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May 31, 2005

Mega mergers ahead in tanker sector?

Is John Fredriksen looking to engineer some mega mergers in the tanker sector?

Fredriksen's Frontline Ltd. has further reduced its holding in Genmar, saying the "negative response towards consolidation from Genmar's management has reduced our interest and forced Frontline to look for alternatives."

"It is of vital importance for the future of the tanker market that the responsible tanker companies, including their shareholders, are looking for ways to reverse the current trend of a more fragmented industry," says the Frontline board. "This should over time spur the outbreak of the mega mergers which we recently have seen in other parts of the shipping market. Economies of scale, flexibility to customers, reduced financing cost, better interest from the capital market and a much improved fleet utilization and efficiency are all factors which strongly direct the industry to further consolidation."

The mega merger remarks were made in announcing first quarter FY 2005 results that saw Frontline report net income of $279.7 million for the quarter, equivalent to earnings per share of $3.74. Operating income for the quarter was $309.3 million compared to $471.7 million in the fourth quarter of 2004, reflecting lower market rates experienced in the first quarter of 2005 compared to the exceptionally strong fourth quarter in 2004. The average daily time charter equivalents ("TCEs") earned in the spot and period market by the company's VLCCs, Suezmax tankers and Suezmax OBO carriers were $77,500, $55,200 and $35,800 respectively compared to $111,200, $85,000 and $31,100 respectively in the fourth quarter of 2004. In the first quarter of 2005, the company reported a gain from sale of assets of $28.5 million as a result of the sale of one Suezmax.

The tanker market looks relatively healthy for the remainder of the year, says Frontline. "The freight futures market seems to be reflecting this view, and at the moment it is possible to sell freight futures for the rest of the year 2005 at a level that equates to approximately $45,000 per day on VLCCs, and $40,000 per day for 2006. For Suezmaxes we can now hedge the rest of the year 2005 at $33,000 per day and $31,000 per day for 2006."

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