Frontline 2012 plans NY listing, goes on building binge

MARCH 20, 2013 — Frontline 2012, whose majority shareholder is John Fredriksen’s Hemen Holding, yesterday reported preliminary fourth quarter and full year 2012 results and said it is “currently in the process of concluding one of the most aggressive newbuilding programs ever executed with vessels in the crude, product, LPG and dry bulk segments. It also said it  will seek New York listing within 10 to 16 months

Frontline 2012 says its target is to position the company for an anticipated recovery of the shipping markets in the next 2-3 years. To achieve this, it is following a strategy of aggressive growth by placing large orders for new efficient tonnage at historically low prices with the main focus on crude tankers and dry bulk. It will also selectively consider opportunities to invest in modern existing tonnage but this is not likely to be a central part of the strategy

The Frontline 2012 Board is of the opinion that the current historically low newbuild prices and the significant fuel efficiency of the new tonnage materially reduce the risk of this major investment. It says that. based on  improved fuel efficiency and low capital cost, most of the tonnage it has ordered will be profitable at rate levels where existing tonnage barely covers operating costs.

    
Following is the text of the company’s announcement:

• • Frontline 2012 reports net income of $0.7 million and earnings per share of $0.004 for the fourth quarter of 2012.
  • Frontline 2012 reports net income of $8.1 million and earnings per share of $0.06 for the year ended December 31, 2012.
  • In January 2013, Frontline 2012 completed a private placement of 59 million new ordinary shares of $2.00 par value at a subscription price of $5.25, raising $310 million in gross proceeds.
  • In January 2013, the Company cancelled the second of the five VLCC newbuilding contracts at Jinhaiwan ship yard due to the excessive delay compared to the contractual delivery date.

Introduction

Frontline 2012 Ltd. (the “Company” or “Frontline 2012”) is a commodity shipping company incorporated in Bermuda on December 12, 2011, which as of December 31, 2012 owned a total of ten crude oil tankers and 28 newbuilding contracts within the crude oil, petroleum product, drybulk and Liquefied Petroleum Gas (“LPG”) markets.

As of today the newbuilding program has increased to 53 firm newbuilding contracts.

The Company’s sailing fleet is one of the youngest in the industry with an average age of approximately three years and currently consists of six very large crude carriers, or VLCCs, and four Suezmax tankers, operating in the spot and the period markets.

The largest shareholder is Hemen Holding Ltd. (“Hemen”) with a shareholding of approximately 51 percent.

Preliminary Fourth Quarter and Full Year 2012 Results

Frontline 2012 announces net income of $0.7 million and earnings per share of $0.004 for the fourth quarter of 2012. Frontline 2012 announces net income of $8.1 million and earnings per share of $0.06 for the year ended December 31, 2012.

The average daily time charter equivalents (“TCEs”) earned in the spot and period market in the fourth quarter by the Company’s VLCCs and Suezmax tankers were $25,700 and $12,400, respectively, compared with $25,100 and $10,400, respectively, in the preceding quarter. The spot earnings for the Company’s VLCC and Suezmax tankers were $24,100 and $12,400, respectively, compared with $23,100 and $10,400, respectively, in the preceding quarter.

As of December 31, 2012, the Company had cash and cash equivalents of $132.7 million compared with $184.6 million as of September 30, 2012. The Company generated $9.2 million in cash from operating activities, used $74.6 million in investment activities and increased bank borrowings by $13.5 million.

The Company prepaid bank debt repayments for the year 2012 in exchange for a one year payment holiday in 2013. Following this the estimated average cash cost break even rates for 2013 on a TCE basis for its VLCCs and Suezmax tankers are approximately $16,300 and $13,700, respectively.

Newbuilding Program

As of December 31, 2012, the Company’s newbuilding program comprised 16 newbuildings within the crude oil and petroleum product markets, four Capesize vessels, four very large gas carriers or VLGCs and four VLCCs. Total installments of $324.0 million have been paid and the remaining installments to be paid amount to $1,112.5 million.

In January 2013, the Company cancelled the second of the five VLCC newbuilding contracts at Jinhaiwan ship yard due to excessive delay compared to the contractual delivery date. The Company’s claim towards the yard is secured with refund guarantees from one of Chinas five largest banks.

Since December 31, 2012 the Company has negotiated and concluded a significant number of additional newbuilding contracts. As of today the total newbuilding program amounts to 53 vessels within the crude, product, LPG and dry bulk segments. The total capital commitment for this newbuilding program is $2,598 million out of which $315 million has already been paid in.

The Company also holds a significant number of fixed price options for newbuilding contracts declarable in the coming months. The Company has in addition entered into specific discussions with existing and new yard relations with the target to increase the newbuilding orderbook further. The Board will target newbuildings with deliveries in 2014 and 2015.

The final size of the total newbuilding program including options is still under negotiation and will be reported to shareholders as soon as practically possible.

Corporate

156,000,000 ordinary shares were outstanding as of December 31, 2012, and the weighted average number of shares outstanding for the quarter was 156,000,000.

In January 2013, Frontline 2012 completed a private placement of 59 million new ordinary shares of $2.00 par value at a subscription price of $5.25, raising $310 million in gross proceeds. The proceeds from the private placement will be used to part finance new building investments.

The Market

Crude

The market rate for a VLCC trading on a standard ‘TD3’ voyage between the Arabian Gulf and Japan in the fourth quarter of 2012 was WS 42.8, representing an increase of approximately WS 7 point from the third quarter of 2012 and a decrease of approximately WS 15 points from the fourth quarter of 2011. Present market indications are $1,250 per day in the first quarter of 2013.

The market rate for a Suezmax trading on a standard ‘TD5’ voyage between West Africa and Philadelphia in the fourth quarter of 2012 was WS 60.5, representing an increase of one WS point from the third quarter of 2012 and a decrease of WS 9 points from the fourth quarter of 2011. Current market forward rates are approximately $12,000 per day in the first quarter of 2013.

Bunkers at Fujairah averaged $615/mt in the fourth quarter of 2012 compared to $650/mt in the third quarter of 2012. Bunker prices varied between a low of $593/mt on November 5(th) and a high of $655/mt on October 1(st).

The International Energy Agency’s (“IEA”) February 2013 report stated an OPEC oil production, including Iraq, of 30.9 million barrels per day (mb/d) in Q4. This was a decrease of 0.5 mb/d compared to the third quarter of 2012, due to lower Saudi Arabian production in November and December.

The IEA estimates that world oil demand averaged 91.0 mb/d in the fourth quarter of 2012, which is an increase of 0.8 mb/d compared to previous quarter and the IEA estimates that world oil demand averaged approximately 89.8 mb/d in 2012, representing an increase of 1.1 percent or 1.0 mb/d from 2011. 2013 demand is expected to be 90.7 mb/d.

The VLCC fleet totalled 622 vessels at the end of the fourth quarter of 2012, up from 617 vessels at the end of the previous quarter. 11 VLCCs were delivered during the quarter, six were removed. The order book counted 81 vessels at the end of the fourth quarter, down from 91 orders from the previous quarter. The current order book represents approximately 13 percent of the VLCC fleet. According to Fearnleys, the single hull fleet is 17 vessels, five less than last quarter.

The Suezmax fleet counts 468 vessels at the end of the fourth quarter, up from 462 vessels at the end of the previous quarter. 14 vessels were delivered during the quarter whilst eight were removed. The order book counted 72 vessels at the end of the fourth quarter, which represents 15 percent of the total fleet. According to Fearnley’s, the single hull fleet has been reduced from nine to five vessels.

Product

Improved economic signals from US and China, robust financial market activity and colder temperatures in the Northern Hemisphere made the foundation for higher oil demand in the fourth quarter of 2012. Stronger growth became apparent for China, Brazil, Korea and Canada. Notable November contractions were seen in the US and Saudi Arabia, as both suffered from weather-related downturns. Particular sharp November contractions in the US was seen in gasoil and residual fuel oil demand which fell by 5 percent and 31.2 percent, respectively, year over year. For January, the US Energy Department’s Weekly Petroleum Status report suggests that total products supplied increased 1.2 percent in 2012. The surprisingly large gains in transport fuel deliveries including gasoline (+4.7 percent and jet/kerosene (+2.3 percent) supports the trend of strengthening consumer sentiment.

Total worldwide products storage now cover 30.4 days after a year end growth in middle-distillates and gasoline while “other products” saw a draw. While plant maintenance slashed US runs in January Asian runs hit new highs ahead of Chinese maintenance. Strong Atlantic Basin gasoline cracks, resilient gasoil cracks and narrowing fuel oil discounts lifted January margins.

The MR fleet totaled 1,513 vessels at the end of the fourth quarter of 2012, up from 1,503 vessels at the end of the previous quarter. The order book counted 142 vessels at the end of the fourth quarter, which represents approximately ten percent of the MR fleet according to IEA.

The LR2 fleet totaled 217 vessels at the end of the fourth quarter of 2012, up from 216 vessels at the end of the previous quarter. The order book counted eight vessels at the end of the fourth quarter, which represents approximately
3.7 percent of the LR2 fleet according to IEA.

LPG

Spot rates have fluctuated greatly through the year and with a seasonal dip in the fourth quarter of 2012 ended in line with 2011. LPG carrier demand is especially linked to oil production since LPG is associated gases coming up with the crude and natural gas streams. Saudi oil production was strong during summer months but has recently been on a downward trend. Saudi domestic consumption of LPG is also higher in winter months, which reduce volumes available for exports.

During the fourth quarter of 2012 VLGCs steamed at 14.5kn on average compared to a designed speed of 16kn. The main barometer on the VLGC market is the naphtha/LNG price ratio. LPG prices have increased due to lower export volumes making naphtha more attractive for chemical producers. RS Platou expects 2013 to stay in line with 2012 and sees interesting opportunities arising from US shale gas long term, which is expected to be very positive for VLGCs.

The VLGC fleet (60,000+ Cbm) totaled 147 vessels at the end of the fourth quarter of 2012, an increase of three vessels from the previous quarter. The order book counted 23 vessels at the end of the fourth quarter, up from 20 vessels the previous quarter, representing 15.6 percent of the VLGC fleet according to Platou.

Drybulk

Dry bulk transportation increased by around seven percent in 2012, however, due to the high number of new vessels entering the market, fleet utilization decreased. Given a net fleet growth of approximately 11 percent, the estimated utilization of the dry bulk fleet was on average 83 percent in 2012. Consequently spot earnings were low. The capesize and panamax segments both earned on average approximately $7,650 per day according to The Baltic Exchange.

Around 220 capesizes and 375 panamaxes were delivered in 2012, still this was 30 percent lower than the official order book at the beginning of the year. At the same time approximately 90 capesizes and 135 panamaxes were sold for scrap. For the dry bulk fleet as a whole 35 million dwt were scrapped against 95 million dwt of deliveries.

Deliveries of new vessels will decrease sharply over the next 24 months. With the same delivery ratio we have experienced over the last three years approximately 60 million dwt should be delivered this year, while the order book for 2014 is 25 million dwt for the entire dry bulk sector. The low spot market presently experienced and relatively high scrap prices should encourage more scrapping. Most forecasters are expecting scrapping to remain at similar levels as last year and consequently net fleet growth could be as low as five percent during 2013.

The steel industry and energy coal for utilities are accounting for almost 70 percent of dry bulk transportation. For several years the importance of increased steel production and energy consumption in China and the increased dependence of this country for the dry bulk market have been well known. Also in 2012 iron ore and coal imports showed a remarkable growth. Iron ore increased by around eight percent while coal imports increased by almost 30 percent year on year. This was in spite of a much slower growth in steel and energy consumption (2 percent and 3.4 percent respectively)

There are a few factors which make most analysts fairly optimistic for dry bulk demand growth going forward. Quality of Chinese domestic iron ore production is on a steady declining trend. Since 2007 China has invested roughly $85 billion in iron ore mining. Over the same period investments per effective ton iron ore produced has increased from $15 per ton in 2007 to $60 per ton in 2012. Adjusting for falling Fe content, effective iron ore production in 2012 is broadly at the same level as in 2007. Even in a modest steel growth scenario for China most forecasters believe in a continued strong growth in iron ore imports.

According to Fearnleys the Capesize fleet (150-200′ dwt) totaled 1022 vessels at the end of the fourth quarter of 2012, an increase of 3 vessels from the previous quarter. The order book counted 94 vessels at the end of the fourth quarter compared to 106 vessels the previous quarter, representing 9.2 percent of the Capesize fleet.

Strategy and Outlook

The Company’s vision is to build the leading global commodity shipping company within three years at historically low newbuilding prices with sole focus on high quality, modern, fuel efficient tonnage.

Frontline 2012’s target is to position the Company for an anticipated recovery of the shipping markets in the next 2-3 years. In order to achieve this, the Company follows the strategy of aggressive growth through placing large orders for new efficient tonnage at historically low prices with the main focus on crude tankers and dry bulk. The Company will also selectively consider opportunities to invest in modern existing tonnage but this is not likely to be a central part of the strategy

The Company is currently in the process of concluding one of the most aggressive new building programs ever executed with vessels in the crude, product, LPG and dry bulk segments.

The Board is of the opinion that the current historically low newbuild prices and the significant fuel efficiency of the new tonnage materially reduce the risk of this major investment. Most of the tonnage the Company has ordered will, based on the improved fuel efficiency and low capital cost, be profitable at rate levels where existing tonnage barely covers operating costs.

The global interest in the new building market has recently increased although from a very low level. The low and, in some cases, negative margins for the shipyards has led to a significant scale down of yard capacity, particularly in China and Japan.

We have seen some upward price movements in some of the sectors in the recent months however, no significant movement should be expected before more activity is generated from the Container sector.

The Board will in view of the limited downside risk endeavor to optimize the Company’s debt to equity level with the target to increase the equity return going forward. This includes aggressive use of debt financing and yard financing.

The Board is of the opinion that several of the shipping markets are massively oversupplied today and that it may take some time before a reasonable market balance occurs. Such a market balance will be dependent on the extent of phase out of existing tonnage as well as global growth conditions.

The Board is confident, however, that the Company’s aggressive ordering of fuel efficient tonnage at historically low contracting cost will position Frontline 2012 favorably to our industry competitors and offer shareholders an attractive long term return.

The Company will seek a listing in New York within 10 – 16 months. As markets develops, the Board targets a dividend strategy, and a refinement of the fleet profile through sale of assets or spin offs.

Frontline 2012 has started to cover some of the future interest risk by buying interest swaps. The Board sees this as an attractive risk reward investment with the long term target to reduce the Company’s capital cost.

Frontline 2012’s current operating fleet consists of VLCCs and Suezmaxes. Based on results achieved so far in the first quarter the Board expects the operating result in the first quarter to be weaker than the fourth quarter.

The Board of Directors Frontline 2012 Ltd. Hamilton, Bermuda March 18, 2013

Questions should be directed to: Jens Martin Jensen: Chief Executive Officer, Frontline Management AS
+47 23 11 40 99

Inger M. Klemp: Chief Financial Officer, Frontline Management AS
+47 23 11 40 76