Why a high cash breakeven cost is risky for Frontline

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Cash breakeven cost

The cash breakeven costs are the daily rates of Frontline’s (or FRO) vessels. They have to earn the rates to cover budgeted operating costs and dry dock, estimated interest expense, payable at hire, and corporate overhead costs. However, the breakeven rates exclude capex and International Tanker Corporation Ltd. (or ITCL) vessels.

Cash cost breakeven

For the rest of 2014, the estimated average cash cost breakeven rates stood at almost $24,000 per day for VLCCs. They stood at $17,800 per day for the Suezmaxes. Meanwhile, in 2Q13, the estimated average cash cost breakeven rates stood at almost $25,000 per day for VLCCs and $19,000 per day for the Suezmaxes.

In its latest report, ITCL’s second quarter results revealed that the average cash breakeven rate for the remainder of 2014 is ~$30,800 per day for its spot trading VLCC Ulriken. It’s on a bareboat charter.

Impact on company and peers

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The rates in 2014 averaged above 2013. Frontline’s performance could lag because it’s a riskier investment than its peers. Its peers include Nordic American Tanker Ltd. (NAT), Tsakos Energy Navigation Ltd. (TNP), Teekay Tanker Ltd. (TNK), and the Guggenheim Shipping ETF (SEA). As a result, Frontline has higher operating costs.

Frontline has a high cash breakeven cost. The company’s higher cash breakeven costs are due to interest and bareboat hire payments that the company has to make to Ship Finance International Ltd. (SFL) and third parties.

Visit the Market Realist Marine Shipping page to learn more about the industry.

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