Frontline Faces Some Fog

Well, it was another freight feast for Frontline (NYSE: FRO  ) . The situation has changed quite dramatically for Frontline and competitors like Tsakos Energy Navigation (NYSE: TNP  ) in recent weeks, but let's first review the highlights of the quarter.

Net income hit a record for both the second quarter and first half of the year. Soaring spot rates had a lot to do with that. Time-charter equivalent rates for Suezmax tankers, for example, improved about 40% sequentially, and that includes both spot and period (i.e., contracted, longer-term) rates. Very Large Crude Carriers saw strong rates as well, but the increase was more muted.

As usual, a flurry of financial activity boosted earnings beyond that generated by core operations. In fact, out of $327 million in total operating income, a gain on asset sales contributed nearly 40%. Frontline also recognized a mark-to-market gain on its nearly 5% shareholding in Overseas Shipholding Group (NYSE: OSG  ) .

As to the downdraft in spot rates in recent weeks, Frontline was hard-pressed to identify a main culprit. At one point in the quarter, Iran had been holding oil in 18 VLCCs offshore. The return of a portion of these vessels to the active fleet may have tipped the balance to oversupply. At the same time, U.S. oil demand has dropped to the largest degree in 26 years. Whatever the reasons for the decline, recent VLCC rates have fallen below Frontline's cash breakeven level of $31,400.

Falling spot rates cut Frontline fairly hard, because the firm maintains both high spot exposure and a pretty leveraged balance sheet. Nordic American Tanker (NYSE: NAT  ) , despite being entirely spot-oriented, actually fares better because of its lean balance sheet and consequently lower breakeven rate.

I'm not too worried for Frontline, given its extreme market savvy. Still, I'm much more comfortable with Nordic American's ultra-transparent operating model at this juncture.

Related Foolishness:

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a transparent disclosure policy.


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  • Report this Comment On August 25, 2008, at 12:20 AM, irjsi wrote:

    re; Frontline's 'Leveraged Balance Sheet;

    I much prefer Frontline's 'leverage' to the Big Banks'!

    Recall . . . 'Barings and Mssr. Neesom's 'Dance of Derivatives '?

    And Hedge Funds' leveraging procedures?

    Don't ask!

    re. Banks: (SEC prohibits FTD's for about one month for FRE and FNM plus 17 or 19 Banks) !

    There is No SEC protection of the Market(s) from FTD's

    And, Frontline has appeared a few times on the FTD lists!

    SEC protects Wall Street, NOT Main Street!

    Frontline, aware of Spot/Charter rate reductions, has prudently chosen this time for a 'Pit Stop', Drydocking vessels for maintenance . . . when the Caution flag is replaced by the Green . . . Frontline will re-enter the race with a 'full tank', and New Tires, and 'above water rates'!

    Unlike most corporations, Frontline 'appreciates and rewards their shareholders!

    How are Buffet's Dividend pay-out rates!

    And, yet, Mr. Buffet, not knowing what to do with the profits garnered from BH's multitudes of 'Customers'.

    elected to charge Mr. and Mrs. Gates with the 'responsibility' of 'scattering' his Billions to the winds'!

    Mr Fredrikson 'feeds the Goats' himself!

    Mr. Fredrikson's Goats eat very well!

    Roy Stewart,

    Phoenix AZ

  • Report this Comment On August 25, 2008, at 3:20 PM, Blindnomore wrote:

    I have learned to not put much stock into what the MF says on many things. Too much fundamental analysis. Watch the trend and look at past performance. It does indicate better what a stock will do than the GAAP rules ever will. To me GAAP is synonymous with legal ways to fudge the numbers.

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