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Edited Transcript of FRO.OL earnings conference call or presentation 27-Nov-19 2:00pm GMT

Q3 2019 Frontline Ltd Earnings Call

Hamilton Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Frontline Ltd earnings conference call or presentation Wednesday, November 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Inger Marie Klemp

Frontline Ltd. - Principal Financial Officer

* Robert Hvide Macleod

Frontline Ltd. - CEO of Frontline Management AS

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Conference Call Participants

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* Erik Hovi

Clarksons Platou Securities AS, Research Division - Research Analyst

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD and Energy & Shipping Analyst

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Michael Webber

Webber Research & Advisory LLC - Managing Partner of Export Infrastructure

* Randall Giveans

Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q3 2019 Frontline Ltd. Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, 27th of November 2019.

I would now like to turn the conference to your speaker today, Mr. Robert Macleod. Please go ahead, sir.

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [2]

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Thank you very much, operator. Dear all, thank you for dialing into Frontline's earnings call for the third quarter. We find the market very favorable at present. It looks to have turned in our favor, and the second half of 2019 represents completely different fundamentals and earnings compared to the first half.

Let's go straight to the first slide, please, and look at Q3. We reported a net loss of $10 million or $0.06 per share. Earnings were $22,900 on Vs, $16,200 on Suezmaxes and $15,900 for LR2s. Q4 is at completely different levels, with Vs showing close to $65,000 on days booked, Suezmaxes almost $50,000 and LR2 around the $30,000 mark. As you've seen in the report, we do expect this to fall or this will fall as we book the ballast days towards the end of the quarter.

On these numbers, I would like to highlight Suezmaxes. We held back most deliberately in the Atlantic in Q3 in anticipation of stronger fundamentals. This explains relatively low numbers for Q3 but a great start to Q4. I think it's important to always look at earnings over time, not just 1 quarter, and always have a clear chartering strategy.

The support from our largest shareholder is unquestionable. The $275 million facility was rolled until May 21. Inger has done a great job securing commitment from ICBC to finance the 10 Suezmaxes we acquired in Q3, and you can expect cash breakeven for Suezmaxes to soon drop.

The Board also declared at its discretion a $0.10 dividend for Q3 despite the loss in the quarter. And we expect Q4 to show more cash to our shareholders, building on the $6 billion worth of dividends we have paid since listing in the U.S.

With that, I'll hand the word over to Inger.

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Inger Marie Klemp, Frontline Ltd. - Principal Financial Officer [3]

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Thanks, Robert, and good morning, and good afternoon, ladies and gentlemen.

Let's then turn to Slides 4 and 5 and look at the financial highlights and the income statement. Frontline achieved total operating revenues net of voyage expenses of $94 million and EBITDA adjusted for certain noncash items of $43 million in the third quarter. Frontline reported a net loss of $10 million equivalent to $0.06 per share and a net loss adjusted for certain noncash items of $10.1 million equivalent to $0.06 per share in the third quarter. The noncash items this quarter consisted of a $0.7 million unrealized gain on marketable securities, a $2 million share of results of an associated company and a $2.6 million loss on derivatives.

The third quarter shows a decrease of $13 million against adjusted EBITDA of $56 million and a decrease of $14.1 million against adjusted net income of $4.1 million in the second quarter of 2019. The decrease in net income in the third quarter of $14 million is mainly explained by a decrease in result on a time charter basis of approximately $7.4 million due to the lower reported TCE rates in the third quarter compared to the second quarter and an increase in operating expenses of $6.1 million mainly explained by increase in dry dock costs of $4 million in the quarter.

Let's then take a look at the balance sheet on Slide 6. The changes to the balance sheet as of September 30 from June 30 mainly relates to an increase in cash and cash equivalents of $17 million, which is the net effect of CapEx payments, repayment of debt, drawdown of debt, cash flow from operation and proceeds from issuance of shares under the ATM program. Then we had an increase in vessels of $323 million mainly due to the initial recognition of the right-of-use assets for 5 of the Trafigura vessels, which are treated as finance leases on our balance sheet. The other 5 Trafigura vessels chartered back to Trafigura will be brought on to the balance sheet only upon closing of the transaction. This is due to that, according to U.S. GAAP, the charter-in and charter-out agreements cancel out each other, and we don't obtain the right of use of these vessels in the period between signing and closing of the acquisition.

Then we have an increase in the long-term assets of $17 million, which is mainly related to the prepaid consideration in relation to the shares issued for the 5 Trafigura vessels that are chartered back to Trafigura and hence not accounted for as finance leases.

Then the next item is that we had a decrease in debt of approximately $30 million in the quarter, which is due to repayments. We had an increase in obligations on the finance leases with approximately $270 million mainly due to the initial recognition of the right-of-use assets of the Trafigura vessels treated as finance leases, which I mentioned; and then an increase in equity of $165 million, mainly due to share issuances in relation to the Trafigura transaction and in relation to the ATM program, offset by a net loss in the third quarter.

As of the end of September, Frontline has $274 million in cash and cash equivalents, including the undrawn amounts under our unsecured loan facility, marketable securities and minimum cash requirements. Our remaining newbuilding CapEx requirements as of end of September amounted to $222 million related to one Suezmax tanker and one VLCC, which are both expected to be delivered in May 2020; and also to 2 LR2 tankers, which are expected to be delivered in January and March 2021. We estimate approximately $175 million in debt capacity for these newbuildings, and we have no near-term debt maturities.

Then let's take a closer look at cash breakeven rates and OpEx on Slide 7. We estimate average cash cost breakeven rate for the remainder of 2019 of approximately $23,400 per day for the VLCCs, $21,100 per day for the Suezmax tankers and $16,100 per day for the LR2 tankers. These rates are all-in daily rates that our vessels must earn to cover the budgeted operating costs and the dry dock, the estimated interest expenses, time charters and bareboat hires, installments on loans and G&A expenses. In this breakeven base, we have included dry dock costs for 3 VLCCs, 2 Suezmax tankers and 1 LR2 tanker in the fourth quarter of 2019. Frontline's low cash breakeven rate offers a strong downside time protection against a low rate environment, and at the same time, it creates a great upside potential in a strengthening tanker market.

As we have said before, every $1,000 per day in achieved rates in excess of our cash breakeven base translates to approximately $22 million in incremental cash flow after debt service per year or $0.11 per share, which shows the high importance of maintaining this low cash breakeven rate.

Then in the graph on the right-hand side of the slide, we have shown incremental cash flow after debt service per year and per share, assuming $10,000, $20,000, $30,000 and $40,000 per day in achieved rates in excess of our cash breakeven base, respectively. As an example, assuming a VLCC rate of $55,000 per day and an implied relative Suezmax tanker and LR2 tanker rates, basis the Clarksons 10-year average, we get to an average rate for our fleet of $46,000 per day, which is approximately $27,000 above our average cash breakeven rate. Thus, in such scenario, Frontline would have a cash flow per share after debt service of about $2.98, close to $3 per share.

The operating expenses per day in the third quarter of 2019 were $11,600 for VLCCs, $8,400 for the Suezmax tankers and $7,000 for the LR2 tankers. We have dry-docked 4 VLCCs and 2 Suezmax tankers in the third quarter, and 3 VLCCs and 2 Suezmax tankers and 1 LR2 tanker are scheduled for dry dock in the fourth quarter of 2019.

With this, I'll leave the word to Robert again.

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [4]

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Great. Thank you very much, Inger. Let's look at the key market developments, please. Sanctions caused panic in the tanker market at the start of the fourth quarter, driving freight rates to record levels. While the surge was short-lived, it could not have occurred without a constructive underlying market. Counter-seasonal increases in rates throughout the year have indicated that the market's balance was tightening. Setting aside certain rates, the market has remained strong overall in Q4 and, in recent weeks, firm in a more sustainable way than early in Q4, in our view. The most important takeaways are the supply-demand balance in the market is tight, fundamentals are highly supportive, and we expect rates to remain strong.

U.S. export is, as we've discussed in the past, an important driver, and ton-mile demand continues to benefit from rising U.S. exports. U.S. production growth, though, is forecasted to slow, but export capacity is ramping up. This will result or is likely to result in more long-haul trade as the demand pool continues to grow from the east as that is virtually where all new refinery capacity is being built.

Let's look at the next slide and how deliveries are declining whilst the fleet is aging. Tanker fleet growth is obviously a key factor for the market balance. Despite the high number of deliveries recently, we are seeing strong rates, which is very encouraging. So this is a very encouraging sign that the market finally is better balanced after years of low rates, low volatility and poor earnings. Importantly, there has not been a large increase in newbuilding orders this year despite widespread optimism for stronger rates. The removal of the overhang caused by a large order book is a significant development, but new orders can, of course, quickly change this.

The pace of recycling has also slowed down. But it's important to highlight that 168 VLCCs are greater than 15 years of age, which is exactly the double of the current order book on VLCCs. The market is increasingly favoring modern ships or our customers are, and this trend will only increase going forward. This, we believe, will play to Frontline's advantage as we have one of the largest and the most modern crude tanker fleets in the industry.

Okay. Let's summarize. And in conclusion, various factors support our positive market outlook. In the short term, rates are strong, and we are generating significant cash flow, as Inger was explaining, due to the size of our fleet and our very competitive breakeven levels. We believe Frontline is in an ideal position to capitalize on what we see as a new market normal. Again, as Inger was highlighting, on earnings per share after debt services, Frontline comes out as #1. Setting aside the impact of Cosco sanctions, the market has already begun to move following extended refinery maintenance ahead of the IMO 2020.

While all these factors point to the positive, the risk of a global slowdown in GDP growth continues to own the news headlines, and it is a real risk that has added volatility to the equity markets. Also, there is always the theoretical chance that the IMO 2020 implementation will not go as expected. Soon, we'll see the new regulations being enforced. How well, we don't know yet, but we expect to see widespread compliance. We think the market will remain at relatively high levels going forward. I do not yet see any supply-side factors emerging in the short term that would lead to a different conclusion. Although there are always risks, multiple possible market drivers should result in a strong end to the year and continued strength into 2020.

Against the backdrop of an expected strong market, we believe we are well positioned to generate significant dividend capacity going forward and to create value to our shareholders.

With that, operator, I would like to turn to questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is coming from the line of Jonathan Chappell from Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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Robert, first question I have for you is on the revenue recognition. I think you did a great job in the press release explaining just what's happening there, and I think most quarters, it makes a lot of sense. But given what's happened in the VLCC market, especially over the last couple of weeks, rates gapping up, which we would assume to mean utilization is very tight, and you kind of showed it in your chart on Slide 8 as well, would it be crazy to think that there would be fewer ballast days in the end of the year because your ships would discharge and immediately be rebooked and rebooked at higher rates than what you've booked so far? Are you just being kind of conservative with saying that the fourth quarter rate to be lower than what you've already booked year-to-date despite the market moving in the opposite direction?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [3]

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Jonathan, thanks for that question. It's a very good question, and it's extremely valid. So what I'll do, to start with, I'll use Q2 -- sorry, I'll use the Q2 reporting where we guided on Q3 as an example. So back then, we guided on 83% having been fixed. And the fact is -- and I don't think this will happen probably ever again. But the fact is after we guided, we didn't book a single cargo that loaded in Q3. So it ended up being -- all the balance, 17%, ended up being ballast days.

It's virtually impossible to say how many bookings we'll do with loading in December. But what I can say is that we definitely will have ships loading here, and the balance percentage would not just be ballast days for sure. What we've done in the VLCCs, for example, is that we've held them relatively short. We've been doing over the last quarter almost -- virtually almost -- just the [AGE strands]. At present, we've only booked very, very few days that are loading in or going to 2020. So we have a lot of positions left open this year. So we'll do a lot of bookings. But I can't give you a percentage. This is what -- every quarter, because of the new accounting rules, this gives the uncertainty, but I can say we will have quite a few bookings.

So let's see where it comes out in the end. But we've got some ammunition left, and we've got this ammunition left because we believe that we would run into higher rates at the end of the year. So at least we're positioned for that, but how it's going to be divided between Q4 and Q1, let's wait and see. But the important thing is that the cash will be coming our way.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Okay. Great. And I appreciate that clarity, Robert. And that was my second question, is the cash coming your way? Borrowing, if you will, from the fourth quarter to pay a dividend for the third quarter of $0.10 makes a lot of sense given the transparency that you have and what you booked already for 4Q. And Inger kind of laid out a sensitivity as to what your cash flow could be in a certain rate environment of almost $3 a share. So I just wanted -- now that we've kind of hit this inflection point and the cash is coming, what's the kind of the cadence that the Board has given? Should we look for a payout ratio similar to kind of legacy Frontline of nearly 100% payout in earnings? Would you expect, given the leverage that you just took for the Trafigura acquisition and the loans still outstanding to Hemen, it may be closer to 50%, 60%? I know it's a Board decision, but now that the cash flow is coming, how do you think that you should message that kind of payout ratio to investors?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [5]

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I'm sorry, I can't give you the -- it will be up to the Board to give the exact on this. But if you look at the historic, as I pointed out very briefly in the beginning here, that the history of Frontline shows $6 billion being paid out -- or $6 billion of dividend value being paid out. So that's going to -- we're going to start building on that number now. We are in a great position. I think it's many years since Frontline has been in such a good position. So all I can say is that I think the Board will be positive to paying out, and we will be ready to return value to shareholders.

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Operator [6]

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Your next question is coming from the line of Greg Lewis from BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [7]

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Yes. If we could dive a little bit into the balance sheet as we kind of come through regular debt amortization, as we think about 2020 and we think about the company position in its balance sheet, it sounds like you're very comfortable with your current leverage. Should we be thinking about -- just as we think about going through and paying out our scheduled debt amortization or should -- or is there the potential in a stronger market to maybe accelerate some of those -- some of the outstanding debt and kind of pay down debt and with the goal of maybe lowering those all-in cash breakevens? Any kind of color around that?

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Inger Marie Klemp, Frontline Ltd. - Principal Financial Officer [8]

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I don't -- I think in a way, that Frontline is quite, let's say, comfortable with the leverage ratio that we have today, and which is -- our target is 65% of market value on our vessels as an average. And I think assuming that there is no specific reason for, let's say, prepaying or accelerating that repayment of the debt, I don't think that will be something we would put priority on.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [9]

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Okay. Perfect. And then my follow-up question was, Robert, you mentioned in the prepared remarks, you expect the Suezmax cash breakevens to kind of head lower here. Any -- could you sort of talk a little bit about that in terms of -- I mean is there some sort of -- do you have a target there? Or do you just mean, "Hey, the Trafi vessels are coming in, and with that, our cash breakeven is going down, and we're comfortable with that?" I'm just trying to get any more color around that.

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [10]

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So Greg, that's related to the finance that Inger has just got committed. So we're presently using the breakeven that the former owner of the ship had and -- or ships had. And then now we're financing ourselves, and we're getting that done at a considerably better terms than what these ships are -- have at present.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [11]

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Okay. So maybe we -- maybe it was those vessels, maybe we shouldn't expect the Suezmax overall cash breakeven to maybe go much lower from where it is currently. Is that kind of the right way to think about it?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [12]

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That's what's going to drop. So 10 of the Suezmaxes will very soon hopefully have a much better finance and then the cash breakeven will fall. I can't give you the exact figure, but we're heading back to where we were a few quarters ago.

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Inger Marie Klemp, Frontline Ltd. - Principal Financial Officer [13]

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For these 10 -- the 10 Suezmaxes, they have today an implicit rate of 375 above LIBOR. And we are then refinancing this with our new ICBC financing at 2.30 out of 230 basis points, which is a difference of 145 basis points in between. And in addition, we have a longer profile than what Trafigura has, which we are now paying in a way on their behalf. So the difference between these 2 elements, I would say, would come to around $2,500 per day, maybe a bit more, on those 10 vessels. But obviously, that will be averaged out with the other vessels then.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [14]

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Okay. Great. And then just one more for me on the Trafigura deal. I guess it looks like it's drifting further a little bit back. Just any sort of thoughts around, was that -- just given the quickness in which the deal was done and signed up in August, that it just -- things just had to get aligned to close this transaction? Or just kind of curious maybe why it didn't close as quickly as we might have thought.

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [15]

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This is purely joint on the financing, Greg. So it -- just obtaining it at the terms we wanted took longer, and there's a lot of paperwork and so forth to complete as well. So this -- but we're confident on that closing, and we'll be back with timing on it soon.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [16]

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Okay. But Trafigura still has to receive those shares as of August despite the transaction not closing? That's correct, right?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [17]

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Yes, yes. So we got full access to earnings and by the fact that we've been only -- have the same exposure as if you've been owning the ships. So we've got the instant access to the earnings from the vessels.

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Operator [18]

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Your next question is coming from the line of Randy Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [19]

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All right. So looking at October, you sold 4.3 million shares, raising about $47 million. Over the past few months, you raised about $100 million in aggregate. So what would the use of these proceeds be going forward or kind of why raise $100 million in the last few months?

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Inger Marie Klemp, Frontline Ltd. - Principal Financial Officer [20]

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Yes. Other than the use of these proceeds, we have already used them, and we are then -- have a portion left, which we are going to use in a way. So let's say, as of the end of September, we had received approximately $51 million or a bit more than $50 million of the proceeds. And that was used in connection with the CapEx or capital expenditures that we had in that period related to newbuilding installments and related to scrubber investments. And then now in the fourth quarter or probably in the first quarter, depending upon the closing of the Trafigura transaction, we will all spend the rest of that -- those proceeds in a way related to covering up the rest of the equity portion, which is a small -- very small portion, and then also the increased minimum cash requirements that we will have in relation to loan agreements with respect to this -- the financing on the Trafigura vessels and then also in relation to further scrubber investments and newbuilding CapEx payments that we have now in the fourth quarter. So that is a sum-up of what we use these proceeds for.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [21]

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Okay. And then you mentioned how much you like kind of scrubber-fitted Suezmaxes, but you did not exercise the options to acquire 4 more Suezmaxes from Trafigura. So why did you let those options expire?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [22]

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That was a call that was made a while ago that the market, the spot market was still lagging. But we were also on a deal here where our share price had moved considerably from the -- what we'd be issuing shares at. So at the time, it didn't seem to us to be the right thing to do. In the meantime, the values have gone up a little bit. But overall, there's not many buyers out there. So I don't think we missed a big opportunity by not taking those options, and we don't regret not doing it.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [23]

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Okay. And then I guess lastly for me, updated cadence of your either off-hire days or CapEx or number of scrubber installations by the end of the year then by the end of the first quarter?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [24]

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I've got this -- I'll take that. I heard the scrubber part. I'll give you the scrubber straight away, which is about 1 out of 3 ships that we have on the water now. And that's going to increase to about half the fleet within the next 3, 4, maybe 5 months.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [25]

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Okay. So by end of the first quarter, maybe April, half the fleet, but no more plans for additional scrubbers thereafter? Or is this kind of an ongoing strategy?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [26]

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So we -- in terms of [scrubber], we've made a call now on scrubbers up to April, May of next year. All the calls we've made have been on ships that were due to dry dock. So the next ones that will be coming up will be a bit trickier in terms of decision-making because they will be outside of docking. So the whole cost will be scrubber only.

I think we'll be in a rate environment which is a lot stronger. So the off-hire cost will increase. But what we've done is that we've -- obviously, we hold the position in FMSI, gives us great access. And that company is now going to be even better when the Clean Marine merger is completed. So our access to all the equipment is obviously excellent. And when it comes to planning, we've spoken to 2 specific yards. The -- so we have things lined up so that we can go alongside and do the installation on a number of ships at a pretty 95% fixed cost.

So now what we're watching is the performance of the scrubbers. We're very happy so far. We're watching the fuel spread. The fuel spread is developing as per our expectations. And now we think it will widen into Q1, and then we will have to start making some calls. They will not be easy calls given the overall cost of doing this. But we are positioned to do it, and we can make calls or we need to make calls 3 or 4 months prior to actually doing the job.

So we've got things at least lined up. So we got the optionality, and we are ready to make a decision when we need to, which, with the current time line, we're looking probably second half of Q1, there will be some calls to make.

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Operator [27]

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Your next question is coming from the line of Michael Webber from Webber Research.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [28]

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Most of my questions have already been answered, but I wanted to zero in on kind of the sustainability of the uptick in rates and profitability here. Obviously, ramping the payout period -- the payout early now is a nice aggressive step. And I think that most of the market would agree that there's going to be a lot of cash that gets drawn out of the business in the next 12, 18 months. But obviously, the sustainability of rates above kind of mid-cycle levels is the biggest question in -- I guess, for most investors.

So Robert, you mentioned something at the end of your remarks around kind of the slow build in the order book or kind of a lack of orders even on the back of rates like we saw earlier this month. We've heard on other calls that there's kind of a heightened fear of obsolescence risk especially around tech and propulsion that's kind of permeating the mindsets of some private owners. And maybe they're reluctant to be the last guy in on old technology, and that's one of the reasons why we haven't seen the order book respond in the way it typically has when you've seen kind of this kind of ramp in profitability. I'm just curious, are you seeing that? And then just, two, kind of your general thoughts around how you will -- what kind of supplier response you'll think we'll see to what should be a pretty firm rate environment in 2020 as it pertains to the sustainability of these kind of rates?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [29]

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I think you're touching on a lot of the right points there, and I'm not going to repeat them. They all have been mentioned on several other calls. And what I'll do instead, Mike, I'll focus on where we as Frontline see things and then -- and also what our strategy will be going forward. Because we love -- we just love the fact that the order book is not increasing like it is. Normally, when rates firm like they are and you have the outlook that you have at the moment, which is as strong as we've seen for a long, long time, then the order book would normally surge. We're not seeing that. And for every week, that remains the case. We are building, I believe, the next cycle length.

So what we are very concerned most, obviously, we've got visibility from here until the next new ship can deliver in terms of old and new orders. So you'll have then the visibility of somewhere between 14 and 18 months, say, but let's call it 1.5 years as -- just to have a round figure, so for the next 1.5 years. Then I don't think on the supply side, I don't think we've got that much to worry about. The old ships will not be able to compete against new ones. They're not -- there will not be much recycling, but we'll have a lot of ships going to -- if it's for storage, maybe we get contango storage, who knows. But the older ships, as you saw on the chart, the old ships are double the amount of ships on order.

So when looking at how to protect Frontline in this position, then one of the obvious ways to do that and to secure income is to do some time charters. And we've held back on that. We've been very firm in our view. And fortunately, we get it right, saying that the second half of '19 will be a lot better than the first half. And we've had a clear strategy on increasing spot exposure. As we come into 2020 in strength, I think we'll see the time charter market becoming more active. And then we will look at doing some coverage, of course. That is the right thing to do at the -- in strong markets. We did it -- we've done it before. In 2017, we had a year we would have lost $60 million, but we lost $10 million because the time charter saved us from $50 million of them. So we will look at that, but we will look at the longer deals because we don't think there's any point in -- when in the period, you have visibility being 12 or 18 months, then looking at that, we're happy with our spot exposure. So a charter for us, ideally, 3 years because then we start taking coverage of some of the period that's not visible to us.

So that will be the aim, but maybe we'll look at 2 years as well. But I'm absolutely convinced that we will see the time charter market, which has been very disappointing lately, it has been more active in the last 3 months than the previous 6 or 9, but I think that market still has a lot to go. I think the rates are also going to increase. So we're not jumping at anything now, but we are watching it very, very closely. And we will -- we'll take action and protect future earnings. And it's a great tool, and I think that tool will be much easier to use in 2020 than it was in 2019.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [30]

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Got you. All right, that's helpful. Just one more on asset value and kind of the interplay between newbuild prices and used. So right now, I think the spread between prompt and newbuild price is around $8 million, which is the way it's been, I think, since 2015, if memory serves. And you've got to go back to 2010 to find the last time you saw the spread between something on the water new and something on order was more than $10 million. And that's obviously kind of right around the time we saw the last amount of exogenous shock to the tanker markets around trying to turn on its heel. Do you think given that kind of spread, something north of $10 million is in play as we move to 2020 where we could see secondhand prices move to $105 million, $110 million, $112 million with kind of a lag, with kind of a deeper lag on newbuild prices because there is that reluctance to potentially spend money on obsolescent propulsion tech?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [31]

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Yes. That's -- so what we're seeing now in our spread -- well, let's take the first point first. The amount of buyers out there is virtually -- this seems to be at an all-time low, right? There's very few there. Certainly, there will be some popping off course, but low -- very low activity. The spread, you're absolutely right, it's around $8 million, maybe $10 million. If I had a choice now between a prompt one or an 18-month forward, I would definitely pay the $8 million or $10 million because I think you've made that in the meantime, being the reason number one. And the always reason #2 is that I'd rather not see the order book grow, right? But the spread is there. And I think you'll be on the right side of the trade by taking the prompt rather than ordering.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [32]

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Got you. And...

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [33]

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And the simple number for Frontline on a year -- or if you look at the 18-month period and you need to -- with our cash breakeven, you'd look at having to earn somewhere in the plus/minus $50,000 depending on the timing of the vessel. But it's -- that's sort of the ballpark figure, right.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [34]

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Yes. No, $8 million definitely seems like a beatable number in terms of that spread. And it's certainly pertinent when it comes to looking at names on an NAV basis and how much juice you could see on secondhand prices at that kind of dynamic. So no, that's helpful. I appreciate it guys.

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Operator [35]

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Your next question is coming from the line of Erik Hovi from Clarksons Securities.

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Erik Hovi, Clarksons Platou Securities AS, Research Division - Research Analyst [36]

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Sorry, something got there. On a dollar per day basis in the current spot market, we are seeing $104,000 a day as of today, so -- and also seeing loading mid-December. So do you think these earnings are artificially high as owners are now starting to move into [yields at all]? Or are these earnings achievable?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [37]

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Achievable.

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Operator [38]

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Your next question is coming from the line of [George Berman] from [Capital Large].

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Unidentified Analyst, [39]

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A couple of quick ones real quick. The recently announced joint venture between Golden Ocean, Trafigura and yourself on the fuel facilities, what are the advantages of having this versus just going the way we did before? And secondly, can you comment on the merger of Feen company? I think you own about a 15% or 20% stake in it. What will that do for you? I saw it had a $2 million loss this quarter. What do you expect out of this joint venture or investment?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [40]

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Okay. Thanks very much. On the -- taking the first one first. I think the change we're going to have here in fuel for ships worldwide is one of the biggest changes obviously for a long, long time. It's going to mean a lot of disruption, and overall disruption is positive for the tanker market. So this situation is going to be one of the drivers for the tanker market.

We -- as the John Fredriksen group of companies, we bunk on our own about 1 million tonnes a year. We are very close to several of the traders, and Trafigura is obviously one of them. By doing this, our group with Trafigura, we're going to increase our volume significantly. We're going to have access through Trafigura's system where they have some very, very strong areas around the world, which we've been using for years with good results. So it was very natural then to look at doing this because both volume and access will be key.

So what we want out of this is delivery at the right time, we want the right quality, and obviously, we also want the right price. So I think this joint venture, this or this company, which we will have in operation very soon, it's probably going to be the 1st of January, that's the start-up date. It puts us in a better position than most, I think, and we'll keep our waiting time down. And overall, we'll be in the pole position when it comes to fueling our fleet.

On the scrubber side, all I can really say on the process on Clean Marine and FMSI is that my understanding is that things are going according to plan. It will successfully close, and once it closes, then Frontline would hold a position of 14.45%.

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Unidentified Analyst, [41]

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Okay. And do you expect this company to do what for Frontline? You're getting more advantageous retrofitting spots there and/or you're going to expect a profit share or you might spin the company off to shareholders like you did with Ship Finance?

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [42]

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I think we have the access. We have some decisions coming up on equipment. And it's obvious that we will be going here for our own equipment at the best price. We're very happy with the quality. So that's an easy and obvious choice.

I think overall, on the scrubber market, for all -- everyone, it's been relatively quiet in terms of new orders. I think the spread in Q1 will -- would widen, and I think there's going to be a new wave of orders here. And that's also one of the reasons I'm very pleased that we're doing this with Clean Marine because I think 2020 will be a very good year for the company.

And then the strategy for our shareholding going forward, having this on holding is not a natural thing for our type of company to do. We are very pleased that we've done it because I think IMO 2020 is such a big event, and it was extremely important to position ourselves, and I think we can clearly say that it's been a success. So let's see how things develop. But one option would be to give this out to -- or the shareholding as a dividend to our shareholders. We'll see how things develop. But for the time being, we will focus on doing our part in this merger happening and making it a successful company. We're -- it's definitely well positioned.

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Operator [43]

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(Operator Instructions) We think you have no further questions coming through. Please continue.

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Robert Hvide Macleod, Frontline Ltd. - CEO of Frontline Management AS [44]

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Okay. Operator, I think we'll then just round off and thank everyone for calling in, and also a special thanks to everyone in Frontline for their hard work and efforts.

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Operator [45]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.