Tanker owner and operator Frontline has secured bank financing of up to USD 548 million and is in the final stages of obtaining approval for further bank financing of up to USD 325 million to part finance twenty newbuilding contracts, the company said in its quarterly financial report.
“This new financing will partially finance 20 of our newbuilding contracts at highly attractive terms and we maintain our very low cash breakeven levels,” Inger M. Klemp, Chief Financial Officer of Frontline Management AS, said.
Out of its total fleet of 82 vessels, Frontline has 24 newbuildings, comprised of eight VLCCs, eight Suezmax tankers and eight LR2 tankers, four of which are under construction at South Korean shipbuilder STX Offshore & Shipbuilding Co.
As STX filed for court receivership in May 2016, Frontline said that “it is unclear whether the four VLCC newbuildings under contract at this shipyard will be delivered. These vessels have therefore not yet been financed.”
As the tanker market experienced a downward pressure on rates in the second quarter, which continued into the third quarter of the year, Frontline saw its net income drop to USD 14.3 million during the period, compared with a net income of USD 78.9 million reported in the previous quarter.
“While these are quarters typically characterized by seasonal weakness, the market was also affected by crude oil supply disruptions in the Atlantic basin, high levels of crude inventories, 13 vessels delivering from the newbuilding fleet and easing congestion in ports around the world. All factors considered, the tanker market has been reasonably well balanced, and we are encouraged by our performance in the second quarter,” Robert Hvide Macleod, Chief Executive Officer of Frontline Management AS, said.
He added that the spot market is currently at a 24 month low, and although Frontline expects the rate environment to improve from current levels, the second half of 2016 “will be significantly weaker than the first half of the year.”
Total ship operating expenses of USD 32.5 million in the second quarter were USD 3 million higher than the previous quarter primarily due to an increase in dry docking expense. Two vessels were dry docked in the second quarter compared with one vessel in the previous quarter.
For the half-year period ended June 30, Frontline generated a net income of USD 93.2 million, compared with a net income of USD 34.2 million seen in the first six months of 2015.
In August 2016, the company estimates that average daily cash breakeven rates for the remainder of 2016 will be USD 21,200, USD 17,300 and USD 15,300 for its owned and leased VLCCs, Suezmax tankers and LR2 tankers, respectively.
Significant disruptions in crude oil supply from the Atlantic Basin in the second quarter led to large import markets like India and China sourcing incremental crude from the Middle East, rather than the Atlantic Basin, according to Frontline.
Although this had a negative impact on ton mile demand, Frontline said that it is “positive about the long-term outlook for the tanker market.” However, almost 100 VLCC’s are still to be delivered over the next two years and this is expected to put pressure on the market.
As of June 30, Frontline’s newbuilding program comprised eight LR2 tankers, eight VLCCs and eight Suezmax tanker newbuildings. Six vessels are expected to be delivered in 2016 and 14 vessels in 2017, excluding the four VLCCs at STX.