Frontline Ltd. — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; the filing provides selected Q4 market data but does not provide a clear standalone Q4 income statement or cash flow.
Business context
Frontline is a Bermuda-based crude-oil tanker owner and operator. At year-end, its operating fleet comprised 33 VLCC and Suezmax vessels, including vessels owned through subsidiary ITCL; it also had two Suezmax newbuildings on order. The fleet was heavily exposed to spot rates: 27 vessels, or 82% of the fleet, were employed in the spot market or pools. The statements are prepared under U.S. GAAP and reported in U.S. dollars.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total operating revenue | $517.2 million | $578.4 million |
| Time charter equivalent revenue | $191.7 million | $282.7 million |
| Operating loss | $100.4 million | Operating income of $18.9 million |
| Net loss attributable to Frontline | $188.5 million | $82.8 million |
| Basic loss per share attributable to Frontline | $2.36 | $1.06 |
| Net cash from (used in) operating activities | $(42.7) million | $68.6 million |
| Cash and cash equivalents at year-end | $53.8 million | $137.6 million |
| Total assets | $1,367.6 million | $1,688.2 million |
| Equity attributable to Frontline | $(27.0) million | $119.7 million |
Voyage expenses and commissions rose 11.1% to $299.7 million, while ship operating expenses fell 7.2% to $109.9 million. Depreciation was $99.8 million. The company recorded vessel impairment losses of $103.7 million, versus $4.7 million in continuing operations in 2012 (2012 also included $27.3 million in discontinued operations).
At December 31, 2013, the balance sheet included $459.1 million of debt, $789.3 million of capital-lease obligations at present value, and $78.6 million of related-party notes payable. The filing separately describes $1.058 billion of debt and lease obligations excluding non-recourse ITCL debt. Restricted cash and investments were $68.4 million, much of it held in ITCL and subject to restrictions. The company reported no outstanding bank debt following its restructuring, but retained convertible bonds and other debt obligations.
Changes versus the prior year
- Revenue declined 10.6%; TCE revenue fell 32.2%, reflecting weaker VLCC market rates, vessel redeliveries, increased off-hire and waiting days, and changes in fleet deployment.
- Frontline moved from operating income to a $100.4 million operating loss. Net loss attributable to Frontline more than doubled, with the 2013 impairment charge and $12.7 million debt-conversion expense among the significant items.
- Operating cash flow fell from $68.6 million provided to $42.7 million used. Management attributed part of the 2013 cash use to $52.2 million of contingent rental expense paid in the year.
- Cash fell by $83.8 million. Frontline raised $6.2 million gross through its ATM offering in 2013 and issued shares in a convertible-bond exchange. The share count increased to 86.5 million at year-end.
- Frontline terminated leases for two high-charter-rate VLCCs, recording $88.1 million of impairment and a $13.8 million net gain on lease termination. A $89.9 million termination payment was agreed; the unpaid balance was recorded as notes payable.
- The final OBO lease ended in March 2013, and OBO results were presented as discontinued operations.
Outlook, risks and contingencies
- Management reported improving tanker rates from the second half of 2013 through February 2014 and expected the supply-demand balance to improve, while warning that this could be reversed by faster ballast speeds, lower scrapping or renewed newbuilding orders. Q4 2013 benchmark rates were higher year over year for both VLCCs and Suezmax tankers.
- In March 2014, management estimated average 2014 total cash-cost breakeven rates of about $24,700 per day for VLCCs and $17,700 for Suezmax tankers. These estimates exclude capital expenditures. No formal earnings or dividend guidance is provided.
- Frontline had $87.9 million of remaining commitments for two Suezmax newbuildings, expected to be paid in 2014, and intended to use cash, operating cash flow and bank financing. Management warned that unavailable financing could impair its ability to meet obligations.
- The $190 million convertible bond matures in April 2015. The filing warns that, if operating cash flow and financing alternatives are insufficient, Frontline may be unable to repay it and could be forced to restructure. The company expanded its ATM authorization to $100 million in January 2014; by the report date it had raised about $40.8 million gross in 2014.
- Three cancelled VLCC newbuilding contracts transferred to Frontline 2012 remained in arbitration. Frontline had given guarantees relating to those contracts but recorded no liability, stating it did not expect to make payments; Frontline 2012 agreed to indemnify it.
- Other key exposures include volatile spot charter rates and vessel values, potential further impairment, lease and financing commitments, related-party transactions, environmental and operational liabilities, and possible dilution from equity issuance. Frontline paid no dividend in 2013 and had not paid one since Q3 2011.
Most important facts for investors to verify
- Whether the recent rate improvement translated into sustained vessel earnings and operating cash flow, against the stated cash-cost breakeven rates.
- Funding for the $87.9 million newbuilding installments and repayment or refinancing of the $190 million convertible bond due April 2015.
- The scale and terms of ATM share issuance after year-end, including dilution and actual net proceeds.
- The assumptions behind vessel impairment tests and the potential effect of lower charter-rate assumptions; management disclosed materially higher hypothetical impairment under shorter trailing-average rates.
- Final outcomes of the newbuilding-contract arbitration and any potential guarantee exposure, as well as payments due under the Ship Finance lease terminations.
- Availability of unrestricted liquidity, given the year-end cash balance, restricted ITCL cash, negative equity attributable to Frontline, and substantial lease and debt obligations.