Frontline Ltd. — FY2018 Form 20-F
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a quarterly filing; the supplied text does not provide a clear standalone fourth-quarter financial result.
Business context
Frontline owns, leases, charters and commercially manages crude-oil and product tankers. At year-end, its fleet comprised 61 vessels with approximately 11.6 million dwt, including owned and leased vessels and vessels under commercial management. The company reported one operating segment: tankers. Its business is highly exposed to volatile tanker freight rates, with 50 of its 51 owned, leased or chartered-in vessels employed in the spot market or on short-term or variable-rate charters.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total operating revenue | $742.3 million | $646.3 million |
| Time-charter-equivalent revenue (non-GAAP) | $339.2 million | $365.1 million |
| Net operating income (loss) | $82.7 million | $(196.3) million |
| Net loss attributable to Frontline | $(8.9) million | $(264.9) million |
| Basic and diluted loss per share | $(0.05) | $(1.56) |
| Cash provided by operating activities | $46.2 million | $130.5 million |
| Cash and cash equivalents | $66.5 million | $104.1 million |
| Total debt | $1.741 billion | $1.592 billion |
Operating income was approximately 11.1% of revenue in FY2018 (calculated). The company’s reported debt-to-equity ratio was 1.6, a measure that includes capital lease obligations. Total equity was $1.164 billion and total assets were $3.078 billion at year-end. Current assets of $308.2 million exceeded current liabilities of $214.2 million.
Changes versus the prior comparable period
- Revenue rose 14.8%, while TCE revenue fell approximately 7.1%. Voyage charter revenue increased as vessels moved from time charters to voyage charters and new vessels entered service; voyage expenses rose 45.7%, reflecting the larger voyage-charter exposure, fleet additions and higher bunker prices.
- Operating results improved from a large loss to operating income. FY2017 included $164.2 million of vessel impairments and a $112.8 million goodwill impairment; neither impairment was recorded in FY2018.
- Despite the operating improvement, Frontline remained loss-making, and interest expense increased 33.6% to $93.3 million, partly due to additional borrowings, higher LIBOR and reduced capitalization of newbuilding interest.
- Operating cash flow decreased to $46.2 million from $130.5 million. Investing outflows moderated to $199.2 million from $722.5 million, largely reflecting lower newbuilding and vessel spending.
- The company declared no dividends in 2018, compared with $0.30 per share declared in 2017.
Outlook, risks and notable items
- Management expected cash on hand and current and expected credit facilities to be sufficient for at least 12 months from the report date. It estimated 2019 daily cash break-even TCE rates, excluding capital expenditures and contingent rental expense, of approximately $24,400 for VLCCs, $19,900 for Suezmax tankers and $16,700 for LR2/Aframax tankers.
- Management cited projected growth in 2019 oil demand and expected volatility around the IMO’s 0.5% sulfur-fuel rules taking effect in 2020. The filing also notes substantial tanker fleet deliveries scheduled for 2019, which could weigh on rates if supply outpaces demand.
- Liquidity and refinancing risks remain important: debt was $1.741 billion, and $37.9 million of cash was held to meet loan covenant requirements. The company said it was compliant with financial covenants at year-end. A 1 percentage-point increase in LIBOR was estimated to add about $13.5 million to annual interest expense, before interest capitalization.
- Capital commitments included $114.4 million for two VLCC newbuildings, plus vessel-upgrade commitments for exhaust-gas cleaning and ballast-water treatment systems. One newbuilding was delivered in January 2019; the other was expected in April 2019.
- ASC 606 was adopted in 2018 using the modified retrospective method. The filing reports a $16.6 million reduction to opening retained earnings and states that the standard reduced FY2018 net income by $8.85 million versus the former accounting treatment; prior-year comparatives were not restated.
- Frontline terminated six Ship Finance vessel leases during 2018, reducing capital-lease obligations and generating a net reported gain on lease terminations of $10.3 million. Some termination compensation was recorded as interest-bearing notes at 7.5%.
- Related-party matters warrant attention: Hemen, indirectly controlled by trusts established by the chairman, owned approximately 48.4% of shares and is affiliated with a $275 million unsecured credit facility. Six Frontline vessels made six port calls in Iran during 2018; the company stated it believed it complied with applicable sanctions.
Important facts for investors to verify
- Review the audited financial statements and notes for the ASC 606 transition, its effect on reported FY2018 results, and comparability with FY2017.
- Assess spot-rate exposure against the disclosed break-even rates, and monitor tanker supply, bunker costs and the 2020 sulfur-fuel transition.
- Check debt maturities, available committed facilities, covenant headroom and the sensitivity of interest expense to LIBOR.
- Confirm funding and installation costs for newbuildings, exhaust-gas cleaning systems and ballast-water treatment; the filing identifies 18 vessels as not compliant with updated ballast-water guidelines at year-end.
- Evaluate related-party financing and governance risks, including Hemen’s shareholding and the terms of the credit facility.
- Consider the board’s discretion over future dividends; the filing gives no assurance that dividends will resume.