Frontline Optimistic Despite Lower Income

John Fredriksen-controlled tanker owner and operator Frontline ended the first quarter of 2017 with a net income of USD 27 million, significantly lower from the net income of USD 78.9 million seen a year earlier.

The company’s total operating revenues for the quarter reached USD 177.1 million, decreasing from USD 227.1 million reported in the same period of the previous year.

“Notwithstanding near-term pressure on crude tanker rates, we believe the market will ultimately return to balance as demand for crude oil continues to increase and vessel scrapping will begin to offset the negative effect of newbuilding deliveries,” Robert Hvide Macleod, Chief Executive Officer of Frontline Management AS, said.

“The recent market weakness and other factors have contributed to a historically low asset price environment that has presented us with opportunities to acquire modern tonnage at attractive prices,” he added.

Namely, during the quarter the company acquired two VLCC resales delivering September and October 2017 from Korean Daewoo Shipbuilding and Marine Engineering (DSME) at USD 77.5 million net per vessel.

Additionally, the owner ordered two VLCC newbuildings scheduled to be delivered during December 2018 and April 2019 and obtained options for two additional sister vessels scheduled to be delivered during August and November 2019 from Hyundai Heavy Industries at USD 79.8 million per vessel.

“Frontline’s continued ability to access attractively priced capital is indicative of the financial strength of our platform as well as our deep relationships within the lending community,” Inger M. Klemp, Chief Financial Officer of Frontline Management AS, said, adding that the company secured financing for the newly acquired four VLCC resales and newbuilding contracts in an amount of up to USD 221 million.

The financing carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years, which supports Frontline’s low cash break-even levels.

Frontline said it believes that the market will begin to improve in 2018 as the pace of deliveries of newbuilding vessels slows and vessels are retired from the global fleet.

“We expect vessel scrapping to begin to pick up as we progress through 2017, particularly in light of the implementation of the ballast water treatment convention later this year and given the amount of older vintage tonnage,” Frontline said.

The company added that some vessels may also be dry docked ahead of the implementation date of the convention in order to defer the cost of compliance, which may have the effect of temporarily removing supply from the market.