Finance & Economy
6/6/2013

Frontline 2012 in the red


Highlights

  • Frontline 2012 reports a net loss of $4.8 million and a loss per share of $0.02 for the first quarter of 2013.
  • In January 2013, Frontline 2012 completed a private placement of 59 million new ordinary shares of $2.00 par value at a subscription price of $5.25, raising $310 million in gross proceeds.
  • In January 2013 the Company cancelled the second of its five newbuilding contracts at Jinhaiwan due to excessive delay and in April 2012 the Company received a refund of $94.0 million.
  • In April 2013, the Company cancelled the third of its five VLCC newbuilding contracts at Jinhaiwan due to the excessive delay.
  • As of today, the newbuilding program has increased to 58 newbuilding contracts within the crude oil, petroleum product, drybulk and Liquefied Petroleum Gas ("LPG") markets.

Introduction

Frontline 2012 Ltd. (the "Company" or "Frontline 2012") is a commodity shipping company incorporated in Bermuda on December 12, 2011, which as of today owns a total of ten crude oil tankers and 58 newbuilding contracts within the crude oil, petroleum product, drybulk and Liquefied Petroleum Gas ("LPG") markets.

The Company's sailing fleet is one of the youngest in the industry and currently consists of six very large crude carriers, or VLCCs, and four Suezmax tankers, with an average age of 3.3 years operating in the spot and the period markets.

The largest shareholder is Hemen Holding Ltd. ("Hemen") with a shareholding of approximately 51 percent.

First Quarter 2013 Results

Frontline 2012 announces a net loss of $4.8 million and a loss per share of $0.02 for the first quarter of 2013 compared with net income of $0.7 million and earnings per share of $0.0046 for the fourth quarter of 2012.

The average daily time charter equivalents ("TCEs") earned in the spot and period market in the first quarter by the Company's VLCCs and Suezmax tankers were $19,600 and $11,800, respectively, compared with $25,700 and $12,400, respectively, in the preceding quarter. The spot earnings for the Company's VLCCs and Suezmax vessels were $14,900 and $11,800 respectively, compared with $24,100 and $12,400 respectively, in the preceding quarter.

As of March 31, 2013, the Company had cash and cash equivalents of $297.0 million compared with $132.7 million as of December 31, 2012. The Company raised $306.7 million (net) from the private placement in January, used $42.8 million in investment activities and repaid bank borrowings of $43.2 million. The Company also used $56.3 million in cash in operating activities primarily due to the reclassification of $63.6 million regarding the second cancelled newbuilding contract from newbuildings to short term claim receivable.

The Company estimates average total cash cost breakeven rates for the remainder of 2013 on a TCE basis for its VLCCs and Suezmax tankers of approximately $16,700 and $13,700, respectively.

Newbuilding Program

In January and April 2013, the Company cancelled the second and third of the five VLCC newbuilding contracts at Jinhaiwan ship yard (hulls J0026 and J0027) due to excessive delay. The Company's claims against the yard are secured with refund guarantees from some of Chinas five largest banks.

In April 2013, the Company received a refund of $94.0 million representing installments paid and accrued interest for the cancellation of hull J0026. $44.9 million of the refund was used to repay debt associated with the newbuilding. The Company's balance sheet carried an amount of $63.6 million in Newbuildings at December 31, 2012 in respect of hull J0026 and expects to record a gain of approximately $30.4 million in the second quarter of 2013.

As of March 31, 2013 , the Company's newbuilding program totaled 53 vessels and comprised 18 newbuildings within the crude oil and petroleum product markets, 24 Capesize vessels, eight very large gas carriers or VLGCs and three VLCCs. Total installments of $349.0 million have been paid and the remaining installments to be paid amount to $2,249.0 million.

As of March 31, 2013, the Company had $300.6 million in net debt and a further $2,249.0 million in remaining installments under its new building program.

Since March 31, 2013 the Company has negotiated and concluded additional newbuilding contracts and cancelled one additional VLCC. As of today the total firm newbuilding program comprises 58 vessels. The total capital commitment is $2,768 million.

The Company also holds fixed price options for newbuilding contracts declarable in the coming months. The Company has in addition entered into specific discussions with existingandnew yard relations with the target to increase the newbuilding orderbook further. The Board has so far targeted new buildings with deliveries in 2014 and 2015.

Frontline 2012 has 14 newbuilding contracts with STX (Dalian) Shipbuilding Co., Ltd., which has encountered financial difficulties, and we are following the situation closely. Frontline 2012 will make every effort to ensure that STX Offshore & Shipbuilding Co., Ltd. and STX (Dalian) Shipbuilding Co., Ltd deliver the new buildings, which they are contractually committed to. The delivery of six of these vessels has a contractual commitment from STX Offshore & Shipbuilding Co., Ltd., Korea in addition to STX (Dalian) Shipbuilding Co., Ltd.

Corporate

215,000,000 ordinary shares were outstanding as of March 31, 2013, and the weighted average number of shares outstanding for the quarter was 208,444,445.

In January 2013, Frontline 2012 completed a private placement of 59 million new ordinary shares of $2.00 par value at a subscription price of $5.25, raising $309.8 million in gross proceeds. The proceeds from the private placement will be used to part finance new building investments.

In March 2013, the Company prepaid bank debt equal to ordinary loan amortization for 2013 in exchange for amendments to the loan-to-value clauses in three of the Company's loan agreements

In April 2013, the Board of Frontline 2012 Ltd appointed Carl Erik Steen as a Director to fill a vacancy on the Board.

Mr Steen graduated in 1975 from ETH Zurich Switzerland with a M.Sc. in Industrial and Management Engineering. He then worked as a consultant in various Norwegian companies before joining I.M. Skaugen as a Director in 1978.  In 1983, Mr Steen moved to Christiana Bank Luxembourg and in 1987 returned to Norway to establish the international shipping desk of Christiania Bank. In 1992, Mr. Steen was appointed Executive Vice-President with the responsibility of Christiania Bank's Shipping, Offshore and International activities.  From January 2001 until February 2011, Mr Steen was head of Nordea Bank's Shipping, Oil Services & International Division.  Mr Steen is also a board member of Eitzen Chemical ASA, Wilhelm Wilhelmsen Holding ASA, RS Platou ASA and Seadrill Limited.

The Market

Crude

The market rate for a VLCC trading on a standard 'TD3' voyage between the Arabian Gulf and Japan in the first quarter of 2013 was WS 35, representing a decrease of approximately WS 7.8 point from the fourth quarter of 2012 and a decrease of approximately WS 21 points from the first quarter of 2012. The flat rate increased by 9.1% from 2012 to 2013.

The market rate for a Suezmax trading on a standard 'TD5' voyage between West Africa and Philadelphia in the first quarter of 2013 was WS 57.5, representing a decrease of three WS points from the fourth quarter of 2012 and a decrease of WS 25 points from the first quarter of 2012. The flat rate increased by 9.3% from 2012 to 2013.

Bunkers at Fujairah averaged $633/mt in the first quarter of 2013 compared to $615/mt in the fourth quarter of 2012. Bunker prices varied between a low of $606/mt on January 2nd and a high of $663/mt on February 18th.

The International Energy Agency's ("IEA") May 2013 report stated an OPEC oil production, including Iraq, of 30.5 million barrels per day (mb/d) in Q1. This was a decrease of 0.4 mb/d compared to the fourth quarter of 2012. 

The IEA estimates that world oil demand averaged 89.8 mb/d in the first quarter of 2013, which is a decrease of 1.2 mb/d compared to the previous quarter. IEA estimates that world oil demand in 2013 will be 90.6 mb/d, representing an increase of 0.9 percent or 0.8 mb/d from 2012.

The VLCC fleet totalled 634 vessels at the end of the first quarter of 2013, up from 622 vessels at the end of the previous quarter. 14 VLCCs were delivered during the quarter, two were removed. The order book counted 81 vessels at the end of the first quarter, unchanged from the previous quarter. The current order book represents approximately 13 percent of the VLCC fleet. According to Fearnleys, the single hull fleet is 15 vessels, two less than last quarter.

The Suezmax fleet totaled 480 vessels at the end of the first quarter, up from 468 vessels at the end of the previous quarter. 14 vessels were delivered during the first quarter whilst two were removed. The order book counted 54 vessels at the end of the first quarter which represents approximately 11 percent of the Suezmax fleet. According to Fearnley's, the single hull fleet stands unchanged at five vessels.

Product

According to IEA, gasoline is expected to lead non-OECD demand growth over the next years. In 2012, strong gasoline-led non-OECD demand and contraction in OECD caused a shift in distribution of products. Gasoil which has in earlier years risen faster than any other product was overtaken by gasoline in 2012, a trend that may be replicated in 2013. Near recessionary conditions in many OECD nations combined with relatively subdued non-OECD gasoil demand, led to global gasoil demand growing less than previous years.

The two regional markets with the highest dieselization rates in the transportation sector were also those who performed worst economically, Europe and OECD Asia Oceania. This factor, coupled, with the clear preference for gasoline in still thriving Chinese and Saudi Arabian transportation sector, boosted gasoline demand to such a degree that it outpaced gasoil. This trend is forecast to hold in 2013.

Total worldwide oil stocks decreased by 8.1mb during the first quarter of 2013. On a forward basis, OECD product stocks cover 31.2 days

The MR fleet totaled 1,524 vessels at the end of the first quarter of 2013, up from 1,513 vessels at the end of the previous quarter. The order book counted 149 vessels at the end of the first quarter, which represents approximately ten percent of the MR fleet.

The LR2 fleet totaled 212 vessels at the end of the first quarter of 2013, down from 217 vessels at the end of the previous quarter. The order book counted 13 vessels at the end of the first quarter, which represents approximately 6.1 percent of the LR2 fleet.

LPG

The beginning of 2013 saw an increase of LPG and Ethane demand of 2.75 percent compared to the same period in 2012. Q1 2013 spot rates have been impacted by a reduction in OPEC crude oil production, which influences the LPG production in the Middle East. Throughout 2012, VLGCs trading in the Western Hemisphere commanded an earnings premium compared to the Eastern Hemisphere according to BRS. Recently we have seen an increase in monthly earnings.

Traditionally naphtha has dominated the global petrochemical industry, but IEA is forecasting a degree of substitution to LPG, particularly in North America. LPG saw its market share increase from 7 to 9 percent from 2000 to 2010. Through to 2018, LPG's market share is forecast to rise further on the back of low-priced and plentiful US supplies, which has spurred a revival on the North American petrochemical sector. In the coming period the US dominates the supply side, while China and the Middle East dominate the demand side.

The VLGC fleet (60,000+ Cbm) totaled 148 vessels at the end of the first quarter of 2013, an increase of three vessels from the previous quarter. The order book counted 24 vessels at the end of the first quarter, up from 23 vessels the previous quarter, representing 16.2 percent of the VLGC fleet according to Platou.

Drybulk

The dry bulk market showed few signs of recovery during the first quarter of 2013. The smaller sizes performed better than the Capesize segment also in absolute terms for most of the quarter. A Capesize earned on average $6,015 per day according to the Baltic Dry Index, which did not cover operating expenses for many owners.

The Capesize segment has underperformed mainly due to that iron ore exports out of Brazil have been low. There is a strong correlation between the Brazilian iron ore export and the Cape size spot market due to the long sailing distances. In addition, Fortescue delayed their ramp up of production in Australia from March until May 2013 and Colombian coal exports were almost 70 million metric ton lower on an annualized basis, partly due to strikes during first quarter of 2013.

The dry bulk market is increasingly dependent on the development of the Chinese economy. During 2012 the Chinese iron ore and coal imports in combination increased more than 12 percent, while preliminary data show an increase of about six percent for the first quarter of 2013. Historically the first quarter is the slowest quarter of the year, which is mainly due to adverse weather in the Southern Hemisphere.

Development in international coal and iron ore prices will have a great impact on the dry bulk market going forward. Presently there is a positive arbitrage both for steel producers and utilities compared to domestic Chinese iron ore and coal. With new iron ore capacity from Australia, Brazil and West Africa coming on stream the next three years and poorer quality of Chinese domestic iron ore, it is expected that imports of iron ore to China will increase.

According to Fearnley's the Capesize fleet (150-200'dwt) totaled 1,028 vessels at the end of the first quarter of 2013, an increase of 6 vessels from the previous quarter. The order book counted 98 vessels at the end of the first quarter, compared with 94 vessels the previous quarter, representing 9.5 percent of the Capesize fleet.

Strategy and Outlook

The Board is of the opinion that several of the shipping markets are massively oversupplied today and that it may take some time before a reasonable market balance is restored. The Board believes that such a market balance will be dependent on the extent of phase out of existing tonnage as well as global growth conditions.

The freight market continues to show weakness, however, there is a clear indication that we have reached a level where rates are unlikely to decrease further.

The Board is getting increasingly confident  about the development in the LPG segment where the Company has eight newbuildings to be delivered in approximately the next 2 years. This market appears well balanced and there are clear signs that positive developments have started. This trend is driven by increased LPG production as well as new trading patterns mainly driven by development in the US.

Frontline 2012's target is to build the leading global commodity shipping company within three years and position the Company for an anticipated recovery of the shipping markets in the next 2 to 3 years. In order to achieve this, the Company follows a strategy of aggressive growth through the placement of large orders for new efficient tonnage at historically low prices with the main focus on tankers and dry bulk carriers.

The Board is confident that the historically low contracting cost and the significant fuel efficiency of the new tonnage materially reduces the risk of the Company's aggressive ordering and will position Frontline 2012 favorably to industry competitors and offer shareholders an attractive future reward.

The value of the Company's newbuilding program increased in the first quarter of 2013 and the positive development has continued in the second quarter. This is in line with the Company's expectation that newbuilding prices are likely to firm up before the freight market. The Board believes there is currently additional value in the newbuildings compared to contract price.

The Board will in view of the limited downside risk endeavor to optimize the Company's debt to equity level with the target to increase the equity return going forward. This includes aggressive use of debt and yard financing.

The Company will seek a listing in New York within 8 to 14 months. As the Company develops, the Board targets a dividend strategy, and a refinement of the fleet profile through sale of assets or spin offs.

Frontline 2012 operates a fleet consisting of 6 VLCCs and 4 Suezmax tankers and owns 58 newbuilding contracts. Due to the composition of Frontline 2012, the Company has limited exposure to the current weak freight market and the major factors driving the shareholder value currently is the development in the newbuilding prices which shows a positive trend and the recovery of the freight markets at the time the new buildings are delivered.
 The major part of the fleet will be delivered in 2014 and 2015, when it is expected that freight market will have strengthened somewhat and thereby creating better operating economics. Due to the low ordering prices and high fuel efficiency of our new buildings Frontline 2012 will have significant lower long term capital cost and better operating economics than the majority of our main competitors. 

The Company has received financing proposals for the MR tankers to be delivered this year and expects financing to be completed within the next couple of months. Debt per vessel, margin and other terms are in line with or better than originally anticipated.

The Board is confident that the current remaining newbuilding commitment can be financed through a combination of cash, debt and only a limited new equity need, if any at all.

The Board is pleased with the execution of the Company's strategic plan, and looks optimistically on the opportunity to create solid return to our shareholders over the next three to five years.

Finance & Economy

Top Ships announced that its Board of Directors has determined to effect a 1-for-7 reverse stock split of the Company's common stock. The Company's share holders approved the reverse stock split and granted the Board the authority to determine the exact split ratio and proceed with the reverse stock split at the Company's special meeting of shareholders held on February 24,2014.

Dynagas LNG Partners LP, an owner and operator of LNG carriers, today announced that it has entered into a new 13-year time-charter contract with Gazprom Marketing & Trading Singapore Pte. Ltd for the Clean Force, a fully winterized, 149,700 cbm Ice Class LNG carrier built in 2008.
Shipping companies are turning to equity markets to fill a growing funding gap, betting that investors hungry for decent returns will provide capital to a sector recovering from its worst downturn since the 1980s. Ship owners ordered large numbers of vessels between 2007 and 2009, just as the global economy sank into crisis. Prospects have brightened in recent months as world trade picks up and the ship glut is absorbed.

PACC Offshore Services Holdings (POSH) could raise at least S$388.27 million ($311 million) after pricing its initial public offering near the bottom of the pricing range indicated earlier, the company said on Thursday.




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