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David Sun

FRO AT A GLANCE

P/E ► 0   EV/EBITDA ► 1.21 VERY LOW ROA ► 19% VERY HIGH ROE ► 90.6% VERY HIGH Debt to Equity ► 4.38 HIGH Current Ratio ► 1.24 AVG Interest Coverage Ratio ► 4.16 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

Frontline (NYSE: FRO) is a shipping company that transports crude oil and, less frequently, dry cargo.^[1] The company derives most of its revenue from short term (single voyage or per day) contracts. These contracts are more lucrative than longer term contracts, but are also less predictable in terms of their frequency.

FRO's business depends on demand for petroleum and petroleum products. In recent years, the breakneck pace of economic development in countries like China and India has led to increasing demand for oil. FRO has benefited from this trend as the world's growing appetite for oil has led to increasing employment opportunities. Going forward, however, the company may face growing pricing pressure as new tanker capacity comes on line in 2008.

[edit] Company Overview

As of December 2007, FRO was managing 79 vessels^[2]. Specifically, they operate crude oil tankers and a smaller number of combination dry bulk/crude oil carriers. Nine of their vessels are single-hulled, barring them from transport in certain parts of the world, among them, the EU^[3]. As of the end of 2006, 59 of Frontline's vessels were leased from third parties ^[4].

The company makes a significant portion of its revenue from by charging a rate per unit of cargo for specific voyages (these are the voyage charters in the chart below). They also make some money charging rates for per day or month use of their vessels (these are the time charters). FRO's high exposure to spot oil voyage charters puts most of their business in a highly competitive environment where the rates they charge can fluctuate significantly^[5].

For the past years, Frontline has been buying and selling vessels through its wholly-owned subsidiary, Ship Finance. They have been slowly increasing their fleet as part of its belief that fleet size is an important negotiation tool while making profits on the sale of vessels and new vessel building contracts. Additionally, they have been working to make their fleet more safe by selling off one of their single hull tankers in January 2007 ^[6]. Most recently in April 2007, the company ordered two 156,000 dwt vessels from a company in China, which is in addition to 12 other newly-built vessels they have on order^[7]. The company has also shown a commitment to focusing their business on shipping pure crude oil (as opposed to petroleum products), selling their entire holding of shares in Sea Production, Ltd. (a vessel supplier to oil companies) in June 2007^[8].

^[9]

^[10] Note that bareboat charters are when a customer assumes voyage and vessel expenses and pays a fixed per time unit rate to use a vessel.

[edit] Trends and Forces

• The growth in world oil demand has an effect on Frontline's business. An increase in world demand in oil will mean that companies in the tanker industry will have more opportunities to ship crude oil. It is uncertain whether the takeoff of alternate methods of exploration and OPEC's decreasing power in restricting oil supply will be sufficient for the tanker industry to maintain or exceed current profit margins as developing countries like China and India put increasing pressure on world oil demand.

• The growth of trade in liquefied natural gas (LNG) could turn the tanker industry's focus away from crude oil transportation. Contrary to many of its competitors, FRO does not have any international product tankers or liquefied natural gas vessels in its fleet. World gas consumption has grown at a rate of 2.5% annually between 1996 and 2006 ^[11], and from 1986 to 2006, world trade in LNG has grown from nearly nothing to half a trillion cubic feet^[12]. As world oil prices rise, consumers could substitute away from petroleum consumption and toward natural gas consumption ^[13]. For instance, recently the Asia Pacific region has experienced increasing demand for LNG because gas-fired power plants are more efficient than oil-fired steam power plants, its use reduces dependence on imported oil, and it is environmentally cleaner. Supplying countries have correspondingly expanded their plants^[14].

• Developments in alternative energies could, in the long-term, result in a decrease in oil demand. As renewable energy becomes an evermore feasible alternative to burning fossil fuels, consumers can substitute their energy use away from oil and petroleum products. While this could lead to lower fuel costs for the tanker industry itself, it could also mean greater competition in an already fragmented industry.

[edit] Competitors

Some of FRO's major competitors include:

• Overseas Shipholding Group, a U.S. based tanker company that transports crude oil, petroleum product, and liquefied natural gas internationally. Domestically, they also operate a U.S. Flagged fleet^[15]..
• General Maritime Corporation, a U.S.-based crude oil transportation company whose fleet is made up of 30 vessels that the company wholly owns. They have a total capacity of 2.4 million dwt^[16].
• Teekay Corporation provides international transportation for crude oil and petroleum products, and operates approximately evenly in the charter and spot markets. They have a total capacity of 4.2 million dwt^[17].
• Tsakos Energy Navigation, based in Bermuda, charters the shipment of crude oil and petroleum products for its fleet of 40 vessels, of which one is a liquefied natural gas carrier. They have a carrying capacity of 14.9 million dwt^[18].

FRO distinguishes itself by holding a highly homogeneous fleet of tankers that were designed to transport crude oil. While all of these companies concentrate in the shipment of crude oil, FRO is different because most of its competitors also include international product carriers and liquefied natural gas vessels in their fleet. Like some of its competitors, however, FRO charters a significant portion of the vessels they operate. They are protecting their asset value in the event that tanker prices experience a downturn.

Note that dwts measure shipping capacity.

[edit] Footnotes

1. ↑ FRO 2006 10-K, page 17
2. ↑ Frontline fleet list
3. ↑ Marine Log's Article on the European Union's ban of single-hulled ships
4. ↑ FRO 2006 10-K, page 6
5. ↑ FRO 2006 10-K, page 6
6. ↑ FRO 2006 10-K, page 13
7. ↑ http://frontline.bm/company/history.shtml
8. ↑ http://frontline.bm/company/history.shtml
9. ↑ Google Finance: FRO Income Statement
10. ↑ FRO 2006 10-K, page F-5
11. ↑ Liquefied Natural Gas
12. ↑ WSJ's article on "Costly Oil's Positive Side"
13. ↑ TSTC, Liquefied Natural Gas
14. ↑ Energy Market Authority - Liquefied Natural Gas
15. ↑ OSG 2006 10-K, Page 9
16. ↑ GMR 2006 10-K, Page 16
17. ↑ TK 2006 10-K, Page 17
18. ↑ TNP 2006 10-K, Page 18