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Why restructuring concerns weigh down Frontline's stock

Part 2
Why restructuring concerns weigh down Frontline's stock (Part 2 of 7)

Why Frontline predicts higher 2014 tanker rates but a weak Q2

Changes in rates

As a commodity, shipping rates is one of the primary drivers for a crude tanker company such as Frontline Ltd. (FRO), Teekay Tanker Ltd. (TNK), Nordic American Tanker Ltd. (NAT), and Tsakos Energy Navigation Ltd. (TNP). The first few months of 2014 brought optimism to the crude tanker industry, allowing Frontline’s VLCCs and Suezmax vessels to earn an average of $32,700 and $27,700 in shipping rates on a time charter equivalent basis.

Average Freight Rate, RS PlatouEnlarge Graph

Rates have fallen recently, however, and this reflects in these companies’ share prices. While some companies are still above the averages in 2013, some are really close. According to RS Platou’s data, average freight rates for VLCCs and Suezmaxes trading in the spot market, where tankers are hired for a voyage, have fallen to $13,200 a day for VLCCs and $13,700 a day for Suezmaxes in May 2014. This is down from $20,000 and $11,800 in April.

Weak second quarter

The second quarter tends to be a weak period for the crude tanker business due to seasonal factors. As Teekay Tanker Ltd. (TNK) recently pointed out, refinery maintenance in Asia, which will peak around May, will likely keep rates capped towards the end of the second quarter. However, the company also said we should start to see some uptick as we approach the end of the first half of the 2014, and the company maintained its outlook that a further recovery will take place.

Frontline Ltd. (FRO) management also provided the view that rates in 2014 will be volatile, which is counterintuitively positive in the shipping industry because of the industry’s steep inelastic supply curve during high utilization. It also holds the view that rates would end up higher than 2013 on average. Recent data on the year-over-year changes in the Baltic Dirty Tanker Index, which is a benchmark Index widely followed by analysts, also supports this perspective, having remained positive over the last few months.

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