Frontline Ltd. — 2020 Form 20-F Summary
Business context and reporting period
This is Frontline Ltd.’s annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter filing. Frontline is a Bermuda-incorporated tanker operator, listed on the NYSE and Oslo Stock Exchange as FRO. Its fleet at year-end comprised 68 vessels, including 60 owned vessels, two VLCCs under finance leases, two VLCCs chartered in, and four vessels under commercial management. Most owned and leased-in vessels were exposed to spot or short-term/variable-rate employment.
Financial performance and liquidity
| Metric (US$ unless stated) | 2020 | 2019 |
|---|---|---|
| Operating revenue | $1,221.2 million | $957.3 million |
| Time charter equivalent revenue (non-GAAP) | $840.7 million | $527.4 million |
| Net operating income | $507.8 million | $239.5 million |
| Net income attributable to Frontline | $412.9 million | $140.0 million |
| Basic / diluted EPS | $2.11 / $2.09 | $0.81 / $0.78 |
| Net cash from operating activities | $604.1 million | $280.2 million |
| Cash and cash equivalents at year-end | $174.7 million | $174.2 million |
| Total assets / total equity | $3,918.2 million / $1,611.6 million | $3,697.8 million / $1,510.2 million |
Revenue increased 27.6%, while TCE revenue increased approximately 59.4%. Net operating income was approximately 41.6% of revenue in 2020, compared with 25.0% in 2019 (calculated from reported figures; the filing does not present these as reported margins). Voyage expenses and commissions declined to $353.1 million from $395.5 million, while ship operating expenses rose to $183.1 million from $157.0 million. Interest expense fell to $72.2 million from $94.5 million.
Cash used in investing activities was $716.0 million, principally reflecting the $533.8 million cash payment for the Trafigura acquisition and vessel/newbuilding expenditure. Financing activities provided $124.2 million, including debt drawdowns, offset in part by $312.4 million of cash dividends paid and debt repayments. Cash, cash equivalents and restricted cash totaled $189.6 million at year-end, including $14.9 million of restricted cash.
Reported debt was $2,156.2 million, and obligations under finance leases were $56.3 million. The company reported a 41.1% equity-to-assets ratio and 1.4 debt-to-equity ratio; its definition of the latter includes finance-lease obligations. Current assets were $378.3 million and current liabilities $281.4 million. The filing also identifies $103.5 million of cash held to meet loan covenant cash requirements; this amount is included in cash and cash equivalents and is not the same as restricted cash.
Material changes versus 2019
- Higher tanker rates, changes in fleet size and mix, and the acquisition of ten 2019-built Suezmax tankers contributed to stronger revenue and operating cash flow. The Trafigura acquisition closed on March 16, 2020, for $538.2 million in cash plus 16,035,856 shares issued in 2019.
- Net income increased to $412.9 million from $140.0 million. Other operating gains rose to $29.9 million from $3.4 million and included gains on the sale of a vessel ($12.4 million), sale of SeaTeam ($6.9 million), and termination of a vessel lease ($7.4 million).
- Depreciation increased to $138.8 million from $117.9 million, in part due to acquired and delivered vessels. Contingent rental expense was $14.6 million, compared with $2.6 million of contingent rental income in 2019.
- Total debt increased from $1,701.3 million to $2,156.2 million, including financing related to the Trafigura transaction. The company refinanced several facilities during 2020 and reported compliance with all financial covenants at year-end.
- The company declared $0.70 per share for 2020’s first quarter and $0.50 for its second quarter; it declared no dividend for the third or fourth quarter. The $1.60 per-share figure in selected financial data includes the $0.40 dividend for 2019’s fourth quarter, declared in February 2020.
Outlook, risks, contingencies and unusual items
- Management described tanker markets as volatile and said COVID-19 contributed to lower tanker rates in the fourth quarter of 2020 after an initial rise early in the year. Crew-rotation restrictions, off-hire, deviations and related costs also affected operations. Management said it was too early to assess the pandemic’s full impact.
- The filing cites an IEA estimate that world oil demand would recover to 96.6 million barrels per day in 2021, up 5.5 million barrels per day from 2020. This is an industry forecast, not company guidance. Management expects continued rate volatility in the near term.
- Management stated that cash on hand, available borrowings and operating cash flows should be sufficient for requirements for at least twelve months from the report date. Four LR2 newbuildings remained in the program, with $142.4 million of commitments expected to be paid in 2021; one was delivered in March 2021, one was expected in April, and two in September.
- At year-end, 56 of 64 owned, leased or chartered-in vessels were in the spot market or on short-term/variable-rate charters. This exposes results and cash generation to freight-rate changes. Other major risks include oil demand and trade-pattern shifts, vessel oversupply and values, customer or counterparty defaults, fuel and operating costs, environmental requirements, geopolitical disruption, sanctions, cyber risk, and access to financing.
- Variable-rate debt exposure, net of swaps, was $1,504.9 million; the filing estimates that a one-percentage-point increase in annual LIBOR would raise annual interest expense by approximately $15.0 million, before interest capitalization. The company also faces the transition from LIBOR to alternative rates.
- Vessel impairment testing found no impairment, but Frontline estimated that the aggregate carrying value of certain vessels exceeded their charter-free market value by approximately $449.1 million. Goodwill was $112.5 million; the impairment assessment depended on management’s control-premium assumptions. The auditor identified goodwill impairment and long-lived-asset impairment assessments as critical audit matters.
- Other exposures include a $50.0 million guarantee connected with a TFG Marine bunker-supply arrangement, a separate maximum pro-rata guarantee exposure of $6.0 million, and approximately $4.4 million of guarantees for assigned property leases. Management stated that no amounts were payable under the TFG guarantees at year-end and did not expect payments under the property-lease guarantees. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether subsequent tanker rates, utilization and charter renewals support the earnings and cash-flow levels reported for 2020, particularly given the fleet’s spot-market exposure.
- The availability of cash after covenant requirements and other restrictions, and the funding plan for 2021 newbuilding commitments, debt maturities and ongoing capital needs.
- The terms and economic substance of the Trafigura acquisition financing and sale-and-leaseback, including associated debt, charter commitments and profit-sharing arrangements.
- The sensitivity of vessel and goodwill valuations to lower charter rates, vessel prices or control-premium assumptions; no vessel or goodwill impairment was recorded at year-end.
- The board’s future dividend decisions. The stated policy does not guarantee distributions, and the filing notes that dividends are discretionary and may be constrained by financing terms and Bermuda law.
- Related-party arrangements and governance, including Hemen’s approximately 40% shareholding and its affiliate’s revolving facility; the filing also discloses director affiliations with other Hemen-related companies.