Frontline Ltd. (NYSE: FRO) is a shipping company that transports crude oil and, less frequently, dry cargo. 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.
Frontline Ltd. is engaged primarily in the ownership and operation of oil tankers and oil/bulk/ore (OBO) carriers, which are configured to carry dry cargo. It operates oil tankers of two sizes: very large crude carriers (VLCCs), which are between 200,000 and 320,000 deadweight tons (dwt) and Suezmaxes, which are vessels between 120,000 and 170,000 dwt. It operates through subsidiaries and partnerships located in the Bahamas, Bermuda, the Cayman Islands, the Isle of Man, Liberia, Norway, the United Kingdom and Singapore. It is also involved in the charter, purchase and sale of vessels.
As of December 31, 2009, Frontline’s tanker fleet consisted of 76 vessels. The fleet consists of 41 VLCCs, which are either owned or chartered in, 27 Suezmax tankers, which are either owned or chartered in and eight Suezmax OBOs, which are chartered in. It also had six VLCC new buildings and four Suezmax new buildings on order and five VLCCs under its commercial management. As of December 31, 2009, the fleet that Frontline operated had a total tonnage of approximately 19.2 million dwt, including the 1.5 million dwt under commercial management. The Company’s VLCCs are designed for the transportation of crude oil and, due to their size, are primarily used to transport crude oil from the Middle East Gulf to the Far East, Northern Europe, the Caribbean and the Louisiana Offshore Oil Port. Its Suezmax tankers are designed for worldwide trading, but the trade for these vessels is mainly in the Atlantic Basin and Middle East to South East Asia.
The company makes a significant portion of its revenue from by charging a rate per unit of cargo for specific voyages. It also generates revenue by charging rates for per day or month use of its vessels (time charters). FRO's high exposure to spot oil voyage charters puts most of its business in a highly competitive environment where the rates it can charge can fluctuate significantly.
Frontline has been buying and selling vessels through its wholly-owned subsidiary, Ship Finance. It has been slowly increasing its fleet as part of its belief that fleet size is an important negotiation tool when selling vessels and negotiating new vessel building contracts. Additionally, it has been working to make its fleet safer by selling off one of its single hull tankers in 2007.
Frontline has shown a commitment to focusing its business on shipping pure crude oil (as opposed to petroleum products), selling its entire stake in Sea Production, Ltd. (a vessel supplier to oil companies) in 2007.
First Quarter 2010 Results
During the first quarter of 2010, Frontline reported net income of $79.7 million and earnings per share of $1.02. Frontline also announced a cash dividend of $0.75 per share for the first quarter of 2010. The reported earnings reflect a stronger spot market compared to the fourth quarter of 2009. The average daily time charter equivalents earned in the spot and period market in the first quarter by the Company‟s VLCCs, Suezmax tankers and Suezmax OBO carriers were $45,300, $31,800 and $47,900, respectively, compared with $33,200, $21,300 and $42,800, respectively, in the fourth quarter. The spot earnings for the Company‟s double hull VLCCs and Suezmax tankers were $49,200 and $30,600, respectively, compared to $30,400 and $18,300 in the fourth quarter. The Gemini Suezmax pool had spot earnings of $30,900 per day in the first quarter, compared to $20,300 per day in the fourth quarter. The Company‟s double hull VLCC tankers excluding the floating time charter vessels had spot earnings of $54,000 per day in the first quarter, compared with $32,100 in the fourth quarter.
During the quarter, Frontline also completed a private placement of $225 million of convertible bonds, announced the acquisition of two double hull VLCC tankers and secured long term bank financing for both vessels, and took delivery of three out of a total of four Suezmax newbuildings from Rongsheng.
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.
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 , and from 1986 to 2006, world trade in LNG has grown from nearly nothing to half a trillion cubic feet. As world oil prices rise, consumers could substitute away from petroleum consumption and toward natural gas consumption . 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, reduce dependence on imported oil, and are environmentally cleaner. Supplying countries have correspondingly expanded their plants.
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.
Some of FRO's major competitors include:
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.