Frontline Ltd. (NYSE/OSE: FRO) — FY2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone Q4 filing; the filing includes selected fourth-quarter market data but does not provide a complete Q4 income statement. Figures are in U.S. dollars unless stated otherwise. Financial statements use U.S. GAAP and reflect Frontline 2012 as the accounting acquirer in the November 2015 merger, limiting direct comparability with earlier periods.
Business context and results
Frontline owns, leases, charters and commercially manages crude-oil and product tankers. At year-end it reported 56 vessels across its fleet arrangements, approximately 11 million dwt, and 16 newbuildings under construction. Of 49 owned or leased-in vessels in its employment summary, 36 (73%) were exposed to the spot market.
| Metric | FY2016 | FY2015 |
|---|---|---|
| Operating revenues | $754.3 million | $458.9 million |
| Time charter equivalent revenue (non-GAAP) | $566.7 million | $342.8 million |
| Net operating income | $177.5 million | $287.2 million |
| Net income from continuing operations | $117.5 million | $255.4 million |
| Net income attributable to Frontline | $117.0 million | $154.6 million |
| Basic and diluted EPS attributable to Frontline | $0.75 | $1.29 |
| Net cash provided by operating activities | $286.0 million | $207.3 million |
Revenue increased 64.4%, principally reflecting a full year of the merged fleet and additional vessel deliveries; management also cited lower market rates as a partial offset. Net income attributable to Frontline fell about 24% year over year. The comparison is affected by 2015 merger accounting, discontinued dry-bulk operations and substantial 2015 gains on cancellation and sale of newbuilding contracts. TCE revenue is a non-GAAP measure and should be considered alongside reported revenue.
Operating expenses were $574.1 million, including $161.6 million of voyage expenses, $119.5 million of ship operating expenses, $67.8 million of charter hire, $141.0 million of depreciation and $61.7 million of vessel and capital-lease impairment. The company recorded $4.0 million provision for an uncollectible receivable. Interest expense was $56.7 million. The filing does not present a standalone Q4 profit or cash-flow figure in the supplied text.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $202.4 million, down from $264.5 million; restricted cash was $0.7 million. Cash included $49.6 million required under loan covenants and $26.0 million required under vessel-leasing arrangements.
- Total assets were $2.97 billion and total equity attributable to the company was $1.50 billion. The reported equity-to-assets ratio was 50.6%.
- Interest-bearing debt was $992.6 million, all floating rate; capital-lease obligations were $422.6 million. The reported debt-to-equity ratio was 0.9 and includes capital-lease obligations under the filing’s definition.
- Current assets were $383.6 million and current liabilities $182.7 million. The company reported compliance with its financial covenants at year-end.
- Operating cash flow of $286.0 million was offset by $396.8 million of investing outflow and $48.6 million of financing inflow, reducing cash by $62.1 million.
- Newbuilding commitments were $684.1 million, all scheduled for payment in 2017. Management said cash on hand and current and expected credit facilities should fund requirements for at least 12 months from the report date; it also disclosed committed financing for the year-end newbuilding program.
Material changes, outlook and risks
- Fleet and capital actions: The company delivered ten newbuildings during 2016, sold six MR tankers for $172.5 million and cancelled four VLCC newbuilding contracts, recording a $2.8 million cancellation loss. It raised $98.2 million net through a December share offering. A further two VLCC newbuildings were acquired in February 2017.
- Impairments and lease items: The $61.7 million impairment charge included $18.2 million on the six MR tankers sold and impairments on leased vessels, including $27.3 million for Front Century. Following that vessel’s lease termination in March 2017, Frontline expected a $20.3 million gain in Q1 2017. Contingent rental income of $18.6 million in 2016 reflected actual Ship Finance profit-share costs below the amount accrued in the merger-date lease valuation.
- Operating outlook: Management estimated 2017 daily total cash break-even TCE rates of approximately $22,300 for owned and leased VLCCs, $17,300 for Suezmaxes and $15,500 for Aframax/LR2 tankers. These estimates exclude capital expenditures and contingent rental expense. The filing gives no earnings or charter-rate guidance. It describes the tanker market as cyclical and volatile; Q4 2016 standard-route averages were $48,478/day for VLCCs, $24,053/day for Suezmaxes and $7,989/day for LR2 product tankers.
- Key risks: Spot-market exposure and volatile freight rates; vessel values and impairment risk; floating-rate debt and loan-to-value/covenant requirements; significant 2017 newbuilding cash needs; counterparty and charterer default; environmental, safety, piracy and sanctions risks; and customer concentration (two customers each generated at least 10% of FY2016 revenue).
- Other notable matters: A 1-percentage-point increase in LIBOR would raise annual interest expense by about $7.8 million, based on year-end debt net of swaps. Frontline did not qualify for the U.S. Section 883 shipping-income tax exemption for 2016 and estimated approximately $0.9 million of U.S. tax. Hemen owned about 48.4% of shares. After year-end, Frontline acquired 10.9 million DHT shares for $46.1 million and made two unsuccessful acquisition proposals to DHT.
- The company reported no material adverse effect expected from ordinary-course litigation and no unresolved SEC staff comments. Management and the auditor concluded that internal control over financial reporting was effective at year-end.
Investor verification priorities
- Reconcile the filing’s FY2016 dividend disclosures: it lists quarterly declared dividends of $0.40, $0.20, $0.10 and $0.15 per share, while selected financial data reports $1.05 per share declared.
- Review the full audited statements and notes for debt maturities, lease obligations, covenant headroom, and financing available for the $684.1 million of 2017 newbuilding commitments.
- Assess realized spot TCE rates against vessel-level operating, financing and lease costs, and test the sensitivity of cash generation to weaker tanker rates and lower vessel values.
- Check the assumptions behind the $61.7 million impairment charges, the remaining leased-vessel exposures and the expected $20.3 million Front Century termination gain.
- Verify post-year-end cash uses, including the DHT share purchases, newbuilding acquisitions, deliveries and dividends, and assess their effect on liquidity and leverage.
- Consider the merger-related comparability limits and the accounting/tax judgments, including goodwill of $225.3 million and the company’s PFIC and future Section 883 exemption assessments.