Frontline Ltd. — FY2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017; this is an annual report, not a standalone fourth-quarter filing. Filed March 19, 2018. Frontline transports crude oil and petroleum products using VLCC, Suezmax and LR2/Aframax tankers. Financial statements are prepared under U.S. GAAP.
Financial performance and position
| Metric | FY2017 / year-end | FY2016 / comparison |
|---|---|---|
| Total operating revenue | $646.3 million | $754.3 million; down 14.3% |
| Time charter equivalent revenue (non-GAAP) | $365.1 million | $566.7 million; down 35.6% |
| Operating income (loss) | $(196.3) million | $177.5 million |
| Net income (loss) attributable to Frontline | $(264.9) million; $(1.56) per share | $117.0 million; $0.75 per share |
| Cash provided by operating activities | $130.5 million | $286.0 million |
| Cash and cash equivalents | $104.1 million | $202.4 million |
| Total debt, including secured borrowing | $1,592.4 million | $992.6 million |
| Capital lease obligations | $299.0 million | $422.6 million |
| Total assets / equity attributable to Frontline | $3,133.7 million / $1,187.3 million | $2,966.3 million / $1,499.6 million |
Current assets were $321.6 million versus current liabilities of $222.0 million. The company reported $74.0 million of cash held to satisfy loan-facility covenants; this amount is included in cash and cash equivalents, not restricted cash. The filing states that Frontline complied with its financial covenants at year-end.
Material changes and unusual items
- Revenue fell despite fleet growth, principally as more vessels entered voyage-charter trading amid weaker rates. Voyage-charter revenue rose 3.2%, but time-charter revenue fell 53.0%; voyage expenses increased 60.4% to $259.3 million, including higher bunker costs.
- Frontline recorded $164.2 million of vessel and capital-lease impairment, including $142.9 million on nine VLCCs leased from Ship Finance, and a $112.8 million goodwill impairment. The goodwill charge left $112.5 million on the balance sheet.
- Net loss also reflected $69.8 million of interest expense. Other items included $26.1 million of contingent rental income associated with Ship Finance leases and a $20.6 million gain on terminating the Front Century lease, partly offset by losses on other lease terminations.
- Cash from operations declined to $130.5 million. Investing used $722.6 million, largely for vessel and newbuilding spending; financing provided $493.8 million, mainly through debt drawdowns. Cash declined by $98.3 million during the year.
- The fleet at year-end comprised 53 owned, leased or chartered-in vessels, with another seven vessels under commercial management; 47 of the 53 were employed in the spot market. Five newbuildings remained under construction.
Outlook, risks and contingencies
Management described tanker conditions as volatile and noted that the industry had not yet absorbed substantial new vessel supply. It cited 58 VLCC deliveries scheduled for 2018, while acknowledging some could be delayed. Estimated 2018 average market TCE benchmarks were materially below 2016 levels: VLCC $22,700 per day versus $42,400; Suezmax $12,200 versus $23,400; and LR2 $9,000 versus $15,000.
For the remainder of 2018, management estimated average daily cash break-even TCE rates of approximately $22,200 for owned and leased VLCCs, $18,200 for Suezmaxes and $16,000 for LR2/Aframaxes. These estimates cover budgeted operating costs, estimated interest, scheduled principal payments, bareboat hire and corporate overhead, but exclude capital expenditures and contingent rental expense. Management said cash on hand and current and expected credit facilities should fund requirements for at least 12 months from the report date.
- Newbuilding commitments were $305.4 million at year-end, with $252.0 million due in 2018 and $53.4 million in 2019. Management reported committed financing to partially fund remaining deliveries. Three vessels were delivered in January 2018; two VLCCs were scheduled for December 2018 and April 2019.
- Debt agreements include value-adjusted equity, positive working capital and minimum free-cash requirements, and some have loan-to-value provisions. Falling vessel values could require additional collateral or repayment and could trigger default remedies.
- Floating-rate debt net of swaps was approximately $1.301 billion; management estimated a one-percentage-point rise in LIBOR would add about $13.0 million to annual interest expense, excluding capitalized interest.
- Management identified ballast-water compliance costs as a risk: 23 vessels did not meet the updated guideline described in the filing. The 2020 global sulfur-fuel limit and other environmental rules may also increase operating or capital costs.
- Frontline had $7.9 million of guarantees relating to assigned property leases, for which it recorded no liability, and ordinary-course maritime claims and lawsuits that management did not expect to materially affect operations or financial condition.
- Dividends are discretionary. The filing says no dividends were declared for the second, third or fourth quarters of 2017; the board gave no assurance of future payments. Hemen held approximately 48.4% of shares. A $275 million unsecured facility from a Hemen affiliate was extended in February 2018 to November 2019.
- Other stated risks include spot-rate and vessel-value volatility, fuel costs, counterparty performance, financing availability, operational and environmental incidents, sanctions compliance, and potential further goodwill impairment. The company reported 13 port calls to Iran by eight vessels during 2017 and stated its belief that it complied with applicable sanctions.
Investor verification priorities
- Review the audited statements and impairment assumptions, especially the $164.2 million vessel impairment and remaining goodwill value.
- Confirm covenant headroom, the availability and terms of committed financing, and how much of reported cash is operationally accessible given covenant and subsidiary restrictions.
- Compare spot-market performance with the disclosed break-even rates and assess exposure from the 89% spot-market fleet mix.
- Verify delivery timing, funding and remaining obligations for the newbuildings, and the cost and schedule for ballast-water and emissions compliance.
- Check subsequent developments in dividends, related-party borrowing and Ship Finance lease terminations; assess the governance implications of Hemen’s ownership and the affiliate facility.