Tanker company Frontline generated net inc[ds_preview]ome of 5.5 mill. $ in the third quarter compared with net income attributable to the Company of 14.3 mill. $ in the previous quarter.
Net income attributable to the company adjusted for certain non-cash charges was 16.6 mill. $ for the third quarter of 2016. These non – cash charges consisted of a loss on the cancellation and sale of newbuildings and vessels of 2.7 mill. $, a vessel impairment loss of 8.9 mill. $ relating to three vessels leased from Ship Finance, an impairment loss on shares of 0.3 mill. $, a mark to market gain on derivatives of 0.9 mill. $ and a non – controlling interest expense of 0.1 mill. $.
Total ship operating expenses of 30.8 mill. $ in the third quarter were 1.7 mill. $ lower than the previous quarter primarily due to a $4.0 mill. $ decrease in dry docking costs, which was partially offset by an increase in running costs.
»Seasonal weakness was more pronounced this year«
Robert Hvide Macleod, CEO of Frontline Management, commented: »While the summer is typically a slower period in the tanker markets, seasonal weakness was more pronounced this year as supply disruptions, easing refinery margins and inventory drawdowns led to reduced oil flows and a slowdown in tanker demand. In addition, the global fleet expanded as newbuilding vessels were delivered from shipyards. We believe that our performance in the third quarter against this market backdrop, further highlights Frontline‘s competitive position in the market and efficient operations. Frontline‘s low cash breakeven rates, large commercial scale, and historically successful access to capital are significant differentiators that support our leading position in the tanker market.«
As of September 30, 2016, the Company’s newbuilding program comprised three VLCCs (excluding four cancelled STX vessels), six Suezmax tankers and seven LR2 tanker newbuildings. Total instalments of $ 208.1 mill. $ had been paid in respect of these newbuildings and the remaining commitments amounted to 760.4 mill. $ with 76.3 mill. $ payable in 2016 and $ 684.1 mill. $ payable in 2017. All 16 vessels are expected to be delivered in 2017.
CFO Inger M. Klemp: »We are pleased to have secured bank financing of up to 870 mill. $ to partially finance all of the Company‘s 16 newbuilding contracts and the four vessels which were delivered during the third quarter. We consider the terms achieved highly attractive, enabling us to maintain our low cash breakeven levels.«
In November 2016, the Company secured a commitment for a senior secured term loan facility in an amount of up to 321.6 mill. $. The facility will be provided by China Exim Bank and will be insured by China Export and Credit Insurance Corporation. The facility matures in 2033, carries an interest rate of LIBOR plus a margin in line with Frontline’s existing loan facilities and has an amortization profile of 15 years. This facility will be used to partially finance eight of the newbuildings and will be secured by four Suezmax tankers and four LR2 tankers. Including this facility, Frontline has secured bank financing in a total amount of up to 870 mill. $ to partially finance all of the Company’s 16 newbuilding contracts and four vessels that were delivered during the quarter.
Frontline expects market to balance
The Company has a positive long term outlook on the tanker market, although it expects periods of market weakness as further newbuildings are delivered. There has been very limited ordering in 2016, a trend supported by the expected contraction in global shipyard capacity and the limited availability of capital to finance new orders. Frontline expects these factors to lead to slippage in the current orderbook and in delivery delays. The company also believes that any prolonged period of market weakness will lead to vessel scrapping as older vessels are increasingly difficult to operate and face more off hire and higher dry docking costs in order to pass special surveys . Additionally, oil price contango may lead to older vessels being chartered to store crude oil on a permanent basis and not return to the trading market.
All factors considered the company believes the tanker market will begin to balance as vessels are absorbed into the global fleet and older vessels retire from trading. In the meantime, Frontline expects that periods of market weakness will inevitably create attractive opportunities to acquire assets at historically low prices. The company sees itself in a unique position to grow its operating fleet and continue to generate substantial returns to its shareholders in a strong tanker market and healthy returns in a more muted market.
