Frontline's Earnings Do Not Paint a Clear Picture

by: Devin Hobbes November 30, 2008 | about stocks: FRO    

Devin Hobbes

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Frontline (FRO) reported its earnings for the third quarter 2008 today. I wrote about a week ago that I would be surprised if the report were not a good one. In the end, whether the report was a good one depends on how you look at it.

Earnings per share were $1.39, $0.20 lower than the analyst consensus and around 67% lower than last quarter. However, earnings per share this quarter were over 4.6 times higher than the same quarter last year.

Daily rates averaged $74,700 for VLCCs. This is down from $86,300 a day last quarter, but up significantly from the $36,000 daily rate recorded in the third quarter of 2007. Average Suezmax daily rates were $62,700 in the third quarter of 2008, down from $72,000 in the second quarter, but up from $25,000 recorded in the third quarter last year.

Besides the analyst earnings miss (if one looks at what the analysts say at all, it's probably better to look at the lowest estimate), the disappointing news is that the dividend will be $0.50 a share for this quarter. Some will view this as a dividend cut. That's one way to see it. But the company does not have a stable dividend, and determines its payout each quarter based on earnings and future outlook. If the recession does not turn into a depression and/or the demand for oil eventually increases, dividend payments will be higher in the future.

For November, the company reports that its costs are $34,700 for VLCCs and $24,800 for the Suezmax fleet daily. As this does not include capital expenditures and loan repayments, costs can increase if FRO is unable to refinance its loans as they mature--a possibility with today's fragile credit market. Costs can also increase if docking fees, etc go up. Avoiding Somali pirates, for example, may make trips longer and more expensive.

Lower demand for oil and more tankers competing for transporting that oil will probably lower daily rates in the coming year. Daily rates in the third quarter were very volatile. VLCC rates were as low as $29,500 per day (below current costs) and as high as $164,000 per day. Suezmax rates were as low as $41,500 a day and as high as $153,000. If rates average at the lower end of these ranges, as is likely, the dividend may be lower in the coming year.

Frontline owes around $1.4 billion for new builds that it'll pay for over the next four years, having already paid almost $400 million. The company expects to receive 18 new build ships (10 VLCCs and 8 Suezmaxes) by the second quarter of 2012. "If credit market doesn't improve before 2012 [the company's] dividend capacity [may be reduced] temporarily," Frontline stated in its most recent report.

The outlook is grim, and the share price can certainly go lower. The company's average P/E for the last five years is around 4.7. The high estimate for 2009 is $6.17 a share. The low estimate is $2.10. If FRO continues trading around 4.7 times earnings, earnings estimates suggest a share price range of around $10 to $30. Investor pessimism/optimism can, of course, alter the P/E dramatically. For example, the trailing P/E right now is under 3.

I hope the share price falls, because I want to buy some shares. I'll look to start buying small amounts after the ex-dividend day, which is December 5, 2008, but will hold off on any big purchases until the economic picture is bleaker (which would potentially signal a turnaround).

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This article has 10 comments:

  •  
    Nov 30 08:26 AM
    Good analysis. Looks like usd10 would be good buy.
    Reply | Link to Comment
  •  
    Nov 30 09:35 AM
    You didn't talk about the biggest problem FRO is facing right now -- new built tanker deliveries.

    By 2010 there will be 130 new VLCCs and 120 new Suezmax vessels. That's 27% of the VLCC fleet world wide and 35% of the Suezmax fleet world wide.

    These new ship additions to the world wide fleet will have a seriously negative affect on spot tanker rates as tanker supply will surpass demand by a large margin -- probably only a 90% vessel utilization rate.

    The only way tanker rates don't collapse is: 1) huge numbers of older vessels are taken out of service (scrap, conversion, storage) in the next 9 months, 2) crude demand returns to 2007 levels.

    Look at what happened to tanker rates in 2002.

    FRO will be a great buy in March 2010 if they survive.
    Reply | Link to Comment
  •  
    Nov 30 01:27 PM
    since the dividends have paid for all my stock in this co. i am not worried. since the chinese are building the tankers they can with all their cash finance the purchase & make even more money.use of oil will be around for years to come @ higher & higher prices & nobody has figured out a way to pave over the ocean.
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  •  
    Nov 30 02:24 PM
    I believe that FRO has 8 or 9 single hull tankers that are required to be out of service by the end of 2010. New builds will just replace those.
    Reply | Link to Comment
  •  
    Nov 30 03:42 PM
    I'm with notsosmart, although the dividends haven't quite paid for my investment yet. They are close, though, and the smaller dividend this quarter and a couple more like it will get me there. The need for oil will perhaps lessen, but not vanish for decades to come. There are too many products we use it for, too many inventions not yet discovered, and not enough fuel efficient trucks to drive that stuff here even if the ocean were paved. This is a stock I'll keep even when it goes lower, because it kept my balance steady when the banks were sinking and my mortgage floundering.
    Reply | Link to Comment
  •  
    Nov 30 04:48 PM
    I have been long FRO for about 16 months, buying 500 shares every couple of months. I now have 4000 shares at an average cost of $47 so I'm currently quite a bit down on share price. However, during that time I have received about about $23,000 in dividends and another $24,000 by selling covered calls. Figuring my average investment over that time, that amounts to a yeild of about 45%. Yes, the latest dividend is disappointing but I consider FRO to be a great income stock and I will continue buying on dips (such as right now). At anything under $20, I would back up the truck.
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  •  
    Nov 30 08:45 PM
    Too much capacity in the DBS industry for anybody to make any money.......too many ships and too little work.
    Reply | Link to Comment
  •  
    Dec 01 04:30 AM
    FRO isn't in DBS though, DRYS is.

    FRO is much more comparable to NAT than it is to DRYS. Shipping in general is taking a beating with the economic slowdown however. Bummer about the dividend but this is a long-term hold for me. I'm with some of the other posters here, FRO has paid me handsomely to hold them for a little while. I think I can do so and will probably add to the position as time goes on.


    On Nov 30 08:45 PM Fam62c wrote:

    > Too much capacity in the DBS industry for anybody to make any money.......too
    > many ships and too little work.
    Reply | Link to Comment
  •  
    Dec 01 12:25 PM
    Well Frontline revenues are exposed 65% in the declining spot frate market for oil. The rates have been rapidly falling as the demand for oil has been falling affected by less trasportation, less industrial production less cars less.. less.. less.., the unfolding of the global crisis. Meanwhile FRO has the highest breakeven levels (34k/d VL and 24/d Suez) in their industry which will turn negative if the rates slip more. If you add the 1.4billion orderbook and demanding repayment schedule. I would much rather hold to the Shipfinance until that gets affects too. You can't expect any high leverage players exposed to market headwinds to sustain their dividents and withstand its shareprise until we are out of this slump.
    Reply | Link to Comment
  •  
    Dec 01 12:51 PM
    Single hull oil tankers are to be phased out end of 2010. That will aleviate the capacity issue, hopefully.
    New Build cancellations will also play in here to support viable rates.
    Reply | Link to Comment
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