FRNT - Frontline 2012 Ltd. Second Quarter and Six Months 2013 Results

Highlights

• Frontline 2012 reports net income of $37.9 million and earnings per share of $0.18 for the second quarter of 2013. 

• Frontline 2012 reports net income of $33.1 million and earnings per share of $0.16 for the six months ended June 30, 2013. 

• Frontline 2012 received $94.0 million in April 2013 in connection with the cancellation of its second newbuilding contract (J0026) at Jinhaiwan and recorded a gain of $30.3 million. 

• Frontline 2012 cancels the third and fourth of its five newbuilding contracts at Jinhaiwan 

• Frontline 2012 received $50.6 million in August 2013 in connection with the cancellation of its third newbuilding contract (J0027) at Jinhaiwan and expects to record a gain of approximately $27.0 million in the third quarter. 

• Frontline 2012 entered into a heads of agreement (HOA) with Stolt-Nielsen Limited whereby Frontline 2012 will become a shareholder in Avance Gas Holding Ltd (AGHL) along with Stolt-Nielsen Gas Ltd. and Sungas Holdings Ltd.  

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 61 newbuilding contracts within the crude oil, product, liquefied petroleum gas and dry bulk 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 3.5 years operating in the spot and the period markets.

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

Second Quarter and Six Months 2013 Results  

Frontline 2012 announces net income of $37.9 million and earnings per share of $0.18 for the second quarter of 2013 compared with a net loss of $4.8 million and a net loss per share of $0.02 in the preceding quarter. Frontline 2012 recorded a gain of $30.3 million in the second quarter following the receipt of $94.0 million in April 2013 in connection with the cancellation of its second newbuilding contract at Jinhaiwan. The Company also recognized a gain of $8.5 million in the second quarter on the mark-to-market revaluation of interest rate swap agreements.

The average daily time charter equivalents ("TCEs") earned in the spot and period market in the second quarter by the Company's VLCCs and Suezmax tankers were $21,500 and $13,800, respectively, compared with $19,600 and $11,800, respectively, in the preceding quarter. The spot earnings for the Company's VLCC and Suezmax tankers were $17,900 and $13,800, respectively, compared with $14,900 and $11,800, respectively, in the preceding quarter.

Frontline 2012 announces net income of $33.1 million and earnings per share of $0.16 for the six months ended June 30, 2013 compared with net income of $8.4 million and net income per share of $0.08 in the six months ended June 30, 2012. Frontline 2012 recorded a gain of $30.3 million in the six months ended June 30, 2013 following the receipt of $94.0 million in April in connection with the cancellation of its second newbuilding contract at Jinhaiwan. The Company also recognized a gain of $7.7 million in the six months ended June 30, 2013 on the mark-to-market revaluation of certain swap agreements.

The average daily time charter equivalents ("TCEs") earned in the spot and period market in the six months ended June 30, 2013 by the Company's VLCCs and Suezmax tankers were $20,600 and $12,800, respectively, compared with $30,300 and $19,400, respectively, in the six months ended June 30, 2012. The spot earnings for the Company's VLCC and Suezmax tankers were $16,400 and $12,800, respectively, compared with $31,400 and $19,400, respectively, in the six months ended June 30, 2012.

The Company estimates average cash breakeven TCE rates for the remainder of 2013 for its VLCCs and Suezmax tankers of approximately $14,600 and $13,500, respectively.

Newbuilding Program

In April 2013, the Company received $94.0 million in refund in connection with the cancellation of its second newbuilding contract (J0026) at Jinhaiwan.

In April 2013, the Company cancelled the third of its five VLCC newbuilding contracts (hull J0027) at Jinhaiwan due to the excessive delay compared to the contractual delivery date and demanded payment from Jinhaiwan and the refund guarantee bank in respect of installments paid and accrued interest. This amount includes installments paid by Frontline Ltd. prior to the acquisition by the Company in December 2011, at which time the newbuilding contracts were valued at estimated fair value. The yard initiated arbitration proceedings on this matter. In July 2013, the arbitrator found in favor of the Company and declared that the yard should repay the installments paid together with interest. In August 2013, the Company received $50.6 million in connection with the cancellation of J0027 at Jinhaiwan and expects to record a gain of approximately $27.0 million in the third quarter.

In August 2013, the Company cancelled the fourth of its five VLCC newbuilding contracts (hull J0028) at Jinhaiwan due to the excessive delay compared to the contractual delivery date and demanded payment from Jinhaiwan in respect of installments paid and accrued interest. This amount includes installments paid by Frontline Ltd. prior to the acquisition by the Company in December 2011, at which time the newbuilding contracts were valued at estimated fair value.

The Company has cancelled four of the five newbuilding contracts at Jinhaiwan ship yard and has received a total refund of $144.6 million, where $44.9 million has been used to repay debt and $ 99.7 million is cash to the Company. Total  claims, where refund is not received is $146.9 million, where $44.9 million is allocated to repay debt and $102.0 million is cash to the Company.
As of June 30, 2013, the Company's newbuilding program totaled 60 vessels and comprised 22 newbuildings within the crude oil and petroleum product markets, 28 Capesize vessels, eight very large gas carriers or VLGCs and two VLCCs. Total installments of $381.3 million have been paid and the remaining installments to be paid amount to $2,478.5 million.
Since June 30, 2013 the Company has negotiated and concluded two newbuilding contracts and cancelled one VLCC (i.e. J0028). The Company's newbuilding program currently comprises 61 newbuildings. The total capital commitment is approximately $2,854 million of which approximately $2.5 billion is still to be paid.

The first MR tanker Front Arrow is expected to be delivered in the third quarter of 2013. This vessel has been fixed on a short term time charter for 60-90 days at just excess of USD 20,000 net per day basis delivery ex shipyard and the company aim to employ the balance on the vessels on similar charters. There will be approximately two months delay in delivery of the vessels from the original delivery schedule.

Frontline 2012 has eight newbuilding contracts with STX (Dalian) Shipbuilding Co., Ltd. and further six newbuildings with STX Offshore & Shipbuilding (Korea). STX Korea has subsequently subcontracted these vessels to STX Dalian. STX Dalian has encountered financial difficulties, and the progress in the construction is slow. The Company is following the situation closely and will make every effort to ensure that STX deliver the new buildings, which they are contractually committed to. There are however a risk that these newbuildings not will be delivered according to the contracts and that Frontline 2012 will need to take legal measures to be compensated for any loss caused by non or late delivery.

Corporate

In July 2013, a subsidiary of the Company entered into a $136.5 million term loan facility non recourse to the Company at attractive terms. The facility will be used to partially fund six MR newbuilding vessels to be delivered from STX Offshore & Shipbuilding Co., Ltd., Korea.

215,000,000 ordinary shares were outstanding as of June 30, 2013, and the weighted average number of shares outstanding for the quarter was 215,000,000.

In August 2013, Frontline 2012 entered into a heads of agreement ("HOA") with Stolt-Nielsen Limited whereby Frontline 2012 will become a shareholder in Avance Gas Holding Ltd ("AGHL") along with Stolt-Nielsen Gas Ltd. and Sungas Holdings Ltd.

As part of the HOA, Frontline 2012 and AGHL will enter into discussions regarding the purchase of eight 83,000 cbm VLGC newbuildings from Frontline 2012. The ships have been ordered by Frontline 2012 from the Jiangnan Changxing Shipyard in China, with deliveries expected to take place between mid 2014 and end 2015.

Frontline 2012 will initially purchase 37.5% of the shares in AGHL and subsequently dividend shares to Frontline 2012's shareholders. Frontline 2012 will following this directly own 25% of AGHL.

It is the partners' decision to immediately register AGHL on the OTC market in Norway.

The Market

Crude

The market rate for a VLCC trading on a standard "TD3" voyage between the Arabian Gulf and Japan in the second quarter of 2013 was WS 37, representing an increase of WS 2 points from the first quarter of 2013 and a decrease of approximately WS 18 points from the second quarter of 2012. The flat rate increased by 9.1 percent from 2012 to 2013.

The market rate for a Suezmax trading on a standard "TD5" voyage between West Africa and Philadelphia in the second quarter of 2013 was WS 54, representing a decrease of WS 3.5 points from the first quarter of 2013 and a decrease of WS 18 points from the second quarter of 2012. The flat rate increased by 9.3 percent from 2012 to 2013.

Bunkers at Fujairah averaged $614/mt in the second quarter of 2013 compared to $633/mt in the first quarter of 2013. Bunker prices varied between a high of $640/mt on April 2nd and a low of $597/mt on June 28th.

The International Energy Agency's ("IEA") August 2013 report stated an OPEC oil production, including Iraq, of 30.8 million barrels per day (mb/d) in the second quarter of 2013. This was an increase of 0.4 mb/d compared to the first quarter of 2013.

The IEA estimates that world oil demand averaged 90.4 mb/d in the second quarter of 2013, which is an increase of 0.5 mb/d compared to the previous quarter. IEA estimates that world oil demand in 2013 will be 90.8 mb/d, representing an increase of 1.0 percent or 0.9 mb/d from 2012.

The VLCC fleet totaled 639 vessels at the end of the second quarter of 2013, up from 634 vessels at the end of the previous quarter. 10 VLCCs were delivered during the quarter, five were removed. The order book counted 57 vessels at the end of the second quarter, down 10 from the previous quarter. The current order book represents nine percent of the VLCC fleet. According to Fearnleys, the single hull fleet is 15 vessels, two less than last quarter.

The Suezmax fleet totaled 448 vessels at the end of the second quarter, up from 442 vessels at the end of the previous quarter. Six vessels were delivered during the second quarter whilst none were removed. The order book counted 39 vessels at the end of the second quarter which represents approximately eight percent of the Suezmax fleet. According to Fearnley's, the single hull fleet stands unchanged at five vessels.
Product

The market rate for an MR trading on Standard "TC2" voyage between Rotterdam and New York in the second quarter of 2013 was WS 137, representing a decrease of WS23 from the first quarter of 2013 and an increase of WS5 from the second quarter of 2012. The flat rate increased by 9% from 2012 to 2013.

Bunkers in Rotterdam averaged $585/mt in the second quarter of 2013 compared to $618/mt in the first quarter of 2013. Bunker prices varied between a high of $615/mt on April 2nd and a low of $578/mt on June 28th.

The MR fleet totaled 1,491 vessels at the end of the second quarter of 2013, down from 1,493 vessels at the end of the previous quarter. The order book counted 143 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, unchanged from the previous quarter. The order book counted 11 vessels at the end of the first quarter, which represents approximately 5.2 percent of the LR2 fleet.

LPG

According to Fearnley's the monthly average VLGC time charter hire was $990,000 in the second quarter of 2013 compared to $375,000 in the first quarter.
The VLGC fleet (60,000+ Cbm) totaled 153 vessels at the end of the second quarter of 2013, an increase of five vessels from the previous quarter. The order book counted 23 vessels at the end of the second quarter, unchanged from the previous quarter, representing 15 percent of the VLGC fleet according to Platou.
Drybulk

According to the Baltic Exchange the average Capesize spot earnings in the second quarter of 2013 was $6,214/day compared to $6,056/day in the first quarter.

According to Chinese official data iron ore imports to China increased from 186 million tons in the first quarter to 200 million tons in the second quarter of 2013. The coal imports increased from 65 million tons to 69 million tons in the same period.

According to Fearnley's the Capesize fleet (150-200'dwt) totaled 1,034 vessels at the end of the second quarter of 2013, an increase of six vessels from the previous quarter. The revised order book counted 71 vessels at the end of the second quarter, compared with 100 vessels the previous quarter, representing 6.9 percent of the Capesize fleet.

Strategy and Outlook

Frontline 2012 operates a fleet consisting of six VLCCs and four Suezmax tankers and owns 61 newbuilding contracts. Due to this fleet composition, the Company has limited exposure to the current weak freight market. 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.

The value of the Company's newbuilding program increased in the second quarter of 2013 and the positive development has continued in the third 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 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 extensive ordering and will position Frontline 2012 favorably to industry competitors and offer shareholders an attractive future reward. In view of the perceived limited downside risk in asset prices, the Board will seek to optimize the Company's debt to equity level with the target to increase the equity return going forward.

The acquisition of shares in AGHL enables Frontline 2012 to expand its investment in the LPG segment where the Company today has eight 83,000 cbm VLGC newbuildings expected to be delivered between mid 2014 and end 2015. The Company will get immediate market exposure to what today is a healthy freight market. With AGHL's six existing modern VLGCs, a solid operation, and strong owners AGHL is well positioned to grow and act as a major consolidator in the large LPG market.

There are also signs of positive development in the cape size segment where the Company has 30 newbuildings, including eight vessels from STX Dalian, to be delivered in 2014 and 2015. This trend is mainly driven by increased supply of cheap iron ore from Brazil and Australia giving a positive ton mile effect.

As the Company develops and the ships come into operation, the Board targets a dividend strategy. The Board is also exploring alternatives to streamline the activities by breaking the company up in several new companies. This can include a dry bulk company, an LPG company and a crude/product company. One of the current ideas is to establish a low levered, high yielding dry bulk vehicle. The low ordering prices create a unique opportunity for such a vehicle. The Company will actively seek consolidation, as represented by the AGHL transaction.

The Company will selectively consider further ordering with a strong focus on early delivery time.

The Board is currently considering to raise another US$ 200 - 250 mill to partly finance the AGHL acquisition and secure capital for growth. Priority will in such case be given to existing shareholders. A final decision regarding this will be taken shortly.

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.

Forward Looking Statements

This press release contains forward looking statements. These statements are based upon various assumptions, many of which are based, in turn, upon further assumptions, including Frontline Ltd's management's examination of historical operating trends. Although Frontline Ltd believes that these assumptions were reasonable when made, because assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond its control, Frontline 2012 cannot give assurance that it will achieve or accomplish these expectations, beliefs or intentions.

Important factors that, in the Company's view, could cause actual results to differ materially from those discussed in this press release include the strength of world economies and currencies, general market conditions including fluctuations in charter hire rates and vessel values, changes in demand in the tanker market as a result of changes in OPEC's petroleum production levels and world wide oil consumption and storage, changes in the Company's operating expenses including bunker prices, dry-docking and insurance costs, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or political events, and other important factors described from time to time in the reports filed by the Company with the United States Securities and Exchange Commission.

The full report is available for download in the link enclosed.

The Board of Directors
Frontline 2012 Ltd.
Hamilton, Bermuda
September 3, 2013

Questions should be directed to:

Jens Martin Jensen: Chief Executive Officer, Frontline Management AS, [phone]

Inger M. Klemp: Chief Financial Officer, Frontline Management AS, [phone]

2nd Quarter 2013 Results

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Source: Frontline 2012 Ltd. via Thomson Reuters ONE

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