Frontline Ltd. — FY 2012 Form 20-F
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; quarterly market data cited below relate to Q4 2012. Financial statements are prepared under U.S. GAAP and amounts are in U.S. dollars unless noted.
Business context and reporting period
Frontline owns and operates crude-oil tankers, principally VLCCs and Suezmax vessels, with additional drybulk-carrier revenue during the period. At year-end it operated 39 vessels, 29 of them exposed to spot or pool markets, and had two Suezmax newbuildings on order. The average tanker age was approximately 14 years, versus an estimated industry average of seven years.
The 2011 restructuring transferred vessels, newbuilding contracts and associated bank debt to related-party Frontline 2012, while renegotiating charter commitments. The reduced fleet and changes in charter arrangements make comparisons with 2011 less like-for-like.
Key financial metrics
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Operating revenue | $668.1m | $810.1m | Down 17.5% |
| Time-charter-equivalent revenue (non-GAAP) | $368.2m | $493.3m | Down 25.4% |
| Operating income (loss) | $7.2m | $(399.6)m | 2011 included the $307.0m restructuring-sale loss |
| Net income (loss) attributable to Frontline | $(82.8)m | $(529.6)m | Basic and diluted EPS: $(1.06), versus $(6.80) |
| Operating cash flow | $68.6m | $56.9m | Up from 2011; down from $314.9m in 2010 |
| Cash and cash equivalents | $137.6m | $160.6m | Restricted cash was a further $87.5m |
| Total assets / equity attributable to Frontline | $1,688.2m / $119.7m | $1,840.6m / $201.0m | Equity-to-assets ratio fell to 7.1% from 10.9% |
| Debt / capital lease obligations | $484.0m / $950.6m | $513.5m / $1,013.2m | Debt includes convertible bonds and ITCL notes; bank debt was eliminated after restructuring |
| Current assets / current liabilities | $392.0m / $186.6m | $410.4m / $167.4m | Current ratio approximately 2.1x; some cash is restricted |
| Dividends declared per share | None | $0.22 | No cash dividends since 2011 |
Operating margin on reported operating revenue was approximately 1.1%; net margin attributable to Frontline was approximately negative 12.4%. The company recorded $32.0m of vessel impairment losses in 2012, compared with $121.4m in 2011. Its reported total operating expenses were $677.7m, while operating income reflects the additional $16.8m gain on asset sales and deferred-gain amortization.
Material changes versus the prior comparable period
- Revenue fell as vessels were sold or redelivered and time-charter and bareboat revenues declined. These effects were partly offset by vessels moving into spot trading and improved average TCE rates for double-hull VLCCs and Suezmaxes.
- The company left the Orion Suezmax pool during Q4 2012 to increase operating flexibility. At year-end, 74% of its fleet was categorized as spot or pool employment, compared with 44% in 2011.
- Interest expense decreased to $95.0m from $141.5m, principally due to lower lease and loan balances and renegotiated lease rates. Contingent rental expense of $54.6m arose under amended charter arrangements.
- 2012 included a $4.6m gain from repurchasing $10.0m face value of convertible bonds for $5.4m. It also included $35.0m compensation from early termination of two OBO time charters, partly offset by related lease termination costs and impairment charges.
- Operating cash flow improved year over year, but cash declined by $23.0m after investing and financing activities. Financing outflows included $64.1m of capital-lease payments and $24.9m of debt repayments.
Outlook, risks, contingencies, and unusual items
- Weak tanker market: Management described the market as severely depressed, with VLCC rates near zero in early 2013 and substantial available tonnage. Q4 2012 standard-voyage rates were WS 42.8 for VLCCs and WS 60.5 for Suezmaxes. Management said a sustained recovery depended on removing overcapacity and planned to continue reducing exposure by redelivering older and non-core vessels.
- Liquidity and financing: The company expected to fund $87.9m of remaining 2013 Suezmax newbuilding installments using cash, operating cash flow and intended bank financing; financing was not assured. Management cited March 2013 average TCE breakeven rates of approximately $24,200 per day for VLCCs and $18,800 for Suezmaxes; these exclude capital expenditures and certain vessels.
- Bond maturity: The remaining convertible bond principal was $215.0m at year-end, due April 2015. The company warned that if the tanker market did not recover before 2015 and it could not raise equity or sell assets, it might lack sufficient funds to repay the bond and could need to restructure.
- Leases and related parties: Capital-lease obligations were $950.6m, with $52.1m classified as current. Ship Finance, a related party, had $875.7m of remaining lease obligations; 2012 contingent rental expense was $52.2m. The restructuring and charter amendments materially affect future cash commitments.
- Commitments and contingencies: Contractual obligations totaled $2.07bn, including capital leases, debt, interest and newbuilding commitments. Frontline was contingently liable for $209.0m of installments on transferred VLCC newbuilding contracts, but said Frontline 2012 had agreed to indemnify it and no liability was recorded. Four vessel leases had put options totaling $36.0m in 2015.
- Asset valuation sensitivity: Management’s impairment test used forecast rates of $13,375/day for VLCCs and $14,524/day for Suezmaxes in the first two years, then long-term historical averages. The filing estimates that using trailing one-year or three-year rates instead would have produced materially larger impairment charges.
- Concentration and governance: Two customers generated 16% and 12% of 2012 operating revenue. The 2011 restructuring involved related party Frontline 2012; Hemen, associated with Chairman and CEO John Fredriksen, held approximately 33.8% of Frontline shares as of March 2013. The filing also identifies extensive related-party transactions and governance differences from NYSE standards for U.S. companies.
- Other principal risks include spot-rate and vessel-value volatility, fuel and operating costs, customer or counterparty default, environmental and safety liabilities, piracy, sanctions compliance, and the ability to obtain insurance or financing. The company reported no Iran port calls in 2012 and stated it believed it was in compliance with applicable sanctions.
Most important facts for investors to verify
- Whether operating cash flow and available, unrestricted liquidity can cover the 2013 newbuilding payments and ongoing lease obligations.
- The full debt and lease maturity profile, including the $215.0m convertible bond due in April 2015, and the terms and covenant headroom of the ITCL notes.
- The enforceability and practical value of Frontline 2012’s indemnity for the $209.0m contingent newbuilding guarantees.
- The assumptions behind vessel impairment tests and the gap between carrying values and estimated charter-free market values disclosed for certain owned vessels.
- The economic terms, related-party approvals and remaining contingent payments under Ship Finance arrangements and the Frontline 2012 restructuring.
- Customer exposure, the transition of vessels into spot trading, and whether actual charter rates meet or exceed management’s stated breakeven levels.
- Potential effects of the aged fleet, regulatory compliance costs, vessel disposals and the suspension of dividends on future earnings and liquidity.