Can Frontline Survive the Shipping Slump?

Tomorrow, Frontline (NYSE: FRO  ) will release its latest quarterly results. With the tanker company having reported big losses for a long time now, investors are nervous about whether Frontline can stop bleeding cash and get back to profitability.

Unfortunately, conditions in the shipping industry remain extremely difficult, and Frontline's losses appear likely to continue for the foreseeable future. With more than $1 billion in net debt on its balance sheet, the big issue is how Frontline can keep sustaining further losses while keeping its business afloat. Let's take an early look at what's been happening with Frontline over the past quarter and what we're likely to see in its quarterly report.

Stats on Frontline

Analyst EPS Estimate

($0.50)

Year-Ago EPS

($0.05)

Revenue Estimate

$69.39 million

Change From Year-Ago Revenue

(36%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will Frontline's earnings sink or float this quarter?
In recent months, analysts have gotten a lot less enthusiastic about Frontline's earnings prospects, widening their loss estimates for the March quarter by $0.20 per share and expanding their full-year loss expectations by more than twice that amount. The stock, meanwhile, has been extremely volatile, with shares roughly in the same place they were toward the end of February.

Frontline has been having increasing trouble dealing with poor conditions in the tanker-shipping industry. In its previous report in February, Frontline reported that time-charter rates of $25,000 per day on very large crude carriers and $20,000 on Suezmax tankers haven't drawn much customer interest, and the current spot rate for VLCCs was much lower at approximately $5,000 per day. Although new shipbuilding activity across the industry is expected to slow in the future, the existing glut of capacity has weighed on rates.

Those conditions have forced Frontline to take some drastic measures. Last December, the company terminated two charters with Ship Finance International (NYSE: SFL  ) , under which Frontline had rented two vessels from Ship Finance in order to charter them out to its own clients. The move allowed Frontline to receive compensation of $34.5 million, but it had to return $23.5 million of it to Ship Finance as the owner of the vessels. Frontline also ended an arrangement last fall with Nordic American Tankers (NYSE: NAT  ) under which the two companies pooled almost 30 of their vessels into a single entity. With Frontline withdrawing its nine Suezmax vessels from the pool, Nordic American took full possession of the pool as of the beginning of 2013.

Since then, things have gotten even worse. In April, Frontline described the market as being in a "state of panic" as it started rejecting oil cargos due to low shipping rates. According to figures from the Baltic Exchange in London, very large crude carriers were losing about $3,000 per day running the Saudi Arabia-to-Japan route. Those losses narrowed to about $1,200 by the end of April, but the industry clearly still remains under pressure. Meanwhile, the trade association in charge of ship crews and maintenance workers has said that Frontline and its peers will struggle to retain personnel given their big losses.

In Frontline's report, pay close attention to how the company plans to deal with its extensive debt. Moreover, with CEO John Fredriksen also involved in other ventures like the Frontline 2012 tanker subsidiary as well as deepwater driller Seadrill, Frontline shareholders need to make sure that they're getting Fredriksen's full attention in getting through the current crisis.

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