Will Frontline (FRO) survive? (Part 2)

By Chris Mascarenhas - August 9, 2012 | Tickers: FRO, VLCCF, OSGIQ, SFL, TK | 0 Comments

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Part 1 was the restructuring overview.

Now let me dig into Frontline's (NYSE: FRO) fleet.  To do that I am going to divide the fleet into smaller groups, five groups in all.

A. Frontline owned vessels
- 1 "for sale" Suezmax
- 2 Suezmax newbuilds

The older Suezmax was sold in Q1 2012 for a small loss.  Only $12.5 million has been paid on the two newbuilds.  Frontline has to pay about $25 million in 2012, and $87.5 million in 2013, in order to take delivery of those vessels.  The two newbuilds are a couple of wildcards here.

B. Independent Tanker Corporation Limited (ITCL) -owned vessels
- 6 Double Hull (DH) VLCCs
- 3 Double Hull (DH) Suezmaxes

These vessels are owned by FRO subsidiary, ITCL.  What makes this grouping special is, all the vessels were financed by bonds issued in the US, three different bonds.  The original charter terms had each vessel fixed on a bare-boat charter that fit specific conditions.  Charters on two VLCCs have been terminated, so the vessels both trade in the spot market.  Frontline has accumulated a significant restricted cash pile that can only be used for payments related to the ITCL vessels.  That provides some interim relief.  The debt on these vessels is non-recourse.

C. Ship Finance International (NYSE: SFL)-owned vessels
- 17 Double Hull (DH) VLCCs
-  3 Single Hull (SH) VLCCs
-  5 OBO vessels
-  6 DH Suezmaxes

The three SH VLCCs have already been sold to Petrobras for storage duty.  One of them left the fleet during Q1, and the other two leave the fleet sometime in the next 15 months.  The OBO vessels are each 19-20 years old, and are likely scrap candidates over the next few years.  In June 2012, there was a press release indicating an OBO vessel has been sold.  The cost to Frontline will be about $0.5 million, but it will clear about $2 million in debt.  A couple of the Suezmax vessels could also be scrap candidates if that market really tanks.

D. Charter-in vessels, leased vessels, sale-and-leasebacks
- 6 DH VLCCs
- 2 DH Suezmaxes

Two VLCCs have already been sold, and leave the fleet in 2013.  Another four vessels, 2 VLCCs and 2 Suezmaxes, leave the fleet in 2015.  Frontline negotiated reduced charter rates with a rate floor, plus profit-share, on these four German KG-financed vessels .  One VLCC has been sold on installments.  One VLCC is a charter-in vessel that may have joined group E below, sometime in Q2 2012.

E. Commercially-managed vessels
- 12 DH VLCCs
-  4 DH Suezmaxes

Included in this group are the 6 VLCCs and 4 Suezmaxes now owned by Frontline 2012.  Also, Knightsbridge Tankers (NASDAQ: VLCCF), has three tankers in this group.  The remaining vessels are three VLCCs financed by German investment funds.


So back to the question- Will Frontline survive?

Unlike Mr Davis (referenced in part 1), I don't think Frontline is quite dead yet.  With the restructuring, Frontline have no bank debt.  The largest chunk of debt, about $1 billion, are the capital lease obligations on the vessels from Ship Finance International, plus four vessels from group D.  Some of these lease obligations stretch out 8, 10 or 12 years, so it isn't like there's a $400 million balloon payment waiting for Frontline in any one year.  Frontline does have one largish debt obligation due in 2015.  That is the $215 million in convertible bonds.  The company purchased a $10 million slice of this debt earlier in 2012 for $5.4 million.  My thinking is Frontline management wouldn't mind repeating such buybacks on similar terms through 2015.    

So how does Frontline generate cash in the meantime?
- two additional cash infusions in the next 15 months from the SH VLCCs.
- Amortization of gains from two 2011 VLCC sales.
- Possible sale of the rights to the two Suezmax newbuilds.

The miserable VLCC spot rates already started reappearing in June 2012.  So hang on, ... another roller-coaster ride of indeteriminate length.  Except this year, and the next three years after, Frontline do have an extra weapon- most vessels in groups C and D are part of the "cash sweep" feature.  It helps reduce the blood-letting in a difficult tanker market.  

I have a concept called a "tanker biggie" with two major characteristics
1. Company operates a large fleet of tankers
2. Company has charter-in vessels and/or commercially manage vessels for other parties.
The three companies I classify as tanker biggies are Teekay Corporation (NYSE: TK), Overseas Shipping Group (NASDAQOTH: OSGIQ) and Frontline.  Each has its own method of dealing with the depressed tanker market.  Teekay opted to transfer 13 mid-sized tankers to a subsidiary, and focus on bigger projects.  Overseas Shipping Group has been squeezed, but is relying more on its US Flag operations, and returning charter-in vessels to their respective owners.  Then, there's Frontline's approach- a split risk approach.  
 
The Frontline restructuring created two entities with different risk profiles.  While Frontline 2012 has the newer assets, it also has the debt repayment and most of the capex requirements.  It also has to satisfy the loan covenants.  But Frontline's risk is much lower- as the focus is mainly on vessel operational payments.  I don't know how the Frontline 2012 story will play out.  But I think Frontline will eventually end up surviving in some form, ... in Frontline 2012.  For now, I think Frontline has enough financial resources to get through this year, and part of next year.  

One should take baby steps here- wait for Q2 results.  See how tanker market conditions play out in the traditionally weak Q3.  Wait for Q3 results.  I have suggested elsewhere, that $100 million in cash after Q2 results will get Frontline through the remainder of 2012.

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