Earnings calls are great places to get information about how a company and its industry has performed, is performing, and is expected to perform. Market Realist summarizes some of the key points that are particularly important from an investment perspective for Frontline Ltd. (FRO) and other similar tanker peers, based on calls and presentations.
Frontline reports lower earnings
On August 28, 2013, Frontline Ltd. was the last company to report its earnings among several other tanker companies. The company carriers VLCCs (very large crude carriers) and Suezmax vessels that are used to transport crude oil primarily from Africa or the Arabian Gulf to other countries around the world. The company reported net loss of $1.54 per share during the second quarter, lower than 0.24 for the first quarter.
Drivers of lower earnings
Higher vessel operating expense due to increased number of ships for drydocking, an activity that shipowners conduct to make sure ships are operational for service from time to time, lower shipping rates, and vessel impairments1 were the primary reasons for lower earnings. The company expects third quarter earnings to be on par with the second quarter, excluding the gains and losses from the sale of assets during this quarter.
Cash flow position
Free cash position is also expected to decline, which suggests negative free cash flow for the third quarter. Interest expense, excluding capitalized interest, amounted to $22.9 million during the second quarter, and at the end of July 30, 2013, the company had total cash and cash equivalents of $83.7 million and restricted cash of $75.8 million. With current time charter rates below the company’s cash breakeven costs, which is the rate that ships need to be hired at in order to cover all of company’s expected cash expenditures (and Frontline’s breakeven is higher than other shipping firms because of its large debt), the board is seriously considering scrapping some vessels.
If the market does not recover in the short term, and no additional equity can be raised or assets sold, it will have problems meeting its liquidity requirements, lease obligations to Ship Finance International (SFL), and repaying an existing convertible bond loan set to mature in 2015. The company has recently entered an equity distribution agreement with Morgan Stanley, in which Frontline may sell new ordinary shares of value up to $40 million at current market price.
Troubled times for Frontline and other tankers
In summary, Frontline Ltd. (FRO) is in trouble, and the company isn’t expecting a quick crude tanker recovery to take place soon. This also bodes negative for other tanker companies, such as Nordic American Tanker Ltd. (NAT), Teekay Tankers Ltd. (TNK), and Teekay Corp. (TK)—even though these companies may show stronger financial strength than Frontline. While this concern also applies to the Guggenheim Shipping ETF (SEA), the ETF is also invested in other shipping industries that are showing more positive fundamentals.
To follow key indicators that affect investment performance, check our Marine Shipping page.
- Vessel impairments are expenses charged to write down the value of the assets when the future cash flow from the asset is expected to be less than current value on a company’s books. ↩
© 2013 Market Realist, Inc.