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Frontline Comments on Time Charter Market

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Updated

Frontline’s spot exposure

Frontline (FRO) operates its crude (DBO) tankers either in the spot market or in the time charter market. At the start of the year, 18 out of 22 of Frontline’s vessels were operating in the spot market. The company doesn’t provide a detailed breakdown of its spot market and fixed market vessels on a quarterly basis. However, the company has stated that it had slightly more vessels operating in the fixed market in 2Q15 than in 1Q15.

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Spot versus time charter

  • Spot contracts are for a short duration, or a voyage from one port to another. Crude tanker companies charge the spot rate prevailing in the market.
  • Under time charter contracts, vessels are hired for a specific period that can last up to five or six years at a pre-decided daily rate.

Merger effect

  • With the merger of Frontline 2012 (FRNT) and Frontline (FRO), the combined company will have a total fleet of 89 vessels. Out of these 89, 24 vessels are owned, and 21 are on capital.
  • Of the vessels owned or leased by the combined company, 39 vessels will be employed in the spot market. This represents 86% of total owned or leased vessels.
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Management’s comments on time charter contracts

  • According to Frontline’s management, traders have been reluctant over the past four to five years to charter in tonnage for longer periods. Time charter contract durations generally used to last six to 12 months.
  • As we can see in the Time Charter Rates chart, time charter rates have increased steeply. This has resulted in an increase in time charter contract durations, from a previous duration of six to 12 months to a new duration of two years.
  • Frontline’s management believes that three-year contracts will be more common in the near future, which is a positive sign for the industry. With three-year contracts, high current tanker rates would be locked in for a longer term.
  • To make this point clearer, Frontline compares current time charter rates with time charter rates from one year ago. In summer 2014, Suezmax was priced at under $20,000 per day for three years. Currently, Suezmax is priced at over $30,000 per day for the same period. This is beneficial for companies like Teekay Tankers (TNK), DHT Holdings (DHT), Euronav (EURN), Nordic American Tanker (NAT), and Tsakos Energy Navigation (TNP).

Road ahead

  • During the analyst call, Frontline management seemed quite firm about shifting more vessels from the spot market to time charter contracts.
  • Going forward, the company stated that it will favor longer charters over shorter charters.
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