and update on where we think the market is at present.

So Inger, if you could start, please.

Inger M. Klemp

Thank you and good morning and good afternoon, ladies and gentlemen. As Jens said, I will guide you through the highlights and the financial review in the second quarter of 2012 and so far into the third quarter.

I would then ask you to move to Slide 4, highlights and transactions. The chartered-in VLCC Hampstead was redelivered on April 22, 2012. And on May 29, 2012, Frontline was allocated 3,546,000 shares in a private placement in Frontline 2012. That was a total placement of the 6 million [indiscernible] shares at subscription price of $3.75 per share. And following this private placement, the company has an ownership of 7.9% in Frontline 2012.

In June 2012, Frontline terminated a long-term charter party for the OBO carrier Front Rider. The charter party terminated July 22, and the company paid a cash compensation to Ship Finance of $400,000 for the early termination of the charter.

The transaction will reduce obligations under capital leases by $2.4 million, and we recorded an impairment loss of $4.9 million in the second quarter of 2012.

In August 2012, Frontline terminated a long-term charter party for the OBO carrier Front Climber. The charter party is expected to terminate late September 2012. The company will make a cash compensation to Ship Finance of approximately $600,000 for the early termination of the charter. The transaction will reduce obligations under capital leases by $1.7 million, and we recorded an impairment loss of $4.2 million in the second quarter of 2012.

Then I would like you to move to Slide 5, financial highlights. Frontline reports net loss, excluding vessel impairment losses of $11.2 million, equivalent to a loss per share of $0.14 in the second quarter 2012. Frontline has recorded a vessel impairment loss of $13.1 million in the 3- and 6-month period ended June 30. That is equivalent to a loss per share of $0.17. This loss relates to the 3 OBO vessels: the Front Rider, with $4.9 million; the Front Climber, with $4.2 million; and the Front Driver with $4 million. The losses relating to Front Driver -- sorry, Rider and Climber are the expected losses on the termination of the long-term charter parties in July and September, respectively.

Impairment losses are taken when events or changes in circumstances occur that cause the company to believe that future cash flows for an individual vessel will be less than the carrying value and not fully recordable. In such instances, an impairment charge is recognized if the estimate of the undiscounted cash flow is expected to result from the use of the vessel and its eventual disposition is less than the vessel's carrying amount.

The net loss, including the vessel impairment loss, was $24.3 million, equivalent to loss per share of $0.31. Frontline announces a net loss, excluding vessel impairment loss, of $4 million for the 6 months ended June 30, equivalent to loss per share of $0.05. The net loss, including vessel impairment loss, was $17 million -- $17.3 million for the 6-month period ended June 30, equivalent to loss per share of $0.22. Frontline will not pay dividends for the second quarter.

Then I would like you to move to Slide 6, income statement. Net loss excluding gains and losses in the second quarter of 2012 is about $5 million weaker than in the first quarter of 2012. This decrease can mainly be explained by some items. First, income on time charter basis was about $1 million better in the second quarter than it was in the first quarter due to an increase of time charter equivalent rates per day in the second quarter. That was partially offset by a reduction in on high days due to recent stays and lease terminations. Cash sweep expense increased about $3 million this quarter compared with the first quarter due to the increase in time charter equivalents per day in the second quarter. Then ship operating expenses increased by almost $6 million compared with the first quarter, primarily as a result of an increase in drydocking cost of $7.3 million, which was partially offset by a decrease in running cost.

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