This Tanker's Built Tough

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Based on grim reports out of the oil tanker market, with talk of tanker spot rates at well-below-breakeven levels, I wasn't expecting Frontline (NYSE: FRO) to report much in the way of net income for the first quarter. Impressively, the tanker titan did manage to generate about $77 million in earnings, beating the median analyst estimate by over 50%. So I guess I wasn't the only one to be surprised.

Less surprising was Frontline's decision to scuttle over half a billion dollars' worth of tanker orders, representing 33% of its newbuild program. The global order book for tankers is simply stuffed to the gills, and Frontline expects the rest of the industry to follow with a combination of delays and cancellations of a third of today's standing orders.

That's a rough development for the big shipyards, but they naturally have an interest in seeing their customers stay solvent, so I think you can expect them to be pretty accommodating.

As for Frontline, the firm continues to display its market savvy, exemplified this quarter by its jump on the contango wagon, as it dubbed the move by majors like BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B), and Hess (NYSE: HES) to store crude offshore in a bit of time arbitrage. As of April 23, Frontline estimated that there were 100 million barrels socked away in this manner. Importantly for the tanker operator, these oil traders were willing to pay a premium over spot market rates.

Looking ahead, Frontline has fixed charter coverage of 40% for 2009 and 27% in 2010. Coverage jumps to 52% for this year when you include variable rate charters. Between contango storage, owner demolitions, and single-hulled vessel scrapping, Frontline should at least be able to tread water until this rough period -- for it and tanker operators Overseas Shipholding Group (NYSE: OSG) and Nordic American Tanker (NYSE: NAT) -- passes.

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