Frontline Ltd. — FY 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; separate Q4 results are not clearly provided. Figures are in U.S. dollars unless stated otherwise.
Business context
Frontline owns, leases, charters and commercially manages crude-oil and product tankers, principally VLCCs, Suezmax and LR2/Aframax vessels. At year-end, its fleet comprised 63 owned, leased or chartered-in vessels, plus seven commercially managed vessels, with approximately 13.5 million dwt of capacity. The business is highly exposed to volatile tanker freight rates: 54 of the 63 operating vessels were in the spot market and two were on market-related time charters.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total operating revenue | $957.3 million | $742.3 million |
| Time charter equivalent revenue (non-GAAP) | $527.4 million | $339.2 million |
| Net operating income | $239.5 million | $82.7 million |
| Net income (loss) attributable to Frontline | $140.0 million | $(8.9) million |
| Basic / diluted EPS | $0.81 / $0.78 | $(0.05) / $(0.05) |
| Net cash from operating activities | $280.2 million | $46.2 million |
| Cash and cash equivalents at year-end | $174.2 million | $66.5 million |
| Total debt, including finance leases | $2,053.3 million | $1,830.6 million |
Revenue increased 29.0%; TCE revenue rose about 55%. The filing attributes the improvement mainly to stronger tanker rates, fleet changes and newbuild deliveries. Voyage expenses and commissions increased 4.7% to $395.5 million; ship operating expenses increased 20.2% to $157.0 million, largely reflecting nine drydockings versus one in 2018 and a larger fleet. Interest expense was $94.5 million, broadly level with 2018; a $10.1 million loss on interest-rate swaps also weighed on results. No vessel or goodwill impairment was recorded in 2019, compared with substantial impairments in 2017.
Net operating margin was approximately 25.0% and net margin approximately 14.6%, calculated from reported operating income and revenue, and net income attributable to Frontline and revenue, respectively. TCE is a non-GAAP measure and should be considered alongside GAAP revenue.
Balance sheet, liquidity and capital commitments
- Total assets were $3.70 billion and equity attributable to Frontline was $1.51 billion. The reported equity-to-assets ratio was 40.8%; the debt-to-equity ratio, including finance leases, was 1.4.
- Year-end current liabilities were $848.1 million against current assets of $448.5 million; reported net current liabilities were $399.6 million. Current debt included a $309.6 million balloon payment due in December 2020. Management expected to refinance it and stated that available cash, facilities and operating cash flows would cover at least the next 12 months.
- Debt outstanding was $1.70 billion, in addition to $359.9 million of finance-lease obligations. Most borrowings were floating-rate. The company was in compliance with its loan covenants at year-end; vessel-value declines could trigger collateral or repayment requirements.
- Operating cash flow was $280.2 million, investing cash outflow $190.6 million and financing cash inflow $19.9 million. Investing outflows principally funded vessels, newbuildings and equipment. Financing included $146.0 million of debt drawdowns and $98.4 million net proceeds from share issuance, offset by $185.3 million of debt repayments and $19.7 million of dividends.
- Six newbuildings carried $302.0 million of remaining commitments, including $159.6 million expected in 2020. Additional year-end commitments included $8.3 million for exhaust-gas cleaning systems and $2.9 million for ballast-water systems, excluding installation costs.
Material changes and unusual items
- The 2019 improvement reflected higher market rates: company-cited average benchmark daily TCE rates increased year over year for VLCCs ($39,400 versus $18,800), Suezmax tankers ($25,100 versus $11,000) and LR2 tankers ($18,800 versus $9,000). These are market estimates, not Frontline’s realized fleet-wide rates.
- Frontline issued 11.0 million shares through its ATM program for $98.4 million net proceeds and issued 16.0 million shares to Trafigura as acquisition consideration. The Trafigura shares were valued at approximately $127.0 million at grant date.
- The Trafigura agreement covered ten 2019-built Suezmax tankers, with $538.2 million cash consideration at closing. The acquisition closed on March 16, 2020 and was financed in part by a subsequent sale-and-leaseback facility of up to $544.0 million. Five vessels were chartered back to Trafigura for three years at a base rate of $28,400 per day plus 50% profit share.
- The Front Altair suffered an explosion in June 2019. Its crew was unharmed; repairs were completed in November. Frontline reported $2.3 million of repair and related costs, expected to be recovered under insurance, and $3.7 million of loss-of-hire insurance recovery. The company said the event did not materially affect results or cash flows.
- Frontline declared a $0.10-per-share dividend for Q3 2019 and announced a $0.40-per-share Q4 dividend in February 2020. Dividends remain discretionary and subject to financial, legal and contractual restrictions.
- ASC 842 lease accounting was adopted in 2019 without a material operating-expense impact. Prior periods were not restated for ASC 606, which affected 2018 revenue and loss comparability; the filing reports a $16.6 million opening retained-deficit adjustment on adoption.
Outlook, risks and contingencies
Management described the tanker market as volatile and forecast continued volatility. Its discussion cited expected 2020 oil-demand growth and potential market support from IMO-2020 fuel rules, while also noting substantial scheduled tanker deliveries. These market expectations were made before the full impact of COVID-19 was known; the filing states that the outbreak could materially adversely affect demand, port access, crew movements and operations, and that its effects could not then be predicted.
Key risks include spot-rate and vessel-value volatility, fleet oversupply, reliance on spot employment, floating-rate debt and LIBOR transition, refinancing and covenant exposure, fuel and operating costs, drydockings, environmental and emissions rules, accidents and pollution liability, sanctions, counterparty performance, and access to capital. Frontline disclosed ordinary-course litigation and approximately $5.4 million of guarantees relating to assigned property leases; it did not expect these matters to have a material adverse effect. Its pollution liability coverage was stated as $1.0 billion per vessel per incident, but catastrophic losses could exceed coverage. The company also noted a $50 million guarantee connected with a post-year-end marine-fuels joint venture arrangement.
Most important facts for investors to verify
- Whether the $309.6 million December 2020 balloon was refinanced on acceptable terms and how subsequent financing affected leverage and lease obligations.
- Actual post-acquisition cash flows, utilization and earnings from the ten Trafigura Suezmax tankers, including the economics of the five chartered back.
- Whether spot-market rates and tanker supply supported the 2019 earnings improvement, and how realized TCE compares with market benchmarks.
- Cash available for dividends after debt service, fleet investment, covenant requirements and restricted or operationally constrained cash.
- Potential exposure to vessel impairments: Frontline estimated that the carrying value of certain vessels exceeded their aggregate charter-free market value by approximately $74.2 million, while concluding undiscounted future cash flows did not require impairment.
- The cost and timing of scrubber and ballast-water upgrades, and the financial and operational effects of COVID-19, emissions regulation and LIBOR replacement.