Frontline Ltd. (FRO), the largest operator of the biggest oil tankers, said it may run out of cash in 2012 and is seeking talks with lenders after eight months of unprofitable rates. The shares fell the most in at least 13 years.
The Hamilton, Bermuda-based company, which has $1 billion of bonds and public loans maturing in the next decade, may need more funding in 2012 and there are “significant uncertainties” about meeting some loan terms at the end of this quarter, Frontline said in a statement today. Billionaire Chairman John Fredriksen “has the funds available and he is prepared to go in and try to find solutions,” Tor Olav Troim, one of his aides, said in an interview in Oslo today.
Tanker rates slumped 69 percent since the start of 2010 as a glut of vessels overwhelmed growth in oil demand hurt by the worst global recession since World War II. General Maritime Corp. (GMR), the second-largest U.S.-based owner of crude carriers, filed for bankruptcy protection last week. Forward freight agreements, traded by brokers and used to bet on future transport costs, are anticipating unprofitable charter rates for at least two more years.
No Cash Flow
“The industry is struggling substantially today with vessels that are not generating any cash flow at all,” said Herman Hildan, an analyst at RS Platou Markets AS in Oslo. “A lot of companies are going to need to go through restructuring in 2012. Frontline is doing it now before everyone else is in the same position.”
Shares of Frontline fell 44 percent to 17.35 kroner by the close in Oslo trading, extending this year’s slump to 88 percent. The company’s market value has shriveled to 1.35 billion kroner ($234 million) from as much as 27.7 billion kroner in June 2008, data compiled by Bloomberg show.
The six-member Bloomberg Tanker Index slid 8.2 percent to 177.30 as of 12:25 p.m. in New York, taking this year’s drop to 48 percent. Shares of Overseas Shipholding Group Inc., the biggest U.S.-based owner, declined 15 percent to $10.70.
Frontline’s $225 million of 4.5 percent convertible bonds maturing in 2015 fell 0.86 cent to 37.53 cents on the dollar, according to Goldman Sachs Group Inc. prices on Bloomberg. The company met all its loan agreements as of Sept. 30 and had $191 million in cash, Frontline said.
The bonds and public loans maturing in the next decade include $363 million of loans due to mature in 2017 that are organized by Nordea Bank Norge ASA and DnB Bank ASA, according to data compiled by Bloomberg. Frontline also has vessels on long-term leases from Ship Finance International Ltd.
Nordea has confidence in the company’s biggest shareholder, the bank said by e-mail. Hemen Holding Ltd., a company indirectly controlled by trusts established by Fredriksen, owns a 34 percent stake in Frontline, according to the company’s last annual report.
“A successful restructuring of the company will require contributions from all of the company’s stakeholders; owners, lessors, bond holders and banks,” Nordea said. “We have trust and confidence in the company’s main shareholder who has publicly expressed a positive view to contribute to an overall solution.”
The global shipping industry faces a funding shortfall of between $21.3 billion and $34 billion over the next three years, according to Petrofin Research, an Athens-based consultant.
Lending needs will be $76 billion to $89 billion for buying an estimated 4,234 new ships, Ted Petropoulos, head of the Athens-based maritime-finance consultancy, said at a conference in London Nov. 16. The industry needs a further $50 billion for buying used vessels and other activities such as refinancing debt, he said, taking the total funding requirement to between $126.3 billion and $139 billion.
Frontline said today it has orders for seven oil tankers to be built including five very large crude carriers and two smaller suezmaxes that haul 1 million-barrel cargoes. Five of those vessels are not financed.
The ship owner reported a third-quarter loss of $166.6 million, compared with net income of $12.72 million a year earlier. It will report full-year losses of $125.7 million for this year and $90.54 million for 2012, according to the mean of 19 analyst estimates compiled by Bloomberg. Frontline will pay no third-quarter dividend.
Fredriksen issued shares and renegotiated shipbuilding contracts of Golden Ocean Group Ltd. (GOGL) in 2008, helping his dry- bulk shipping company to avert seeking bankruptcy protection. He also sold convertible bonds back to the company at 35 cents on the dollar.
Rates for VLCCs, hauling about 20 percent of the world’s oil, were last at $28,829 a day, according to London-based Clarkson Plc, the world’s biggest shipbroker. Rents surged to $229,000 a day in 2007. Frontline’s largest tankers need $30,200 to break even and made $17,000 in the third quarter.
Frontline said this month it would sell three vessels that were each designed to haul 1 million-barrel cargoes.
The global tanker fleet expanded 11 percent to 555 vessels since the end of 2008 and orders at ship yards still equal almost 15 percent of existing capacity, according to data from Redhill, England-based IHS Fairplay. Each VLCC can hold about 2 million barrels of oil, more than France consumes daily.
“If the market doesn’t improve, we may have a breach in the covenants package, and we may run out of cash in the first half of 2012,” Troim said. “John Fredriksen is capable and has the funds available and he is prepared to go in and try to find solutions, but it is depending on that other people also contribute in the same degree.”
Frontline operates a tanker fleet with a combined capacity of 18.6 million deadweight tons, enough to haul about 140 million barrels of oil, according to data on its website. Its 43 VLCCs represent about 7.7 percent of the global fleet, according to data from IHS Fairplay.
“The main problem right now is there are too many ships, which means we need to increase the demand,” Jens Martin Jensen, chief executive officer of Frontline’s management unit, said at the company’s presentation today. “Our main shareholder is willing to support us now and going forward.”
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