Frontline (FRO) Tops Q1 EPS by 7c; Enters Amended Charter Agreements with Ship Finance (SFL)

Frontline (NYSE: FRO) reported Q1 EPS of $0.25, $0.07 better than the analyst estimate of $0.18.

Frontline Ltd. also announced that the Company has entered into a heads of agreement to amend the terms of the long term charter agreements with Ship Finance International Limited (NYSE: SFK) for the remainder of the charter period.

A subsidiary of Frontline has 17 vessels on charter from Ship Finance with an average remaining charter period of 7.7 years. The new agreement will take effect from July 1, 2015 and will reflect a combination of reduced long-term base rates, increased profit split to Ship Finance, increased operating expenses payable by Ship Finance, release of Frontline's guarantee for the charters and an ownership interest in Frontline for Ship Finance.

• New time charter rates for VLCCs: $20,000/day
• New time charter rates for Suezmax tankers: $15,000/day
• New opex for all vessels: $9,000/day payable by Ship Finance (previously $6,500/day)
• New profit split: 50%/50% above new time charter rates
• 55 million Frontline shares will be issued to Ship Finance

The chartering counterparty will continue to be a subsidiary of Frontline, and in exchange for releasing Frontline from the current guarantee obligation on the charters, a cash buffer of $34 million ($2 million per vessel) will be built up in the chartering counterparty.

Accrued cash sweep by Ship Finance from January through June 2015 based on the existing agreement, estimated to be approximately $20 million, will be paid to Ship Finance in July, 2015.

In the current charter arrangement, Ship Finance is entitled to a 25% profit split above an average of $26,737/day for the VLCCs and an average of $21,100/day for the Suezmax tankers, calculated and payable on an annual basis. Frontline prepaid $50 million in profit split in December 2011 and no additional profit split has so far accrued in excess of this amount.

The new profit split arrangement will start accruing from July 1 and will be calculated and payable on a quarterly basis. Going forward, profit split payments will not be subject to the previous $50 million threshold.

The estimated reduction in fixed charter payments to Ship Finance under the amendments to the charter agreements is approximately $283 million. In addition, the new agreement significantly strengthens Frontline's balance sheet and reduces its financial risk.

Based on closing share price on May 28, 2015, of $3.06 per share, the market value of the Frontline shares to be issued to Ship Finance is approximately $168 million, and based on the volume-weighted share price last 3 months of $2.64 per share, the value is $145 million.

The shares to Ship Finance will be issued concurrently with completion of the new agreement, representing approximately 27.7% per cent of the shares and votes in Frontline following completion of the share issue. Frontline has agreed to register those shares for resale with the US Securities and Exchange Commission.

In addition, Ship Finance owns approximately $116 million of senior unsecured amortizing notes in Frontline, which will remain unchanged.

CEO of Frontline Management AS, Robert Hvide Macleod said in a comment: "The new structure will reduce Frontlines cash break-even rates significantly and ensure a more sustainable long-term structure. This agreement significantly strengthens Frontline's balance sheet and reduces its financial risk. The board and management can now shift the focus from balance sheet restructuring to business development and growth. This represents a major milestone for the company."

For earnings history and earnings-related data on Frontline (FRO) click here.

You May Also Be Interested In

• Nanometrics (NANO) Issues Business Update, Reports FY23 Results
• VIA optronics AG (VIAO) to Be Delisted from NYSE
• Meritage Homes Corporation (MTH) Tops Q1 EPS by 151c; offers guidance