Frontline's Technical Triumph

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In a recent piece, I extolled the simplicity and transparency of Nordic American Tanker (NYSE: NAT). Larger competitor Frontline (NYSE: FRO) has a lot more moving parts, but those parts add up to a very impressive whole. In results announced last week, the tanker operator's per-share earnings from continuing operations rocketed 54% higher sequentially, and 13% higher for the full year.

In the fourth quarter, Frontline sold some investments that turned out fabulously. For example, of the $51 million in proceeds from Frontline's sale of its stake in freight derivative exchange IMAREX to NYMEX Holdings (NYSE: NMX), nearly $42 million was recognized as a gain. As a founding shareholder back in 2000, Frontline earned an approximate 28% compound annual return on its investment.

Lest you start thinking that Frontline's hefty earnings result owed simply to extra items, let me assure you that the company's core operating performance was also very strong. The firm's fleet is mainly comprised of Very Large Crude Carriers (a technical term in the industry, believe it or not) and Suezmax tankers, which are small enough to traverse the Suez Canal. For an apples-to-apples comparison, Frontline's double-hulled Suezmax tankers earned an average of $37,500 per day in the spot market, versus Nordic American's $27,000.

How could such a large chasm have formed between these two fleets' freight rates? Well, things were pretty calm until the end of the quarter, at which point rates exploded. Frontline management noted it "somewhat saw" this coming, and employed "strategic waiting" in order to lock in rates near the peak.

This goes to show you that there's more to these tanker companies than just fleet composition and degree of spot market exposure. Commercial savvy and superior technical management of a shipping fleet can make a big difference in operating results, and there are no metrics that neatly capture such abilities. You simply have to monitor the performance of fleet managers like Frontline, Tsakos Energy Navigation (NYSE: TNP), and Teekay (NYSE: TK) over time in order to get a feel for such a foundation.