The Q&A section of an earnings call presentation can also give investors some color on the industry’s fundamental landscape as well as the company’s future outlook. Sometimes, it might be hard for retail investors to understand why analysts are asking the questions they choose. So this part of our series is dedicated to that section.
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Several analysts asked about Frontline Ltd.’s (FRO)’s cash position, current new build status, and expansion plans during the earnings call on the general expectation that rates will improve. Since Frontline is now operating in negative operating cash flow with a new build program that requires further payments of $87.9 million, it’s important to know whether the company will have enough cash to sustain itself through the trough. If the market is expected to rise, analysts wonder whether the company has plans to take advantage of the change.
Frontline currently has $79 million in cash and $59 million in restricted cash. The $59 million in restricted cash is held by ITCL, and it reflects the amount of short- and medium-term liquidity that’s used to fund payment of certain loans and lease payments. It may also be used to fund operating expenses for certain vessels according to contracts.
Because a significant portion of Frontline’s vessels is leased and the company is financially more levered, it has a relatively high cash break-even rate. Some of those periodic lease payments and operating expenses for certain vessels can be funded with restricted cash held at ITCL, but the rest has to come from operating cash flows and cash balance.
This means the company has to tap external funding if it has to pay the remaining $87.9 million for two Suezmax new builds. The remaining $37 million at the market new share issuance program could be enough to fund the two vessels. With covenants to comply, annual capital lease payment of approximately $50 million a year, and negative operating cash flow over the past few months, Frontline is riskier than other firms like Tsakos Energy (TNP), Teekay Tankers (TNK), or Nordic American Tanker (NAT) when it’s unable to meet those debt obligations if rates do fall from recent highs and stay low.