Frontline sees major weakening in tanker market in H2

Frontline

Norway’s Frontline, one of the biggest international independent tanker groups, expects a major deterioration in the tanker market in the remaining half of the year, compared with the first half, it said Wednesday.

Posting second-quarter results, the company said the softer global tanker market led to its Q2 net profit slumping to $14.3 million from $78.9 million in the first quarter.

“The spot market is currently at a 24-month low, and although we expect the rate environment to improve from current levels, the second half of 2016 will be significantly weaker than the first half of the year,” Frontline CEO Robert Hvide Macleod said in a statement.

“In the second quarter the tanker market experienced a downward pressure on rates which has continued into the third quarter,” Macleod added.

While these quarters are seasonally weaker, the tanker market was also hit by crude oil supply disruptions in the Atlantic basin, high levels of crude inventories, 13 vessels delivering from the newbuild fleet and easing congestion in ports around the world, Macleod said.

Macleod said Frontline’s scale, strong shareholder base and cost-effective operations positioned it well in the difficult market, with CFO Inger Klemp indicating the group had sound financial resources to ride out the market.

Klemp said the company had secured bank financing of up to $548 million and was in the final stages of obtaining approval for further bank financing of up to $325 million.

She said this new financing would partly finance 20 of Frontline’s newbuild contracts at highly attractive terms, with the group maintaining its very low cash break-even levels.

As of June 30, 2016, the company’s fleet consisted of 82 vessels, including newbuilds, with an aggregate capacity of approximately 15 million dwt. The newbuild program comprised eight LR2 tankers, eight VLCCs and eight Suezmax tanker newbuildings.

Almost 100 VLCCs were still to be delivered over the next two years and this was expected to put pressure on the tanker market.

Frontline said there had been a notable absence of new orders placed in 2016 and it expected constraints in debt financing would continue to restrict newbuild orders, perhaps leading to a stronger market further out in the cycle.

“Shipyards are also under pressure to restructure, and a reduction of capacity at several yards is expected,” Frontline said. “Periods of market weakness, like we are currently experiencing, may also encourage scrapping of older tonnage, a factor which has been virtually absent for the last two years.”

[platts]

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