Frontline plc 6-K, filed Sep 1, 2020
Frontline plc (FRO)
6-K
2020-09-01
For: 2020-06-30
View Original
Added on
April 10, 2026
About this 6-K
Frontline plc filed this 6-K on September 1, 2020.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13A-16 OR 15D-16 UNDER THE SECURITIES
EXCHANGE ACT OF 1934
For the six months ended June 30, 2020
Commission File Number: 001-16601
FRONTLINE LTD.
(Translation of registrant's name into English)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [ X ] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ________.
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ________.
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.
INFORMATION CONTAINED IN THIS FORM 6-K REPORT
Attached hereto as Exhibit 1 to this Report on Form 6-K are the unaudited condensed consolidated interim financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations of Frontline Ltd. (the “Company”) for the six months ended June 30, 2020.
This Report on Form 6-K is hereby incorporated by reference into the Company's Registration Statement on Form F-3, filed with the Commission on July 5, 2019 (File No. 333-232567).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FRONTLINE LTD. (registrant) | ||||||||||||||
| Dated: September 1, 2020 | By: | /s/ Inger M. Klemp | ||||||||||||
| Name: Inger M. Klemp | ||||||||||||||
| Title: Principal Financial Officer | ||||||||||||||
EXHIBIT 1
FRONTLINE LTD.
As used herein, "we," "us," "our", "Frontline" and "the Company" all refer to Frontline Ltd. This management's discussion and analysis of financial condition and results of operations should be read together with the discussion included in the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2019.
Management's Discussion and Analysis of Financial Condition and Results of Operations for the Six Months Ended June 30, 2020.
General
As of June 30, 2020, the Company’s fleet consisted of 71 vessels, with an aggregate capacity of approximately 13.4 million DWT:
(i)60 vessels owned by the Company (15 VLCCs, 27 Suezmax tankers, 18 LR2/Aframax tankers);
(ii)two VLCCs that are under finance leases;
(iii)two VLCCs chartered in from an unrelated third party; and
(iv)seven vessels that are under the Company’s commercial management (three VLCCs, two Suezmax tankers, and two Aframax tankers)
In February 2020, the Company agreed with SFL Corporation Ltd. ("SFL") to terminate the long-term charter for the 2002-built VLCC Front Hakata upon the sale and delivery of the vessel by SFL to an unrelated third party. Frontline received a compensation payment of $3.2 million from SFL for the termination of the current charter. The charter with SFL terminated in February 2020.
In April 2020, the Company sold one VLCC, which was previously recorded as an investment in finance lease and delivered the vessel to its buyers in the second quarter of 2020.
In May 2020, the Company took delivery of the Suezmax tanker Front Cruiser from Hyundai Samho Heavy Industries (“HSHI”).
In June 2020, the Company took delivery of the VLCC Front Dynamic from HSHI.
In August 2019, the Company entered into a Sale and Purchase Agreement ("SPA") with Trafigura Maritime Logistics ("TML"), a wholly owned subsidiary of Trafigura Group Pte Ltd ("Trafigura"), to acquire 10 Suezmax tankers built in 2019 through the acquisition of a special purpose vehicle, which will hold the vessels (the "Acquisition"). In addition, the Company entered into fixed rate, three year time charter-out contracts for five of the 10 Suezmax tankers acquired under the SPA to a subsidiary of Trafigura at a daily base rate of $28,400 with a 50% profit share above the base rate. Up until the closing of the Acquisition, the time-charter revenues, net of charter-hire expense, for these five vessels have been recorded as a reduction in the acquisition costs of 10 vessels acquired under the SPA. From the date of closing of the transaction in March 2020, the revenues related to these arrangements, net of expenses are reflected in our earnings. See Note 19 to our Condensed Consolidated Financial Statements.
Fleet changes
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| (number of vessels) | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Year ended December 31, 2019 | ||||||||
| VLCCs | |||||||||||
| At start of period | 19 | 17 | 17 | ||||||||
| Other acquisitions/newbuilding deliveries | 1 | 2 | 2 | ||||||||
| Disposal/lease termination | (1) | — | — | ||||||||
| Chartered-in/redelivered | — | — | — | ||||||||
| At end of period | 19 | 19 | 19 | ||||||||
| Suezmax tankers | |||||||||||
| At start of period | 26 | 16 | 16 | ||||||||
| Chartered-in/redelivered (2) | (10) | — | 10 | ||||||||
| Other acquisitions/newbuilding deliveries (2) | 11 | — | — | ||||||||
| At end of period | 27 | 16 | 26 | ||||||||
| LR2/Aframax tankers | |||||||||||
| At start of period | 18 | 18 | 18 | ||||||||
| Other acquisitions/newbuilding deliveries | — | — | — | ||||||||
| At end of period | 18 | 18 | 18 | ||||||||
| Total | |||||||||||
| At start of period | 63 | 51 | 51 | ||||||||
| Other acquisitions/newbuilding deliveries (2) | 12 | 2 | 2 | ||||||||
| Disposal/lease termination | (1) | — | — | ||||||||
| Chartered-in/redelivered (2) | (10) | — | 10 | ||||||||
| At end of period | 64 | 53 | 63 | ||||||||
(1) The table above excludes vessels commercially managed on behalf of third parties and related parties and also the vessel previously recorded as an investment in finance lease and sold in the six months ended June 30, 2020.
(2) 10 Suezmax tankers chartered-in from Trafigura have been recorded as owned vessels upon closing of the Acquisition in March 2020.
Tanker Market Update
The first six months of 2020 brought dramatic crude oil demand correction the likes of which we have never seen. The demand shock brought on by COVID-19 was so large and sudden that global commercial inventories quickly surged to record levels, effectively utilizing all available land-based capacity. At the same time, the crude oil market went into contango, encouraging traders to store oil on tankers and driving demand for short-term charters of tankers. This in turn resulted in exceptionally strong tanker rates, which are reflected in our results for the second quarter of 2020.
The freight market has since receded, and rates have declined to lower levels. Although signs of a recovery are evident, as economies have begun to re-open, the recovery in demand is unlikely to be linear and the extent and duration of the impact of COVID-19 is difficult to gauge. It is highly likely that demand will take some time to fully recover, and we shouldn’t expect seasonal strength in the winter months simply based on historical trends. Invariably, global oil demand looks to be significantly lower at the end of 2020, relative to year-end 2019.
The demand shock is likely behind us, but there is also significant month-to-month volatility in the demand forecast. In the second quarter of 2020, global oil demand fell by 16.4 mb/d compared to 2019, a previously unimaginable decline. The IEA forecasts that world oil demand will decline by 7.9 mb/d in 2020 before recovering by 5.3 mb/d to 97.4 mb/d, in 2021, a figure the IEA concedes is highly uncertain. Supply also fell to a nine-year low of 86.9 mb/d
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in the second quarter of 2020, primarily due to production cuts from OPEC+, the United States and Canada. Forecasts suggest that a significant portion of this cut could return in the next coming quarters as the Northern Hemisphere moves toward winter.
The vessel supply side of the equation continues to improve which is very positive. The orderbook as a percent of the total fleet is at the lowest level since 1997 with only 69 VLCCs on order. At the same time the average age of the VLCC fleet as of the end of the second quarter of 2020, was at the highest level since September 2002. By the end of 2021, there will be 65 vessels that are older than 20 years and an additional 85 that are older than 17.5 years. While a pandemic like COVID-19 was virtually impossible to imagine, such a positive outlook for fleet supply growth defies historical convention. The effect of slowing fleet supply growth will be pushed out to 2021 or 2022, but it should be material and lead to a sustained period of higher rates.
In the short-term, Frontline has secured sufficient charter coverage to reduce the effective breakeven levels for our vessels trading in the spot market and lessen the impact of market volatility. The Company is also well-positioned to generate significant cash on the back of an improving market outlook. Although we acknowledge the uncertainty of current economic conditions, we believe that over the long term, global stimulus measures will drive increased commodity demand at a time when fleet growth has begun to slow significantly.
COVID-19 Update
Frontline has maintained its specific Frontline guide-lines for the ship managers to follow in addition to its robust emergency management plan adopted in early January in response to the COVID-19 pandemic in order to ensure the health and safety of our employees while maintaining business operations as efficiently as possible. All crewing managers continue to follow the guidance issued by the World Health Organization and the International Chamber of Shipping to ensure that the proper protocols are in place on board our vessels. Our technical department is hosting regular meetings with all crewing managers across all business segments to discuss and handle any issues, in particular challenges facing our crew and safe operations, as they arise. To date, issues have primarily related to crew transfers.
Results of Operations
Amounts included in the following discussion are derived from our Unaudited Condensed Consolidated Financial Statements for the six months ended June 30, 2020 and June 30, 2019.
Total operating revenues, voyage expenses and commissions
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Time charter revenues | 76,534 | 19,404 | ||||||||||||
| Voyage charter revenues | 708,528 | 395,445 | ||||||||||||
| Finance lease interest income | — | 484 | ||||||||||||
| Other income | 13,842 | 16,350 | ||||||||||||
| Total operating revenues | 798,904 | 431,683 | ||||||||||||
| Voyage expenses and commissions | 209,263 | 188,176 | ||||||||||||
Time charter revenues increased by $57.1 million in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 primarily due to the income recognized from the five vessels chartered out to Trafigura after the closing of the Acquisition and the net delivery of four vessels to time charters with increased rates.
Voyage charter revenues increased by $313.1 million in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 primarily due to the increase in market freight rates, as well as the delivery of five vessels acquired from Trafigura and two newbuildings onto voyage charters. These factors were partially offset by
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the net increase in vessels trading under time charters and the termination of the lease on one vessel chartered-in from SFL.
The finance lease interest income relates to the investment in a finance lease for one VLCC, which has decreased as the underlying lease receivable was fully amortized.
Other income primarily comprises the income earned from the commercial management of related party and third party vessels and newbuilding supervision fees derived from related parties. The decrease in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 was due to a decrease in newbuilding supervision fees earned.
Voyage expenses and commissions increased by $21.1 million in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 primarily due to the charter-in and subsequent acquisition of 10 Suezmax tankers from Trafigura, the delivery of four newbuildings between January 2019 and June 2020, and an increase in commissions due to increased market rates. This was partially offset by a reduction in expenses due to the delivery of vessels onto time charters and the termination of the lease for one VLCC chartered-in from SFL Corp Ltd ("SFL").
Other operating gains
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Gain on termination of vessel leases | 7,409 | — | ||||||||||||
| Gain on sale of vessel | 12,354 | — | ||||||||||||
| Gain on settlement of claim | 3,422 | — | ||||||||||||
| Gain on pool arrangements | 766 | 681 | ||||||||||||
| Other gains | 268 | 288 | ||||||||||||
| Other operating gains | 24,219 | 969 | ||||||||||||
In February 2020, the Company agreed with SFL to terminate the long-term charter for the 2002-built VLCC Front Hakata upon the sale and delivery of the vessel by SFL to an unrelated third party. Frontline received a compensation payment of $3.2 million from SFL for the termination of the current charter and recognized a gain on termination of $7.4 million. The charter with SFL terminated in February 2020.
In April 2020, the Company sold one VLCC previously recorded as an investment in finance lease at a purchase price of $25.5 million. The vessel was delivered to its buyer in June 2020 and the Company recorded a gain on sale of $12.4 million.
In the six months ended June 30, 2020, the Company recorded a gain on pool arrangements of $0.8 million (2019: gain of $0.7 million) and a $3.4 million gain on settlement of a claim. A further $0.3 million (2019: $0.3 million) was recognized in relation to other miscellaneous settlements.
Contingent rental expense (income)
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Contingent rental expense (income) | 8,270 | (2,555) | ||||||||||||
Contingent rental expense in the six months ended June 30, 2020 relates to the charter party contracts with SFL and was incurred by the Company because the actual profit share payable in the six months ended June 30, 2020 of $10.4 million (2019: $1.5 million) was $8.3 million more (2019: $2.6 million less) than the amount accrued in the lease obligation payable when the leases were recorded at fair value at the time of the merger with Frontline 2012 Ltd. ("Frontline 2012") in 2015. The increase in contingent rental expense is due to an increase in market rates
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which has increased the amount payable to SFL in the six months ended June 30, 2020, partially offset by a reduction in the number of vessels leased from SFL.
Ship operating expenses
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Ship operating expenses | 79,831 | 70,425 | ||||||||||||
Ship operating expenses are the direct costs associated with running a vessel and include crew costs, vessel supplies, repairs and maintenance, dry docking expenses, lubricating oils and insurance.
Ship operating expenses increased in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 primarily due to the delivery of four newbuildings and the 10 vessels chartered-in and subsequently purchased since January 1, 2019. These factors were partially offset by a reduction in ship operating expenses as a result of the redelivery of one vessel chartered-in under long-term lease from SFL and a decrease in drydocking costs.
Charter hire expenses
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Charter hire expenses | 4,454 | 4,244 | ||||||||||||
In the six month period ended June 30, 2020 and 2019, the Company chartered-in two VLCCs under operating leases. The increase in charter hire expense is due to increased hire payable under the new charter-in contracts in the six months ended June 30, 2020.
Administrative expenses
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Administrative expenses | 20,604 | 20,880 | ||||||||||||
Administrative expenses in the six months ended June 30, 2020 are comparable to the six months ended June 30, 2019.
Depreciation
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Depreciation | 66,725 | 55,719 | ||||||||||||
Depreciation increased in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 due to the delivery of four newbuildings since January 2019 and the charter-in and subsequent purchase of 10 vessels from Trafigura. These factors were partially offset by a decrease in depreciation due to the redelivery of one vessel chartered-in under finance lease in the six months ended 2020.
Interest income
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Interest income | 597 | 674 | ||||||||||||
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Interest income in the six months ended June 30, 2020 and the six months ended June 30, 2019 relates solely to interest received on bank deposits.
Interest expense
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Interest expense | (40,859) | (46,685) | ||||||||||||
Interest expense decreased in the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 primarily due to the scheduled repayment of outstanding debt and the movement in interest rates, offset by the increase in finance lease interest expense due to the net increase in vessels under finance lease, which were subsequently purchased, as well as the additional interest expense and amortization of deferred charges in relation to loan facilities and commitments since January 1, 2019.
Share of results of associated company
| (in thousands of $) | 2020 | 2019 | |||||||||
| Share of results of associated company | (1,427) | 842 | |||||||||
In October 2019, the Company announced that FMSI, a company accounted for under the equity method, and Clean Marine AS had entered into a term sheet pursuant to which the entities would effect a business combination to create a leading provider of Exhaust Gas Cleaning Systems ("EGCS" or "scrubbers"). In order to facilitate the merger a new holding company, FMS Holdco, was established into which the former shareholders of FMSI contributed their shareholdings in FMSI in exchange for shares in FMS Holdco. As a result of this transaction, the Company owned 28.9% of the issued share capital of FMS Holdco. FMSI was subsequently sold to Clean Marine AS by FMS Holdco in exchange for 50% of the issued share capital of Clean Marine. The merger was completed on January 23, 2020. Furthermore, the Company acquired an additional stake in FMS Holdco from another shareholder for $0.8 million. Following the transactions, Frontline holds an effective 17.34% interest in Clean Marine AS through its 34.7% equity interest in FMS Holdco, which is accounted for under the equity method.
A share of losses of FMS Holdco of $2.6 million was recognized in the six months ended June 30, 2020.
In January 2020, the joint venture agreement with Golden Ocean and companies in the Trafigura Group to establish a leading global supplier of marine fuels was completed. As a result, Frontline took a 15% interest in the joint venture company, TFG Marine, and made a $1.5 million shareholder loan to TFG Marine. Frontline concluded that it is able to exercise significant influence over TFG Marine as a result of its equity shareholding and board representation and therefore its investment is accounted for under the equity method.
A share of results of TFG Marine of $1.1 million was recognized in the six months ended June 30, 2020.
Unrealized (loss) gain on marketable securities
| (in thousands of $) | 2020 | 2019 | |||||||||
| Unrealized (loss) gain on marketable securities | (4,542) | 302 | |||||||||
The Company recognized an unrealized loss of $4.5 million and a gain of $0.3 million due to the movement in the fair value of marketable securities for the six months ended June 30, 2020 and the six months ended June 30, 2019, respectively.
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Loss on derivatives
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Loss on derivatives | (21,746) | (9,682) | ||||||||||||
The loss on derivatives in the six months ended June 30, 2020 and the six months ended June 30, 2019 primarily relate to interest rate swap agreements as a result of movements in interest rates.
Other non-operating gain
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Other non-operating gain | 139 | 92 | ||||||||||||
Other non-operating gains primarily comprised dividends received on marketable securities, offset by bank charges.
Net income attributable to non-controlling interest
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Net income attributable to non-controlling interest | (63) | (3) | ||||||||||||
Net income attributable to non-controlling interest in the six months ended June 30, 2020 and the six months ended June 30, 2019 is primarily attributable to the non-controlling interests in the results of Seateam Management Pte. Ltd ("Seateam").
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Critical Accounting Policies and Estimates
Impairment Assessment of Goodwill
We allocate the cost of acquired companies to identifiable tangible and intangible assets and liabilities acquired, with the remaining amount being classified as goodwill. Our future operating performance may be affected by potential impairment charges related to goodwill. Goodwill is not amortized, but rather reviewed for impairment annually, or more frequently if impairment indicators arise. The Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company may elect to bypass the qualitative assessment in any period and proceed directly to performing the goodwill impairment test. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company assesses relevant events and circumstances. Examples of such events and circumstances include: (i) macroeconomic conditions; (ii) industry and market conditions; (iii) changes in cost factors that may impact earnings and cash flows; (iv) overall financial performance; (v) other entity specific events such as changes in management, strategy, customers or key personnel (vi) other events and (vii) if applicable, changes in the Company's share price, both in absolute terms and relative to peers.
The Company has adopted ASU 2017-04 (ASC 350 Intangibles - Goodwill) effective January 1, 2020, which simplifies the test for goodwill impairment. The accounting update eliminates Step 2 from the goodwill impairment test. Impairment of goodwill in excess of amounts allocable to identifiable assets and liabilities is determined using a one-step approach, based on a comparison of the fair value of the reporting unit to the book value of its net assets; if the fair value of the reporting unit is lower than the book value of its net assets, then an impairment loss is recognized for the difference. The Company has one reporting unit for the purpose of assessing potential goodwill impairment and has selected September 30 as its annual goodwill impairment testing date. The process of evaluating the potential impairment of goodwill and intangible assets is highly subjective and requires significant judgment at many points during the analysis.
We estimate the fair value of the Company based on its market capitalization plus a control premium and compare this to the carrying value of its net assets. Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts.
The Company's market capitalization at June 30, 2020 was $1,379.9 million (based on a share price of $6.98) compared to its carrying value of approximately $1,665.8 million. The Company reviewed merger transactions in North America with values of over $25.0 million in the six months ended June 30, 2020, global deals between public companies of more than $100.0 million in the last three years and global marine transport sector transactions of more than $100.0 million in the last five years and observed average control premiums (based on the one month average share price before the bid) of between 27% and 33%. Based on a range of 27% to 33% and using 30% as the mid point in the range, the fair value of the Company was calculated as $1,793.9 million. As the fair value of the Company was above the carrying value, the Company concluded that there was no requirement for an impairment.
If our stock price declines, or if our control premium declines, this could result in an impairment of some or all of the $112.5 million of goodwill. Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts. The Company believes that a control premium may be attributable, in part or in whole, to the expected synergies from combining the operations of the Company and an acquirer, particularly in respect of the benefits of operating an enlarged oil tanker fleet and assembled workforce as well as being able to take advantage of an expected reduction in costs from an expansion in scale. Events or circumstances may occur that could negatively impact our stock price, including changes in our anticipated revenues and profits and our ability to execute on our strategies. An impairment could have a material negative effect on our condensed consolidated balance sheet and results of operations.
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Liquidity and Capital Resources
We operate in a capital intensive industry and have historically financed our purchase of tankers and other capital expenditures through a combination of cash generated from operations, equity capital and borrowings from commercial banks. Our ability to generate adequate cash flows on a short and medium-term basis depends substantially on the trading performance of our vessels in the market. Historically, market rates for charters of our vessels have been volatile. Periodic adjustments to the supply of and demand for oil and product tankers causes the industry to be cyclical in nature. We expect continued volatility in market rates for our vessels in the foreseeable future with a consequent effect on our short and medium-term liquidity.
Our funding and treasury activities are conducted within corporate policies to increase investment returns while maintaining appropriate liquidity for our requirements. Cash and cash equivalents are held primarily in U.S. Dollars with some balances held in British Pounds, Euros, Norwegian Kroner and Singapore Dollars.
Our short-term liquidity requirements relate to payment of operating costs (including drydocking), funding working capital requirements, repayment of debt financing, payment of newbuilding installments, payment of upgrading costs in relation to EGCS and Ballast Water Treatment Systems ("BWTS"), lease payments for our chartered-in fleet, contingent rental expense and maintaining cash reserves against fluctuations in operating cash flows. Sources of short-term liquidity include cash balances, short-term investments and receipts from our customers. Revenues from time charters are generally received monthly or fortnightly in advance while revenues from voyage charters are received upon completion of the voyage.
As of June 30, 2020, and December 31, 2019, we had cash and cash equivalents of $224.7 million, and $174.2 million, respectively. As of June 30, 2020, and December 31, 2019, we had restricted cash balances of $16.3 million, and $3.2 million, respectively. Restricted cash as of June 30, 2020 does not include cash balances of $106.1 million (December 2019: $38.3 million), which represents 100% (December 2019: 50%) of the cash required to be maintained by the financial covenants in our loan agreements. The Company is permitted to satisfy up to 50% of the cash requirement by maintaining a committed undrawn credit facility with a remaining availability of greater than 12 months. The Company did not satisfy any of the minimum cash requirement with a committed undrawn credit facility as of June 30, 2020 because the Company's senior unsecured facility agreement with an affiliate of Hemen Holding Ltd., the Company's largest shareholder (“Hemen”), is repayable in May 2021. Furthermore, Frontline Shipping Limited ("FSL"), the chartering counterparty with SFL with respect to the remaining two VLCCs leased from them, has agreed to certain dividend restrictions as a result of the amendment of the terms of the long-term charter agreements in May 2015. In order to make or pay any dividend or other distribution to the Company, FSL shall demonstrate a cash buffer of $2.0 million per vessel both prior to and following such payment, and following payment of the next monthly hire due plus any profit share accrued under the agreement. As of June 30, 2020, the cash held by FSL was $9.3 million (December 31, 2019: $13.1 million), and these amounts are included in "Cash and cash equivalents".
Our medium and long-term liquidity requirements include funding the equity portion of investments in new or replacement vessels and repayment of bank loans. Additional sources of funding for our medium and long-term liquidity requirements include new loans, refinancing of existing arrangements, equity issues, public and private debt offerings, vessel sales, sale and leaseback arrangements and other asset sales.
As of June 30, 2020, total installments of $28.0 million had been paid in connection with the Company's current newbuilding program and remaining commitments amounted to $161.1 million, of which we expect $18.7 million to be paid in 2020 and $142.4 million to be paid in 2021.
As of June 30, 2020, the Company had entered into forward bunker purchase arrangements for the delivery of 5,000 MT of bunker fuel per month for delivery between October 2020 to December 2021. The contracts oblige the company to purchase and take delivery of the physical fuel at prices between $325 per MT and $365 per MT. In addition, the Company has entered into a further arrangement for the delivery of 5,000 MT of bunker fuel per month for delivery between January 2021 to December 2021. The contract obliges the Company to purchase and take delivery of the physical fuel at $232 per MT.
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As of June 30, 2020, the Company has remaining commitments for the installation of EGCS on 10 vessels owned by the Company, with a financial commitment of $3.7 million, excluding installation costs. These remaining commitments are due in 2020.
As of June 30, 2020, the Company has remaining commitments for the installation of BWTS on eight vessels, with a remaining commitment of $1.6 million excluding installation costs, which is due in 2020.
In August 2019, the Company entered into a sale and purchase agreement with Trafigura to acquire 10 Suezmax tankers built in 2019 through the acquisition of a special purpose vehicle, which will hold the vessels (the “Acquisition”). The Acquisition consideration consists of (i) 16,035,856 ordinary shares of Frontline at an agreed price per the SPA of $8.00 per share issuable upon signing; and (ii) a cash amount of $538.2 million, payable upon the closing of the Acquisition, which took place on March 16, 2020. Frontline agreed to time charter-in all the 10 vessels from Trafigura until the closing of the Acquisition at a daily rate of approximately $23,000. In addition, Frontline has agreed to charter-out five of the vessels to Trafigura, for a period of three years commencing in August 2019, at a daily base rate of $28,400 plus a 50% profit share. In March 2020, the Company signed a sale-and-leaseback agreement in an amount of $544.0 million with ICBCL to finance the cash amount payable upon closing of the Acquisition, which took place on March 16, 2020. The lease financing has a tenor of seven years, carries an interest rate of LIBOR plus a margin of 230 basis points, has an amortization profile of 17.8 years and includes purchase options for Frontline throughout the term with a purchase obligation at the end of the term. See Note 19 to our Condensed Consolidated Financial Statements for a detailed description of the accounting for this transaction.
In April 2020, the Company repaid $60.0 million of its $275.0 million senior unsecured facility agreement with an affiliate of Hemen. Up to $215.0 million remains available under the facility following this repayment as of June 30, 2020.
In May 2020, the Company signed a restated and amended senior secured term loan facility with Nordea in an amount of up to $50.0 million to refinance an existing loan facility maturing in March 2021. The new facility matures in March 2023, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 20 years. The facility was fully drawn down in July 2020, and $39.0 million of the refinanced facility has been recorded as long-term debt as of June 30, 2020.
In May 2020, the Company drew down $42.9 million under its senior secured term loan facility with Credit Suisse, entered into in November 2019, to partially finance the delivery of the Suezmax tanker Front Cruiser from HSHI. The facility matures five years after the vessel's delivery date, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years.
In June 2020, the Company drew down $62.5 million under its senior secured term loan facility with Crédit Agricole, entered into in May 2020, to partially finance the delivery of the VLCC Front Dynamic from HSHI. The facility matures five years after the vessel's delivery date, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years.
In June 2020, the Company entered into an Equity Distribution Agreement with Morgan Stanley & Co. LLC (the “EDA”), under which the Company may, from time to time, offer and sell its ordinary shares having aggregate sales proceeds of up to $100.0 million. As of June 30, 2020, no sales were made under the EDA.
In July 2020, the Company entered into a senior secured term loan facility with a number of banks in an amount of up to $328.6 million to refinance an existing loan facility maturing in December 2020. The new facility matures in February 2023, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years counting as from delivery date from yard. The facility was fully drawn down in July 2020 and $300.1 million of the refinanced facility has been recorded as long-term debt as at June 30, 2020.
In August 2020, the Company obtained a financing commitment for a senior secured term loan facility in an amount of up to $133.7 million from CEXIM and Sinosure to partially finance the remaining cost of $161.1 million for four LR2 tankers under construction. The facility will have a tenor of 12 years, carry an interest rate of LIBOR plus a
10
margin in line with the Company's other loan facilities and will have an amortization profile of 17 years. The facility is subject to final documentation.
Cash Flows
The following summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2020.
Net cash provided by operating activities
Net cash provided by operating activities in the six months ended June 30, 2020 was $445.5 million compared to $143.0 million in the six months ended June 30, 2019.
The increase was driven by an increase in voyage and time charter revenues of $370.2 million, partially offset by an increase in voyage and ship operating expenses of $21.1 million and $9.4 million, respectively. The key factors in relation to this were (i) the increase in market freight rates and (ii) a net increase in the fleet that we own and charter-in primarily as a result of the delivery of the 10 vessels chartered-in and then subsequently acquired from Trafigura and four newbuildings delivered since January 1, 2019 offset by the redelivery on termination of the lease for one vessel chartered in under finance lease from SFL.
The net increases in cash provided by operating activities were partially offset by the movement in working capital balances which has decreased the cash provided by $37.9 million. The movement in working capital balances are impacted by the timing of voyages and in particular the timing of the billing and receipt of freights, and also by the timing of fueling and consumption of fuel on board our vessels. In particular, freight rates rose significantly since the end of 2019 which has led to a corresponding increase in voyages in progress and receivables as the higher freights, which are typically paid on completion of a voyage, have not been fully received in the six months ended June 30, 2020.
Our reliance on the spot market contributes to fluctuations in cash flows from operating activities as a result of its exposure to highly cyclical tanker rates. Any increase or decrease in the average TCE rates earned by our vessels in periods subsequent to June 30, 2020, compared with the actual TCE rates achieved during the six months ended June 30, 2020, will have a positive or negative comparative impact, respectively, on the amount of cash provided by operating activities. We estimate that average daily total cash cost break even TCE rates for the remainder of 2020 will be approximately $22,600, $18,900 and $15,700 for our owned and leased VLCCs, Suezmax tankers, and LR2/Aframax tankers, respectively. These are the daily rates our vessels must earn to cover budgeted operating costs, dry dock expenses, estimated interest expenses, scheduled loan principal repayments, bareboat hire, time charter hire and corporate overhead costs. These rates do not take into account capital expenditures and contingent rental expense.
Net cash used in investing activities
Net cash used in investing activities of $662.3 million in the six months ended June 30, 2020 comprised mainly of the cash impact of closing the Acquisition with Trafigura of $533.7 million, capitalized additions of $152.8 million, primarily in respect of the delivery of two newbuildings and additions to four newbuilding contracts along with EGCS and BWTS upgrade costs. In addition, a $1.5 million loan was advanced to TFG Marine, and $0.8 million was paid to acquire an additional share in FMS Holdco, both of which are associated companies accounted for under the equity method. See Note 13 for additional information on transactions related to our investments in associated companies. The cash used in investing activities was partially offset by $26.6 million of proceeds from the sale of one vessel previously recorded as an investment in finance lease in the six months ended June 30, 2020.
Net cash provided by financing activities
Net cash provided by financing activities in the six months ended June 30, 2020 of $280.5 million was primarily a result of drawdown of debt in the amount of $650.3 million in relation to the new loan facilities in the period and the issuance of 798,000 new ordinary shares as part of options exercise which generated net proceeds of $5.8 million. In addition, the Company received $3.2 million as compensation payment in relation to the termination of
11
the finance lease of one VLCC with SFL. This was partially offset by the debt and finance lease repayments of $149.7 million and $8.0 million, respectively, the payment of dividends of $215.0 million, as well as $6.1 million in debt commitment fees paid.
Debt restrictions
The Company's loan agreements contain loan-to-value clauses, which could require the Company to post additional collateral or prepay a portion of the outstanding borrowings should the value of the vessels securing borrowings under each of such agreements decrease below required levels. In addition, the loan agreements contain certain financial covenants, including the requirement to maintain a certain level of free cash, positive working capital and a value adjusted equity covenant. Restricted cash does not include cash balances of $106.1 million (December 2019: $38.3 million), which represents 100% (December 2019: 50%) of the cash required to be maintained by the financial covenants in our loan agreements. The Company is permitted to satisfy up to 50% of the cash requirement by maintaining a committed undrawn credit facility with a remaining availability of greater than 12 months. The Company did not satisfy any of the minimum cash requirement with a committed undrawn credit facility as at June 30, 2020 because the Company's senior unsecured facility agreement with an affiliate of Hemen is repayable in May 2021. These cash amounts are included in "Cash and cash equivalents". Failure to comply with any of the covenants in the loan agreements could result in a default, which would permit the lender to accelerate the maturity of the debt and to foreclose upon any collateral securing the debt. Under those circumstances, the Company might not have sufficient funds or other resources to satisfy its obligations.
The current portion of long-term debt as of June 30, 2020 includes $320.3 million of balloon payments due on final maturity of the $466.5 million term loan facility in April 2021 and of the $109.2 million term loan facility in June 2021. The Company expects to refinance these facilities prior to their maturities in April and June 2021, respectively. We believe that cash on hand and borrowings under our current and expected credit facilities, along with cash generated from operating activities will be sufficient to fund our requirements for, at least, the twelve months from the date of this interim report.
Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The Company is exposed to the impact of interest rate changes primarily through its floating-rate borrowings that require the Company to make interest payments based on LIBOR. Significant increases in interest rates could adversely affect operating margins, results of operations and ability to service debt. The Company uses interest rate swaps to reduce its exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with its floating-rate debt. The Company is exposed to the risk of credit loss in the event of non-performance by the counterparty to the interest rate swap agreements.
As of June 30, 2020, the Company's outstanding debt, which was at variable interest rates, net of the amount subject to interest rate swap agreements, was $1,450.3 million. Based on this, a one percentage point increase in annual LIBOR interest rates would increase its annual interest expense by approximately $14.5 million, excluding the effects of capitalization of interest.
Currency Risk
The majority of the Company's transactions, assets and liabilities are denominated in U.S. dollars, its functional currency. Certain of its subsidiaries report in British pounds, Norwegian kroner or Singapore dollars and risks of two kinds arise as a result: a transaction risk, that is, the risk that currency fluctuations will have an effect on the value of cash flows; and a translation risk, which is the impact of currency fluctuations in the translation of foreign operations and foreign assets and liabilities into U.S. dollars in the condensed consolidated financial statements.
Inflation
12
Inflation has only a moderate effect on the Company's expenses given current economic conditions. In the event that significant global inflationary pressures appear, these pressures would increase operating, voyage, general and administrative, and financing costs.
Interest Rate Swap Agreements
In February 2013, Frontline 2012 entered into six interest rate swaps with Nordea Bank whereby the floating interest rate on an original principal amount of $260.0 million of the then anticipated debt on 12 MR product tanker newbuildings was switched to fixed rate. These newbuildings were subsequently financed from the $466.5 million term loan facility. In February 2016, the Company entered into an interest rate swap with DNB whereby the floating interest on notional debt of $150.0 million was switched to a fixed rate. In the six months ended June 30, 2020, the Company entered into three interest rate swaps with DNB whereby the floating interest rate on notional debt totaling $250.0 million was switched to a fixed rate. In the six months ended June 30, 2020, the Company entered into two interest rate swaps with Nordea Bank whereby the floating interest rate on notional debt of $150.0 million was switched to a fixed rate. The fair value of these swaps as of June, 2020 was a receivable of nil (December 2019: receivable of $0.1 million) and a payable of $25.7 million (December 2019: $4.3 million). Credit risk exists to the extent that the counterparty is unable to perform under the contracts, but this risk is considered remote as the counterparty is a bank, which participates in the loan facility to which the interest rate swaps are related. The Company recorded a loss on these interest swaps of $21.7 million in the six months ended June 30, 2020 (six months ended June 30, 2019: loss of $9.7 million).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Matters discussed in this report and the documents incorporated by reference may constitute forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements, which include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.
Frontline Ltd. and its subsidiaries, or the Company, desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation. This report and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance, and are not intended to give any assurance as to future results. When used in this documents, the words "believe," "anticipate," "intend," "estimate," "forecast," "project," "plan," "potential," "will," "may," "should," "expect" and similar expressions, terms or phrases may identify forward-looking statements.
The forward-looking statements in this report are based upon various assumptions, including without limitation, management's examination of historical operating trends, data contained in our records and data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include
•the strength of world economies;
•fluctuations in currencies and interest rates;
•general market conditions, including fluctuations in charter hire rates and vessel values, changes in the supply and demand for vessels comparable to ours;
•the highly cyclical nature of the industry that we operate in;
•the loss of a large customer or significant business relationship;
•changes in worldwide oil production and consumption and storage;
13
•changes in the Company's operating expenses, including bunker prices, drydocking, crew costs and insurance costs;
•planned, pending or recent acquisitions, business strategy and expected capital spending or operating expenses, including drydocking, surveys and upgrades;
•risks associated with any future vessel construction;
•our expectations regarding the availability of vessel acquisitions and our ability to complete acquisition transactions planned;
•our ability to renew our time charters when they expire or to enter into new time charters;
•availability of financing and refinancing, our ability to obtain financing and comply with the restrictions and other covenants in our financing arrangements;
•availability of skilled crew members other employees and the related labor costs;
•work stoppages or other labor disruptions by our employees or the employees of other companies in related industries;
•compliance with governmental, tax, environmental and safety regulation, any non-compliance with the U.S.
•the impact of increasing scrutiny and changing expectations from investors, lenders and other market participants with respect to our Environmental, Social and Governance policies;
•Foreign Corrupt Practices Act of 1977 (FCPA) or other applicable regulations relating to bribery;
•the impact of the discontinuance of LIBOR after 2021 on interest rates of our debt that reference LIBOR;
•general economic conditions and conditions in the oil industry;
•effects of new products and new technology in our industry, including the potential for technological innovation to reduce the value of our vessels and charter income derived therefrom;
•vessel breakdowns and instances of off-hire;
•the impact of an interruption in or failure of our information technology and communications system, including the impact of cyber attacks, upon our ability to operate;
•potential conflicts of interest involving members of our board of directors and senior management;
•the failure of counter parties to fully perform their contracts with us;
•our dependence on key personnel;
•adequacy of insurance coverage;
•our ability to obtain indemnities from customers;
•changes in laws, treaties or regulations;
•the volatility of the price of our ordinary shares;
•our incorporation under the laws of Bermuda and the different rights to relief that may be available compared to other countries, including the United States;
•changes in governmental rules and regulations or actions taken by regulatory authorities;
•government requisition of our vessels during a period of war or emergency;
•potential liability from pending or future litigation;
•the arrest of our vessels by maritime claimants;
•general domestic and international political conditions;
•any further changes in US trade policy that could trigger retaliatory actions by the affected countries;
•potential disruption of shipping routes due to accidents, political events, acts by terrorists or acts of piracy on ocean-going vessels;
•the impact of adverse weather and natural disasters;
•the current outbreak of the coronavirus COVID-19 or similar pandemics; and
•other important factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission or Commission.
We caution readers of this report not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward looking statements are not guarantees of our future performance, and actual results and future developments may vary materially from those projected in the forward looking statements. Please see our Risk Factors in Item 3 of the Company's Annual Report on Form 20-F for the year ended December 31, 2019, filed with the Commission on March 20, 2020 for a more complete discussion of these and other risks and uncertainties.
14
FRONTLINE LTD.
INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
| Condensed Consolidated Statements of Operations for the six months ended June 30, 2020 and June 30, 2019 (unaudited) | |||||
| Condensed Consolidated Statements of Comprehensive Income for the six months ended June 30, 2020 and June 30, 2019 (unaudited) | |||||
| Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (unaudited) | |||||
| Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019 (unaudited) | |||||
| Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2020 and June 30, 2019 (unaudited) | |||||
| Notes to the Unaudited Condensed Consolidated Financial Statements | |||||
15
Frontline Ltd.
Condensed Consolidated Statements of Operations for the six months ended June 30, 2020 and June 30, 2019
(in thousands of $, except per share data)
| 2020 | 2019 | |||||||||||||||||||
| Operating revenues | ||||||||||||||||||||
| Time charter revenues | ||||||||||||||||||||
| Voyage charter revenues | ||||||||||||||||||||
| Finance lease interest income | ||||||||||||||||||||
| Other income | ||||||||||||||||||||
| Total operating revenues | ||||||||||||||||||||
| Other operating gains | ||||||||||||||||||||
| Voyages expenses and commissions | ||||||||||||||||||||
| Contingent rental expense (income) | ( | |||||||||||||||||||
| Ship operating expenses | ||||||||||||||||||||
| Charter hire expense | ||||||||||||||||||||
| Administrative expenses | ||||||||||||||||||||
| Depreciation | ||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||
| Net operating income | ||||||||||||||||||||
| Other income (expenses) | ||||||||||||||||||||
| Interest income | ||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||
| Share of results of associated company | ( | |||||||||||||||||||
| Foreign currency exchange loss | ( | ( | ||||||||||||||||||
| Unrealized gain (loss) on marketable securities | ( | |||||||||||||||||||
| Loss on derivatives | ( | ( | ||||||||||||||||||
| Other non-operating gain | ||||||||||||||||||||
| Net other expenses | ( | ( | ||||||||||||||||||
| Net income before income taxes and non-controlling interest | ||||||||||||||||||||
| Income tax benefit (expense) | ( | |||||||||||||||||||
| Net income | ||||||||||||||||||||
| Net income attributable to non-controlling interest | ( | ( | ||||||||||||||||||
| Net income attributable to the Company | ||||||||||||||||||||
| Basic earnings per share attributable to the Company ($) | ||||||||||||||||||||
| Diluted earnings per share attributable to the Company ($) | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
16
Frontline Ltd.
Condensed Consolidated Statements of Comprehensive Income for the six months ended June 30, 2020 and June 30, 2019
(in thousands of $)
| 2020 | 2019 | |||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Foreign currency translation income (loss) | ( | |||||||||||||||||||
| Other comprehensive income (loss) | ( | |||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | ||||||||||||||||||||
| Comprehensive income attributable to the Company | ||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
17
Frontline Ltd.
Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019
(in thousands of $)
| 2020 | 2019 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | ||||||||||||||
| Restricted cash | ||||||||||||||
| Marketable securities | ||||||||||||||
| Marketable securities pledged to creditors | ||||||||||||||
| Trade accounts receivable, net | ||||||||||||||
| Related party receivables | ||||||||||||||
| Other receivables | ||||||||||||||
| Inventories | ||||||||||||||
| Voyages in progress | ||||||||||||||
| Prepaid expenses and accrued income | ||||||||||||||
| Investment in finance lease | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Long-term assets | ||||||||||||||
| Newbuildings | ||||||||||||||
| Vessels and equipment, net | ||||||||||||||
| Vessels and equipment under finance leases, net | ||||||||||||||
| Right-of-use assets under operating leases | ||||||||||||||
| Investment in finance lease | ||||||||||||||
| Investment in associated company | ||||||||||||||
| Goodwill | ||||||||||||||
| Loan notes receivable | ||||||||||||||
| Long-term derivative instruments receivable | ||||||||||||||
| Prepaid consideration | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Total assets | ||||||||||||||
| LIABILITIES AND EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Short-term debt and current portion of long-term debt | ||||||||||||||
| Current portion of obligations under finance leases | ||||||||||||||
| Current portion of obligations under operating leases | ||||||||||||||
| Related party payables | ||||||||||||||
| Trade accounts payable | ||||||||||||||
| Accrued expenses | ||||||||||||||
| Derivative instruments payable | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
18
| Obligations under finance leases | ||||||||||||||
| Obligations under operating leases | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
| Equity | ||||||||||||||
Share capital ( | ||||||||||||||
| Additional paid in capital | ||||||||||||||
| Contributed surplus | ||||||||||||||
| Accumulated other comprehensive income | ||||||||||||||
| Retained earnings (deficit) | ( | |||||||||||||
| Total equity attributable to the Company | ||||||||||||||
| Non-controlling interest | ||||||||||||||
| Total equity | ||||||||||||||
| Total liabilities and equity | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
19
Frontline Ltd.
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and June 30, 2019
(in thousands of $)
| 2020 | 2019 | |||||||||||||
| Net cash provided by operating activities | ||||||||||||||
| Additions to newbuildings, vessels and equipment | ( | ( | ||||||||||||
| Investment in associated company | ( | |||||||||||||
| Net proceeds from sale of vessel | ||||||||||||||
| Cash inflow on repayment of loan from associated company | ||||||||||||||
| Cash outflow on issuance of loan to associated company | ( | |||||||||||||
| Trafigura asset acquisition | ( | |||||||||||||
| Net cash used in investing activities | ( | ( | ||||||||||||
| Proceeds from issuance of debt | ||||||||||||||
| Repayment of long-term debt | ( | ( | ||||||||||||
| Repayment of finance leases | ( | ( | ||||||||||||
| Net proceeds from issuance of shares | ||||||||||||||
| Lease termination compensation receipt | ||||||||||||||
| Purchase of shares from non-controlling interest | ( | |||||||||||||
| Debt fees paid | ( | ( | ||||||||||||
| Dividends paid | ( | |||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| Net change in cash and cash equivalents and restricted cash | ||||||||||||||
| Cash and cash equivalents and restricted cash at beginning of period | ||||||||||||||
| Cash and cash equivalents and restricted cash at end of period | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
20
Frontline Ltd.
Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2020 and June 30, 2019
(in thousands of $, except number of shares)
| 2020 | 2019 | |||||||||||||
| Number of shares outstanding | ||||||||||||||
| Balance at beginning of the period | ||||||||||||||
| Shares issued on exercise of options | — | |||||||||||||
| Shares issued under ATM program | — | |||||||||||||
| Balance at the end of the period | ||||||||||||||
| Share capital | ||||||||||||||
| Balance at beginning of the period | ||||||||||||||
| Shares issued on exercise of options | — | |||||||||||||
| Shares issued under ATM program | — | |||||||||||||
| Balance at the end of the period | ||||||||||||||
| Additional paid in capital | ||||||||||||||
| Balance at beginning of the period | ||||||||||||||
| Stock compensation expense | ( | |||||||||||||
| Gain attributable to change in non-controlling interest | ( | |||||||||||||
| Shares issued on exercise of options | — | |||||||||||||
| Shares issued under ATM program | — | |||||||||||||
| Balance at end of the period | ||||||||||||||
| Contributed surplus | ||||||||||||||
| Balance at beginning of the period | ||||||||||||||
| Cash dividend | ( | |||||||||||||
| Balance at end of the period | ||||||||||||||
| Accumulated other comprehensive income | ||||||||||||||
| Balance at beginning of the period | ||||||||||||||
| Other comprehensive income | ( | |||||||||||||
| Balance at end of the period | ||||||||||||||
| Retained earnings (deficit) | ||||||||||||||
| Balance at beginning of the period | ( | ( | ||||||||||||
| Net income | ||||||||||||||
| Cash dividend | ( | |||||||||||||
| Balance at end of the period | ( | |||||||||||||
| Total equity attributable to the Company | ||||||||||||||
21
| Non-controlling interest | ||||||||||||||
| Balance at beginning of the period | ||||||||||||||
| Net income attributable to non-controlling interest | ||||||||||||||
| Adjustment on repurchase of non-controlling interest | ( | |||||||||||||
| Balance at end of the period | ||||||||||||||
| Total equity | ||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
22
Frontline Ltd.
Notes to the Unaudited Condensed Consolidated Financial Statements
1. INTERIM FINANCIAL DATA
2. ACCOUNTING POLICIES
Basis of accounting
The Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States. The Condensed Consolidated Financial Statements include the assets and liabilities of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated on consolidation.
The Condensed Consolidated Financial Statements are prepared in accordance with the accounting policies, which are described in the Company's Annual Report on Form 20-F for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on March 20, 2020, with the exception of certain changes noted below.
ASU 2016-13 (ASC 326 Financial Instruments - Credit losses)
The Company has adopted this update effective January 1, 2020 using the modified retrospective transition approach. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. In may 2019, the FASB issued ASU No. 2019-05 Codification improvements to Financial instruments-Credit Losses, (Topic 326), which provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. In April 2019, the FASB issued ASU No. 2019-04, Codification improvements to Financial instruments-Credit Losses, (Topic 326), which includes amendments related to the estimate of equity method losses. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The Company assesses allowances for its estimate of expected credit losses based on historical experience, other currently available evidence, and reasonable and supportable forecasts about the future, including the use of credit default ratings from third party providers of credit rating data. The Company assesses credit risk in relation to its non-operating lease receivables using a portfolio approach. The Company's main portfolio segments include (i) state-owned enterprises, (ii) oil majors, (iii) commodities traders and (iv) related parties. In addition, the Company performs individual assessments for customers that do not share risk characteristics with other customers (for example a customer under bankruptcy or a customer with known disputes or collectability issues). The Company makes significant judgements and assumptions to estimate its expected losses. Based on the Company's evaluation, these standard updates have not materially impacted its Condensed Consolidated Financial Statements on adoption or as of June 30, 2020.
ASU 2017-04 (ASC 350 Intangibles - Goodwill)
23
The Company has adopted this update effective January 1, 2020, which simplifies the test for goodwill impairment. The accounting update eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of the assets acquired and liabilities assumed in a business combination. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The Company will apply the one step approach in our quantitative impairment assessments henceforth which may result in the recognition of impairment losses sooner as compared to the two-step impairment test. There has been no impact of this accounting standard on the Company’s Condensed Consolidated Financial Statements on adoption or as of June 30, 2020.
ASU 2018-13 (ASC 820 Fair Value Measurement)
The Company has adopted this update effective January 1, 2020, which removes, modifies and adds specific disclosure requirements in relation to fair value measurement with the aim of improving the effectiveness of disclosures to the financial statements. The standard update did not materially impact the Condensed Consolidated Financial Statements on adoption or as of June 30, 2020.
ASU 2018-18 (ASC 808 Collaborative Arrangements)
The Company has adopted this update effective January 1, 2020, which provides clarity on when transactions between entities in a collaborative arrangement should be accounted for under the new revenue standard, ASC 606. In determining whether transactions in collaborative arrangements should be accounted under the revenue standard, the update specifies that entities shall apply unit of account guidance to identify distinct goods or services and whether such goods and services are separately identifiable from other promises in the contract. The accounting update also precludes entities from presenting transactions with a collaborative partner which are not in scope of the new revenue standard together with revenue from contracts with customers. The standard update did not materially impact the Condensed Consolidated Financial Statements on adoption or as of June 30, 2020.
3. RECENT ACCOUNTING PRONOUNCEMENTS
4. EARNINGS PER SHARE
The components of the numerator and the denominator in the calculation of basic and diluted earnings per share are as follows for the six months ended June 30, 2020 and June 30, 2019:
| (in thousands of $) | 2020 | 2019 | ||||||
| Net income attributable to the Company | ||||||||
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| 2020 | 2019 | |||||||
Weighted average number of shares (000s) | ||||||||
| Dilutive effect of share options | ||||||||
| Dilutive effect of contingently returnable shares | ||||||||
| Denominator for diluted earnings per share | ||||||||
| 2020 | 2019 | |||||||
| Cash dividends per share declared | $ | $ | ||||||
The impact of stock options using the treasury stock method was dilutive in the six months ended June 30, 2020 as the exercise price was lower than the average share price during the period and, therefore 141,753 options were included in the denominator in the calculation.
The 16,035,856 shares issued to Trafigura as consideration as part of the Acquisition were legally issued and outstanding as of the grant date on August 23, 2019 and were therefore included in share capital from this date. Trafigura was the beneficial owner of the shares, was entitled to exercise voting rights, and was also eligible for any dividends if-and-when declared. ASC 260 defines issued shares that are held in escrow and all or part must be returned if specified conditions are not met as "contingently returnable". The shares issued as part of the Acquisition were treated as contingently returnable shares for the purpose of calculating earnings per share as they were held in escrow until such date after November 30, 2019 that Trafigura wished to dispose of such shares, in which case they could be removed from escrow and sold, with the proceeds being placed in a cash escrow account until closing of the Acquisition. Shares not disposed of prior to closing of the Acquisition remained in the escrow account until the closing of the Acquisition which took place on March 16, 2020. In the six months ended June 30, 2020, 4,106,028 shares were treated as contingently returnable and have been excluded from the denominator in the calculation of basic earnings per share and included in the denominator in the calculation of diluted earnings per share until the closing date. Following the closing of the Acquisition on March 16, 2020, all shares have been released from the escrow account and are included in the weighted average number of ordinary shares from the date of release from that account as they are no longer contingently returnable.
5. OPERATING REVENUES
In a voyage charter contract, the charterer hires the vessel to transport a specific agreed-upon cargo for a single voyage. The consideration in such a contract is determined on the basis of a freight rate per metric ton of cargo carried or occasionally on a lump sum basis. The charterer is responsible for any short loading of cargo or "dead" freight. The voyage charter party generally has standard payment terms with freight paid on completion of discharge. The voyage charter party generally has a "demurrage" clause. As per this clause, the charterer reimburses us for any potential delays exceeding the allowed laytime as per the charter party clause at the ports visited, which is recorded as voyage revenue, as such, demurrage is considered variable consideration under the contract. Estimates and judgments are required in ascertaining the most likely outcome of a particular voyage and actual outcomes may differ from estimates. Such estimates are reviewed and updated over the term of the voyage charter contract. In a voyage charter contract, the performance obligations begin to be satisfied once the vessel begins loading the cargo.
Certain of our voyage charter contracts contain a lease. Voyage charters contain a lease component if the contract (i) specifies a specific vessel asset; and (ii) has terms that allow the charterer to exercise substantive decision-making rights, which have an economic value to the charterer and therefore allow the charterer to direct how and for what purpose the vessel is used. Voyage charter revenues and expenses are recognized ratably over the estimated length of each voyage, which the Company has assessed to commence on loading of the cargo. The new lease standard provides a practical expedient for lessors in which the lessor may elect, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for these components as a single component if both of the following are met: (1) the timing and pattern of transfer of the non-lease component(s) and associated lease component are the same and (2) the lease component, if accounted for separately, would be classified as an operating lease. When a lessor, we have elected this expedient for our time charter contracts and voyage charter contracts that qualify as leases and thus not separated the non-lease component, or service element, from the lease. Furthermore, the standard requires the Company to account for the combined component in accordance with ASC 606 revenues from contracts with customers if the non-lease components are the predominant components. Under this guidance the Company has assessed that the lease components were the predominant component for all of its time charter contracts. Furthermore, for certain of its voyage charter contracts the lease components were the predominant components.
The lease and non-lease components of our revenues in the six months ended June 30, 2020 were as follows:
| (in thousands of $) | Lease | Non-lease | Total | ||||||||
| Time charter revenues | |||||||||||
| Voyage charter revenues | |||||||||||
| Other income | |||||||||||
| Total | |||||||||||
Certain voyage expenses are capitalized between the previous discharge port, or contract date if later, and the next load port and amortized between load port and discharge port. $2.3 million of contract assets were capitalized in the period ended June 30, 2020 as "Other current assets", of which $0.7 million was amortized up to June 30, 2020, leaving a remaining balance of $1.6 million as of June 30, 2020. $4.5 million of contract assets were amortized in the six months ended June 30, 2020 in relation to voyages in progress at the end of December 31, 2019. No impairment losses were recognized in the period.
| (in thousands of $) | 2020 | 2019 | ||||||
| Voyages in progress | ||||||||
| Trade accounts receivable | ||||||||
| Related party receivables | ||||||||
| Other current assets | ||||||||
| Total | ||||||||
6. OTHER OPERATING GAINS
Other operating gains for the six months ended June 30, 2020 and June 30, 2019 are as follows:
| (in thousands of $) | 2020 | 2019 | ||||||
| Gain on termination of vessel lease | ||||||||
| Gain on sale of vessel | ||||||||
| Gain on settlement of claim | ||||||||
| Gain on pool arrangements | ||||||||
| Other gains | ||||||||
| Other operating gains | ||||||||
In February 2020, the Company agreed with SFL to terminate the long-term charter for the 2002-built VLCC Front Hakata upon the sale and delivery of the vessel by SFL to an unrelated third party. Frontline received a compensation payment of $3.2 million from SFL for the termination of the current charter and recognized a gain on termination of $7.4 million. The charter with SFL terminated in February 2020.
In April 2020, the Company sold one VLCC previously recorded as an investment in finance lease at a purchase price of $25.5 million. The vessel was delivered to its buyers in June 2020 and the Company recorded a gain on sale of $12.4 million.
In the six months ended June 30, 2020, the Company recorded a gain on pool arrangements of $0.8 million (2019: gain of $0.7 million) and a $3.4 million gain on settlement of a claim. A further $0.3 million gain (2019: $0.3 million gain) was recognized in relation to other miscellaneous settlements.
7. RESTRICTED CASH
Restricted cash consists of cash, which may only be used for certain purposes and is held under a contractual arrangement.
Restricted cash as of June 30, 2020 does not include cash balances of $106.1 million (December 2019: $38.3 million), which represents 100 % (December 2019: 50 %) of the cash required to be maintained by the financial covenants in our loan agreements. The Company is permitted to satisfy up to 50 % of the cash requirement by maintaining a committed undrawn credit facility with a remaining availability of greater than 12 months. The Company did not satisfy any of the minimum cash requirement with a committed undrawn credit facility as of June 30, 2020 because the Company's senior unsecured facility agreement with an affiliate of Hemen is repayable in May 2021. Furthermore, FSL, the chartering counterparty with SFL with respect to the remaining two VLCCs leased from them, has agreed to certain dividend restrictions as a result of the amendment of the terms of the long-term charter agreements in May 2015. In order to make or pay any dividend or other distribution to the Company, FSL shall demonstrate a cash buffer of $2.0 million per vessel both prior to and following such payment, and following payment of the next monthly hire due plus any profit share accrued under the agreement. As of June 30, 2020, the
8. MARKETABLE SECURITIES
A summary of the movements in our marketable securities for the six months ended June 30, 2020 and the year ended December 31, 2019 is presented in the table below:
| (in thousands of $) | 2020 | 2019 | ||||||
| Balance at beginning of period | ||||||||
| Unrealized gain (loss) on marketable securities | ( | |||||||
| Repurchase of securities pledged to creditors | ||||||||
| Marketable securities pledged to creditors | ( | ( | ||||||
| Balance at end of period | ||||||||
Avance Gas
In the six months ended June 30, 2020, the Company recognized an unrealized loss of $1.7 million in relation to the 0.4 million shares held in Avance Gas Holdings Ltd ("Avance Gas").
SFL
In the six months ended June 30, 2020, the Company recognized an unrealized loss of $0.4 million in relation to the 0.1 million shares held in SFL.
Golden Ocean
In December 2019, the Company sold 1,260,358 shares in Golden Ocean Group Ltd. ("Golden Ocean") for proceeds of $7.2 million. At the same time the Company entered into a forward contract to repurchase 1.3 million shares in Golden Ocean in March 2020 for $7.2 million.
In March 2020, the Company repurchased these shares and subsequently sold them for proceeds of $3.7 million. At the same time the Company entered into a forward contract to repurchase 1.3 million shares in Golden Ocean in June 2020 for $3.7 million and as such made a net cash settlement of $3.5 million after adjustment for foreign exchange differences. This was treated as a settlement of debt.
In June 2020, the Company repurchased these shares and subsequently sold them for proceeds of $5.3 million. At the same time the Company entered into a new forward contract to repurchase the 1.3 million shares in September 2020 for $5.3 million and as such received a net cash settlement of $1.6 million after adjustment for foreign exchange differences. This was treated as a drawdown of debt. The transaction has been accounted for as a secured borrowing, with the shares retained in marketable securities and a liability recorded within short-term debt for $5.2 million. These transactions have been reported on a net basis in the Condensed Consolidated Statement of Cash Flows.
As of June 30, 2020, the Company held 1,270,657 shares in Golden Ocean, of which 1,260,358 was held as marketable securities pledged to creditors.
9. NEWBUILDINGS
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Movements in the six months ended June 30, 2020 are summarized as follows;
| (in thousands of $) | |||||
| Balance at December 31, 2019 | |||||
| Additions, net | |||||
| Interest capitalized | |||||
| Transfer to Vessels and Equipment, net | ( | ||||
| Balance at June 30, 2020 | |||||
In the six months ended June 30, 2020, the Company took delivery of one Suezmax, Front Cruiser, and one VLCC, Front Dynamic.
As of June 30, 2020, the Company’s newbuilding program consisted of four LR2 tankers; two are expected to be delivered in January 2021 and February 2021, respectively, and two are expected to be delivered in August 2021.
10. VESSELS AND EQUIPMENT, NET
Movements in the six months ended June 30, 2020 are summarized as follows;
| (in thousands of $) | Cost | Accumulated Depreciation | Net Carrying Value | ||||||||
| Balance at December 31, 2019 | ( | ||||||||||
| Depreciation | — | ( | |||||||||
| Additions to vessels and equipment | — | ||||||||||
| Transfers from Newbuildings | — | ||||||||||
| Balance at June 30, 2020 | ( | ||||||||||
In the six months ended June 30, 2020, the Company completed the acquisition of 10 Suezmax tankers from Trafigura. See Note 19 for full details of the accounting for this transaction. In the six months ended June 30, 2020, the Company took delivery of one Suezmax, Front Cruiser, and one VLCC, Front Dynamic. The Company also completed the installation of EGCS on one vessel during the period.
11. VESSELS AND EQUIPMENT UNDER FINANCE LEASE, NET
As of June 30, 2020, the Company leased in two vessels on long-term time charter from SFL (December 2019: three vessels) which are classified as finance leases.
| (in thousands of $) | Cost | Accumulated Depreciation | Net Carrying Value | ||||||||
| Balance at December 31, 2019 | ( | ||||||||||
| Additions | — | ||||||||||
| Lease termination | ( | ||||||||||
| Trafigura asset acquisition | ( | ||||||||||
| Depreciation | — | ( | |||||||||
| Balance at June 30, 2020 | ( | ||||||||||
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| (in thousands of $) | ||||||||
| Year 1 | ||||||||
| Year 2 | ||||||||
| Year 3 | ||||||||
| Year 4 | ||||||||
| Year 5 | ||||||||
| Thereafter | ||||||||
| Minimum lease payments | ||||||||
| Less: imputed interest | ( | |||||||
| Present value of obligations under finance leases | ||||||||
The outstanding obligations under finance leases as of December 31, 2019 are payable as follows:
| (in thousands of $) | ||||||||
| 2020 | ||||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Thereafter | ||||||||
| Minimum lease payments | ||||||||
| Less: imputed interest | ( | |||||||
| Present value of obligations under finance leases | ||||||||
The Company recognized the following income (expenses) in relation to the amortization of finance lease assets and obligations in the six months ended June 30, 2020 and June 30, 2019:
| (in thousands of $) | June 30, 2020 | June 30, 2019 | ||||||
| Depreciation of vessels under finance leases | ( | ( | ||||||
| Interest expense on obligations under finance leases | ( | ( | ||||||
| Contingent rental income (expense) | ( | |||||||
| Gain on termination of vessel lease | ||||||||
| Total finance lease expense, net | ( | ( | ||||||
12. OPERATING LEASES
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As of June 30, 2020, two vessels are leased in on time charter from a third party and have been classified as operating leases. These leases are at fixed rates. The initial two-year terms of the leases, which ended in April 2020, were extended for an additional year. The Company has allocated the consideration due under the leases between the lease and non-lease components based upon the estimated stand alone price of the services provided by the owner of the vessels, which include the provision of crewing, vessel insurance, repairs and maintenance and lubes. In the six months ended June 30, 2020, the Company has recorded the non-lease component of $3.3 million ($3.3 million in the six months ended June 30, 2019) within Ship operating expenses and has recognized the lease component of $4.5 million ($4.2 million in the six months ended June 30, 2019) within Charter hire expense within the Condensed Consolidated Statement of Operations. Furthermore, the Company is committed to make rental payments under operating leases for office premises. Certain of these leases include variable lease elements linked to inflation indexes. Such variable payments were estimated on the date of adoption of ASC 842 based on the index at that time and included in the minimum lease payments. In the six months ended June 30, 2020, lease expense of $1.2 million ($1.4 million in the six months ended June 30, 2019) is recorded in Administrative expenses in the Condensed Consolidated Statement of Operations.
Rental expense
The future minimum rental payments under the Company's non-cancellable operating leases as of June 30, 2020 are as follows:
| (in thousands of $) | ||||||||
| Year 1 | ||||||||
| Year 2 | ||||||||
| Year 3 | ||||||||
| Year 4 | ||||||||
| Year 5 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | ||||||||
| Less: Imputed interest | ( | |||||||
| Present value of operating lease liabilities | ||||||||
Total expense for operating leases was $5.8 million in the six months ended June 30, 2020 (2019: $5.6 million). Total cash paid in respect of operating leases was $5.7 million in the six months ended June 30, 2020 (2019: $5.2 million). The weighted average discount in relation to the operating leases was 3.8 % for the six months ended June 30, 2020 and the weighted average lease term was 3 years for the six months ended June 30, 2020.
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Rental income
| (in thousands of $) | ||||||||
| Year 1 | ||||||||
| Year 2 | ||||||||
| Year 3 | ||||||||
| Year 4 | ||||||||
| Year 5 | ||||||||
| Thereafter | ||||||||
| Total minimum lease payments | ||||||||
Profit share to be earned under our chartering arrangements has been excluded from the minimum future revenues above. Our revenues from these leases have been included within time charter revenues in the Condensed Consolidated Statement of Operations, which solely relates to leasing revenues.
There are no options to extend our operating leases where we are the lessor.
The cost and accumulated depreciation of vessels leased to third parties as of June 30, 2020 were $510.8 million and $39.2 million, respectively, and as of December 31, 2019 were $239.4 million and $47.8 million, respectively.
Contingent rental income
The Company recognized profit share income of $2.8 million in the six months ended June 30, 2020 in relation to the two Suezmax tankers on fixed rate time charters with profit sharing clauses, which were both terminated in the period. In addition, the Company recognized profit share income of $6.3 million in relation to the five time charters to Trafigura from closing of the transaction until June 30, 2020.
13. INVESTMENT IN ASSOCIATED COMPANY
In October 2019, the Company announced that FMSI and Clean Marine AS had entered into a term sheet pursuant to which the entities would effect a business combination to create a leading provider of EGCS. In order to facilitate the merger a new holding company, FMS Holdco, was established into which the former shareholders of FMSI contributed their shareholdings in FMSI in exchange for shares in FMS Holdco. As a result of this transaction, the Company owned 28.9 % of the issued share capital of FMS Holdco. FMSI was subsequently sold to Clean Marine AS by FMS Holdco as a result of the merger in exchange for 50 % of the issued share capital of Clean Marine AS. The merger completed on January 23, 2020. Furthermore, the Company acquired an additional stake in FMS Holdco from another shareholder for $0.8 million. Following the transactions, Frontline owns an effective 17.34 % interest in Clean Marine AS through its 34.7 % equity interest in FMS Holdco, which is accounted for under the equity method.
A share of losses of FMS Holdco of $2.6 million was recognized in the six months ended June 30, 2020.
In January 2020, the joint venture agreement with Golden Ocean and companies in the Trafigura Group to establish a leading global supplier of marine fuels was completed. As a result, Frontline took a 15 % interest in the joint venture company, TFG Marine, and made a $1.5 million shareholder loan to TFG Marine. Frontline concluded that
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it is able to exercise significant influence over TFG Marine as a result of its equity shareholding and board representation and therefore its investment is accounted for under the equity method.
A share of results of TFG Marine of $1.1 million was recognized in the six months ended June 30, 2020.
14. DEBT
In March 2020, the Company signed a sale-and-leaseback agreement in an amount of $544.0 million with ICBCL to finance the cash amount payable upon closing of the Acquisition, which took place on March 16, 2020. The lease financing has a tenor of seven years , carries an interest rate of LIBOR plus a margin of 230 basis points, has an amortization profile of 17.8 years and includes purchase options for the Company throughout the term with a purchase obligation at the end of the term.
The Company is precluded from accounting for the sale of the vessels due to the purchase obligation at the end of the term which prevents the lessor from obtaining control of the vessels and as such the lease has been accounted for as a secured borrowing, with the vessels recorded under "Vessels and equipment, net". The facility was fully drawn down at the closing of the Acquisition.
In February 2020, the Company settled the outstanding balances due under the notes payable in relation to the termination of the leases for Front Circassia, Front Page, Front Serenade, Front Stratus and Front Ariake of approximately $20.0 million.
In April 2020, the Company repaid $60.0 million of its $275.0 million senior unsecured facility agreement with an affiliate of Hemen. As of June 30, 2020, $215.0 million remains available under the facility following this repayment.
In May 2020, the Company signed a restated and amended senior secured term loan facility with Nordea in an amount of up to $50.0 million to refinance an existing loan facility maturing in March 2021. The new facility matures in March 2023, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 20 years. The facility was fully drawn down in July 2020 and $39.0 million of the refinanced facility has been recorded as long-term debt as of June 30, 2020.
In May 2020, the Company drew down $42.9 million under its senior secured term loan facility with Credit Suisse entered into in November 2019 to partially finance the delivery of the Suezmax tanker Front Cruiser from HSHI. The facility matures five years after the vessel's delivery date, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years.
In June 2020, the Company drew down $62.5 million under its senior secured term loan facility with Crédit Agricole entered into in May 2020 to partially finance the delivery of the VLCC Front Dynamic from HSHI. The facility matures five years after the vessel's delivery date, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years.
Golden Ocean shares
In December 2019, the Company sold 1,260,358 shares in Golden Ocean for proceeds of $7.2 million. At the same time the Company entered into a forward contract to repurchase 1.3 million shares in Golden Ocean in March 2020 for $7.2 million.
In March 2020, the Company repurchased these shares and subsequently sold them for proceeds of $3.7 million. At the same time the Company entered into a forward contract to repurchase 1.3 million shares in Golden Ocean in June 2020 for $3.7 million and as such made a net cash settlement of $3.5 million after adjustment for foreign exchange differences. This has been treated as a settlement of debt.
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In June 2020, the company repurchased these shares and subsequently sold them for proceeds of $5.3 million. At the same time the Company entered into a new forward contract to repurchase the 1.3 million shares in September 2020 for $5.3 million and as such received a net cash settlement of $1.6 million after adjustment for foreign exchange differences. This was treated as a drawdown of debt. The transaction has been accounted for as a secured borrowing, with the shares retained in marketable securities and a liability recorded within short-term debt for $5.2 million. These transactions have been reported on a net basis in the Condensed Consolidated Statement of Cash Flows.
Debt issuance costs
The Company has recorded debt issuance costs (i.e. deferred charges) of $15.3 million as of June 30, 2020 (December 2019: $8.0 million) as a direct deduction from the carrying amount of the related debt.
Assets pledged
| (in thousands of $) | 2020 | 2019 | ||||||||||||
| Vessels and equipment, net | ||||||||||||||
15. SHARE CAPITAL
The authorized share capital of the Company as of June 30, 2020 is $500,000,000 divided into 500,000,000 shares of $1.00 par value each, of which 197,692,321 shares (December 31, 2019: 196,894,321 shares) of $1.00
In January 2020, the Company issued 798,000 ordinary shares under its share options scheme, the Frontline Scheme, to Robert Hvide Macleod at a strike share price of $7.30 per share.
16. FINANCIAL INSTRUMENTS
Interest rate swap agreements
In February 2013, Frontline 2012 entered into six interest rate swaps with Nordea Bank whereby the floating interest rate on an original principal amount of $260.0 million of the then anticipated debt on 12 MR product tanker newbuildings was switched to fixed rate. Six of these newbuildings were subsequently financed from the $466.5 million term loan facility. In February 2016, the Company entered into an interest rate swap with DNB whereby the floating interest on notional debt of $150.0 million was switched to a fixed rate. In the six months ended June 30, 2020, the Company entered into three interest rate swaps with DNB whereby the floating interest rate on notional debt totaling $250.0 million was switched to a fixed rate. In the six months ended June 30 2020, the Company entered into two interest rate swaps with Nordea Bank whereby the floating interest rate on notional debt totaling $150.0 million was switched to a fixed rate.
As of June 30, 2020, the Company recorded a derivative instruments receivable of nil (December 31, 2019: $0.1 million) and a derivative instruments payable of $25.7 million (December 31, 2019: $4.3 million) in relation to these agreements. The Company recorded a loss on derivatives of $21.7 million in the six months ended June 30, 2020 (six months ended June 30, 2019: loss of $9.7 million) in relation to these agreements.
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| Notional Amount | Inception Date | Maturity Date | Fixed Interest Rate | ||||||||
| ($000s) | |||||||||||
| June 2013 | June 2020 | % | |||||||||
| September 2013 | September 2020 | % | |||||||||
| December 2013 | December 2020 | % | |||||||||
| March 2014 | March 2021 | % | |||||||||
| June 2014 | June 2021 | % | |||||||||
| September 2014 | September 2021 | % | |||||||||
| February 2016 | February 2026 | % | |||||||||
| March 2020 | March 2027 | % | |||||||||
| March 2020 | March 2027 | % | |||||||||
| March 2020 | March 2025 | % | |||||||||
| April 2020 | April 2027 | % | |||||||||
| April 2020 | April 2025 | % | |||||||||
Fair Values
The carrying value and estimated fair value of the Company's financial assets and liabilities as of June 30, 2020 and December 31, 2019 are as follows:
| 2020 | 2019 | ||||||||||||||||||||||
(in thousands of $) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||||||||
| Restricted cash | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Floating rate debt | |||||||||||||||||||||||
| Fixed rate debt | |||||||||||||||||||||||
The estimated fair value of financial assets and liabilities as of June 30, 2020 are as follows:
(in thousands of $) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| Restricted cash | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Floating rate debt | ||||||||||||||||||||
| Fixed rate debt | ||||||||||||||||||||
35
The estimated fair value of financial assets and liabilities as of December 31, 2019 are as follows:
(in thousands of $) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Cash and cash equivalents | ||||||||||||||||||||
| Restricted cash | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Floating rate debt | ||||||||||||||||||||
| Fixed rate debt | ||||||||||||||||||||
The following methods and assumptions were used to estimate the fair value of each class of financial instrument;
Cash and cash equivalents – the carrying values in the balance sheet approximate fair value.
Restricted cash – the carrying values in the balance sheet approximate fair value.
Floating rate debt - the fair value of floating rate debt has been determined using level two inputs and is considered to be equal to the carrying value since it bears variable interest rates, which are reset on a quarterly basis. Floating rate debt is presented net of deferred financing charges of $15.3 million as of June 30, 2020 (December 2019: $8.0 million).
Fixed rate debt - short-term debt held with a third party bank has been valued using level two inputs, the remaining fixed rate debt has been determined using level three inputs being the discounted expected cash flows of the outstanding debt.
Assets Measured at Fair Value on a Nonrecurring Basis
On March 16, 2020, the Company closed the Acquisition with Trafigura and recorded the vessels and time charters acquired based on their proportionate share of the fair value of the total consideration of $651.8 million. As such, $11.9 million of the combined fair value of the consideration was recognized within other current and long-term liabilities in relation to the time charters, and the vessels were recorded at a combined fair value of $663.7 million. See Note 19 for further details. The fair value of the vessels acquired upon were valued (level two) based on the average of broker valuations from two different ship broker companies. The brokers assess each vessel based on, among others, age, yard, deadweight capacity and compare this to market transactions. The time charter contracts were fair valued (level three) using an 'excess earnings' technique whereby the terms of the contract are assessed relative to current market conditions and they were recorded at the sum of the incremental or decremental cash flows arising over the life of the contracts.
Assets Measured at Fair Value on a Recurring Basis
Marketable securities are listed equity securities considered to be available-for-sale securities for which the fair value as at the balance sheet date is their aggregate market value based on quoted market prices (level one).
The fair value (level two) of derivative interest rate agreements is the present value of the estimated future cash flows that the Company would receive or pay to terminate the agreements at the balance sheet date, taking into account, as applicable, fixed interest rates on interest rate swaps, current interest rates, forward rate curves, current and future bunker prices and the credit worthiness of both the Company and the derivative counterparty.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash equivalents to the extent that substantially all of the amounts are carried with Skandinaviska Enskilda Banken, or SEB, HSBC, Royal Bank of Scotland, or RBS, DNB Bank ASA, or DNB and Nordea Bank Norge, or Nordea. There is a concentration of credit risk with respect to restricted cash to the extent that substantially all of the amounts are carried with DNB. However, the Company believes this risk is remote.
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17. RELATED PARTY TRANSACTIONS
We transact business with the following related parties, being companies in which Hemen and companies associated with Hemen have a significant interest: SFL, Seadrill Limited, Seatankers Management Norway AS, Seatankers Management Co. Ltd, Golden Ocean, Alta Trading UK Limited (formerly known as Arcadia Petroleum Limited), Archer Limited, Flex LNG Ltd and Avance Gas. We also own interests in TFG Marine and Clean Marine AS (through our interest in FMS Holdco) which are accounted for as equity method investments.
SFL Transactions
As of June 30, 2020, the Company held two vessels under finance leases, which are leased from SFL. The remaining periods on these leases as of June 30, 2020 was approximately seven years .
In February 2020, the Company agreed with SFL to terminate the long-term charter for the 2002-built VLCC Front Hakata upon the sale and delivery of the vessel by SFL to an unrelated third party. Frontline received a compensation payment of $3.2 million from SFL for the termination of the current charter. The Company recognized a gain on termination, including the compensation payment, of $7.4 million in the six months ended June 30, 2020. The charter with SFL terminated in February 2020. In conjunction with the termination of the lease, the Company has settled the outstanding balances due under the notes payable in relation to the termination of the leases for Front Circassia, Front Page, Front Serenade, Front Stratus and Front Ariake of approximately $20.0 million. The Company was charged $0.2 million in the six months ended June 30, 2020 (six months ended June 30, 2019: $0.8 million) for interest expense in relation to these notes.
A summary of leasing transactions with SFL in the six months ended June 30, 2020 and June 30, 2019 are as follows;
| (in thousands of $) | 2020 | 2019 | ||||||
| Charter hire payable (principal and interest) | ||||||||
| Lease interest expense | ||||||||
| Contingent rental expense (income) | ( | |||||||
| Remaining lease obligation | ||||||||
Contingent rental expense in 2020 (income in 2019) is due to the fact that the actual profit share expense earned by SFL in the six months ended June 30, 2020 of $10.4 million (six months ended June 30, 2019: $1.5 million) was $8.3 million more (six months ended June 30, 2019: $2.6 million less) than the amount accrued in the lease obligation payable when the leases were recorded at fair value at the time of the merger between Frontline Ltd. and Frontline 2012 Ltd.
In January 2014, the Company commenced a pooling arrangement with SFL, between two of its Suezmax tankers Front Odin and Front Njord and two SFL vessels Glorycrown and Everbright. The Company recognized income of $0.7 million in the six months ended June 30, 2020 in relation to this pooling arrangement (six months ended June 30, 2019: $0.2 million).
Transactions with associated companies
In the six months ended June 30, 2020, the Company paid or accrued amounts totaling $4.6 million due to Clean Marine AS in relation to the installation of EGCS on its owned.
As of June 30, 2020, the Company has committed to the installation of EGCS with Clean Marine on 10 vessels owned by the Company, with a financial commitment of $3.7 million, excluding installation costs.
In the six months ended June 30, 2020, the Company completed the acquisition of 15 % of the share capital of TFG Marine which is accounted for under the equity method. As result of this transaction the Company advanced a shareholder loan of $1.5 million to TFG Marine. The Company also entered into a bunker supply arrangement with
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TFG Marine, under which it has paid $16.1 million to TFG Marine and $1.1 million remains due as of June 30, 2020. The Company has also agreed to provide a $50.0 million guarantee in respect of the performance of its subsidiaries, and two subsidiaries of an affiliate of Hemen, under a bunker supply arrangement with TFG Marine. As of June 30, 2020 there are no exposures under this guarantee. In addition, should TFG Marine be required to provide a parent company guarantee to its bunker suppliers or finance providers then for any guarantee that is provided by the Trafigura Group and becomes payable Frontline shall pay a pro-rata amount based on its share of the equity in TFG Marine. The maximum liability under this guarantee is $6.0 million and there are no amounts payable under this guarantee as of June 30, 2020.
Transactions with other affiliates of Hemen
In April 2020, the Company repaid $60.0 million of its senior unsecured revolving credit facility of up to $275.0 million with an affiliate of Hemen. The Company recognized interest expense of $2.8 million in the six months ended June 30, 2020 (six months ended June 30, 2019: $5.1 million). The Credit Facility is repayable in May 2021 and $215.0 million remains available as of June 30, 2020.
In the six months ended June 30, 2020, the Company chartered seven of its vessels on voyage charters to an affiliate of Hemen. The Company recognized revenue of $23.6 million in relation to these voyages.
A summary of net amounts earned from (paid to) related parties in the six months ended June 30, 2020 and June 30, 2019 are as follows:
| (in thousands of $) | 2020 | 2019 | ||||||
| Seatankers Management Co. Ltd | ||||||||
| SFL | ||||||||
| Golden Ocean | ||||||||
| Flex LNG Ltd | ||||||||
| Seatankers Management Norway AS | ( | ( | ||||||
| Seadrill Limited | ||||||||
| Archer Limited | ||||||||
| Alta Trading UK Limited | ||||||||
| Avance Gas | ||||||||
| Other related parties | ||||||||
Amounts earned from related parties comprise office rental income, technical and commercial management fees, newbuilding supervision fees, freights, corporate and administrative services income and interest income. Amounts paid to related parties comprise primarily rental for office space and the provision of other administrative services and guarantee fees.
Related party balances
A summary of balances due from related parties as of June 30, 2020 and December 31, 2019 is as follows:
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| (in thousands of $) | 2020 | 2019 | ||||||
| SFL | ||||||||
| Seatankers Management Co. Ltd | ||||||||
| Archer Limited | ||||||||
| Golden Ocean | ||||||||
| Seadrill Limited | ||||||||
| Flex LNG Ltd | ||||||||
| Avance Gas | ||||||||
| Other related parties | ||||||||
A summary of balances due to related parties as of June 30, 2020 and December 31, 2019 is as follows:
| (in thousands of $) | 2020 | 2019 | ||||||
| SFL | ||||||||
| Seatankers Management Co. Ltd | ||||||||
| Avance Gas | ||||||||
| Flex LNG Ltd | ||||||||
| Golden Ocean | ||||||||
See also Note 11, Note 13, Note 14 and Note 18 for details regarding related party transactions and balances.
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18. COMMITMENTS AND CONTINGENCIES
The Company insures the legal liability risks for its shipping activities with mutual protection and indemnity associations, who are members of the International Group of P&I Clubs. As a member of these mutual associations, the Company is subject to calls payable to the associations based on the Company's claims record in addition to the claims records of all other members of the associations. A contingent liability exists to the extent that the claims records of the members of the associations in the aggregate show significant deterioration, which result in additional calls on the members.
As of June 30, 2020, the Company’s newbuilding program consisted of four LR2 tankers; two are expected to be delivered in January 2021 and February 2021, respectively, and two are expected to be delivered in August 2021. As of June 30, 2020, total instalments of $28.0 million had been paid in connection with the Company's current newbuilding program, and remaining commitments amounted to $161.1 million, of which we expect $18.7 million to be paid in 2020 and $142.4 million to be paid in 2021.
As of June 30, 2020, the Company has remaining commitments for the installation of EGCS on 10 vessels owned by the Company, with a financial commitment of $3.7 million, excluding installation costs. These remaining commitments are due in 2020.
As of June 30, 2020, the Company has remaining commitments for the installation of Ballast Water Treatment Systems on eight vessels, with a remaining commitment of $1.6 million, excluding installation costs, due in 2020.
As of June 30, 2020, the Company had entered into forward bunker purchase arrangements for the delivery of 5,000 MT of bunker fuel per month for delivery between October 2020 to December 2021. The contracts oblige the Company to purchase and take delivery of the fixed quantity of physical fuel at prices between $325 per MT and $365 per MT. In addition, the Company has entered into a further arrangement for the delivery of 5,000 MT of bunker fuel per month for delivery between January 2021 to December 2021. The contract obliges the Company to purchase and take delivery of the physical fuel at $232 per MT.
As of June 30, 2020, the Company has agreed to provide a $50.0 million guarantee in respect of the performance of its subsidiaries, and two subsidiaries of an affiliate of Hemen, under a bunker supply arrangement with TFG Marine. The Company may revoke the guarantee at any time giving 15 days notice, provided that the revocation will not terminate or limit the liability in respect of amounts incurred under the guarantee prior to the revocation. As of June 30, 2020 there are no amounts payable under this guarantee. In addition, should TFG Marine be required to provide a parent company guarantee to its bunker suppliers or finance providers then for any guarantee that is provided by the Trafigura Group and becomes payable Frontline shall pay a pro rata amount based on its share of the equity in TFG Marine. The maximum liability under this guarantee is $6.0 million and there are no amounts are payable under this guarantee as of June 30, 2020. See Note 13. for further details.
The Company is a party, as plaintiff or defendant, to several lawsuits in various jurisdictions for unpaid charter hire, demurrage, damages, off-hire and other claims and commercial disputes arising from the operation of its vessels, in the ordinary course of business or in connection with its acquisition activities. The Company believes that the resolution of such claims will not have a material adverse effect on the Company's operations or financial condition individually and in the aggregate.
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19. TRAFIGURA TRANSACTION
In August 2019, the Company entered into a sale and purchase agreement with Trafigura to acquire 10 Suezmax tankers built in 2019 through the acquisition of a special purpose vehicle, which will hold the vessels (the "Acquisition"). The Acquisition has been accounted for as an asset acquisition rather than a business combination as substantially all of the fair value of the gross assets acquired on closing of the Acquisition is concentrated in the value of the vessels, being a group of similar identifiable assets.
The Acquisition consideration consists of (i) 16,035,856 ordinary shares of Frontline at an agreed price per the SPA of $8.00 per share issuable upon signing; and (ii) a cash amount of $538.2 million, payable upon the closing of the Acquisition, which took place on March 16, 2020. Frontline agreed to time charter-in all the 10 vessels from Trafigura until the closing of the Acquisition at a daily rate of approximately $23,000 . In addition, Frontline has agreed to charter-out five of the vessels to Trafigura for a period of three years at a daily base rate of $28,400 plus 50 % profit share.
Upon commencement of the charters for the five vessels, which the Company did not charter back to Trafigura, the Company concluded that the charter-in constituted a finance lease, due to the obligation to purchase the underlying asset, and recognized a right-of-use asset and finance lease obligation until closing of the Acquisition. The lease obligation for these vessels on signing of the agreement includes the scheduled charter payments and the cash amount to be paid on closing of $269.2 million, discounted using the rate implicit in the lease. On issuance of the shares on August 23, 2019, the Company initially recorded a prepaid expense of $63.5 million, based on the grant date fair value of the shares of $7.92 per share, which was subsequently adjusted to the right-of-use asset on commencement of the leases. The Company recognized a right-of-use asset of $336.0 million and a finance lease obligation of $272.0 million in respect of these vessels as of December 31, 2019. Depreciation of $6.3 million ($2.5 million in 2020) and finance lease interest expense of $6.1 million ($2.4 million in 2020) has been recognized up until March 16, 2020 in relation to these vessels. The weighted average discount rate for these finance leases is 4.36 %. On closing of the Acquisition, the lease and purchase obligations were settled, and the right-of-use assets were transferred to vessels and equipment.
For the five vessels chartered back to Trafigura, the Company determined that the charter-in of the vessels did not commence until closing of the Acquisition, as control of the right-of-use asset did not transfer to Frontline until then as a result of the lease back to Trafigura. The Company allocated 8,017,928 of the shares issued to the purchase consideration for these vessels, which was recognized as prepaid acquisition cost. The grant date fair value of these shares was $63.5 million, based on a share price of $7.92 . In addition, the Company committed to pay a cash amount of $269.0 million on closing of the Acquisition. The net difference between the cash amounts paid and received on the charter-in and charter-out of these vessels has been treated as a reduction of the transaction price for all of the vessels. Accordingly, $17.0 million ($7.1 million in 2020) of receipts, net of payments, including accrued profit share due, has not been recognized in net income and has been treated as a reduction of the Acquisition cost of all of the vessels. Of this, $13.9 million ($5.7 million in 2020) has been offset against prepaid consideration and $3.1 million ($1.4 million in 2020) has been recorded under the finance lease obligations. On closing of the Acquisition, the purchase obligations were settled and the vessels were recognized on the balance sheet. In addition, the Company assessed that part of the consideration should be allocated to the time charters attached to the vessels as a result of the movement in the market value of these charters since signing of the SPA and up until the date of closing.
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20. SUBSEQUENT EVENTS
In July 2020, the Company entered into a senior secured term loan facility with a number of banks in an amount of up to $328.6 million to refinance an existing loan facility maturing in December 2020. The new facility matures in February 2023, carries an interest rate of LIBOR plus a margin of 190 basis points and has an amortization profile of 18 years counting as from delivery date from yard. The facility was fully drawn down in July 2020 and $300.1 million of the refinanced facility has been recorded as long-term debt as of June 30, 2020.
In August 2020, the Company obtained a financing commitment for a senior secured term loan facility in an amount of up to $133.7 million from CEXIM and Sinosure to partially finance the remaining cost of $161.1 million for four LR2 tankers under construction. The facility will have a tenor of 12 years, carry an interest rate of LIBOR plus a margin in line with the Company's other loan facilities and will have an amortization profile of 17 years. The facility is subject to final documentation.
In August 2020, the Company declared a cash dividend of $0.50 per share for the second quarter of 2020.
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