Why Frontline Earnings Disappointed Investors

Frontline's  (NYSE: FRO  )  quarterly report, released this morning, likely disappointed shareholders. They've enjoyed a nice advance in the past few months on increased optimism about the future prospects of the long-suffering tanker-shipping sector. But as long as Frontline earnings remain solidly negative, it'll be hard for investors to have much confidence in the company's ability to weather tough conditions in the industry.

Frontline is just one of many shipping companies faced with a glut of shipping vessels and rock-bottom day-rates for tanker charters. Despite many calls for a bottom in shipping, the industry has only managed the slightest of recoveries in the recent past. When will the tide finally turn for Frontline and its peers? Let's take an early look at what's been happening with Frontline over the past quarter, and what the company reported this time around.

Stats on Frontline

EPS

($1.54)

Analyst EPS Estimate

($0.50)

Revenue

$121.2 million

Change From Year-Ago Revenue

(31%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Why Frontline earnings sank
Analysts had had mixed views in recent months about the prospects for Frontline earnings, widening their loss estimates for the June quarter by $0.03 per share, but narrowing their full-year 2013 loss projections by nearly 10 times that amount. Prior to this morning's report, the stock had been responding favorably, climbing almost 30% since late May -- albeit from very low levels.

Frontline's first-quarter report in May highlighted the tanker company's challenges. On one hand, the company managed to post a less extreme loss than analysts had expected. Yet with a heavy overhang of debt that needs to be repaid or refinanced in the near future, Frontline is feeling time pressure to enact a recovery that has been stubbornly slow in coming.

The company's trend of less-worse losses reversed itself in the second quarter, as Frontline posted much poorer results than anticipated, due in part to vessel impairment charges on vessels leased from Ship Finance International (NYSE: SFL  ) .

In particular, Frontline has felt more pain than its peers because it has a relatively concentrated focus on its traditional tanker fleet. That's similar to Nordic American Tankers (NYSE: NAT  ) , which has also seen some sharp revenue declines and share-price drops over the past several years. By contrast, more diversified companies Teekay (NYSE: TK  ) and Ship Finance International have managed to outpace their rivals by maintaining more diversified exposure to better markets such as energy, with specialized services like oil-drilling and liquefied natural gas attracting interest.

One question still facing Frontline: what impact unrest in the Middle East might have. So far, Egyptian turmoil hasn't led to closures of the Suez Canal or its affiliated pipelines. But if such closures were to occur, it could boost demand for shipping by tanker as an alternative, with the longer route around the Cape of Good Hope potentially boosting revenue.

The biggest takeaway from the Frontline earnings report is the fact that daily charter rates have continued to fall, both for its very large crude carriers and for its Suezmax tankers. In particular, with the company calling for itself and other industry players to scrap older tankers in order to cut capacity and hopefully raise prices, it's evident that Frontline is trying to move forward aggressively to support tanker prices. Nevertheless, with no signs of imminent improvement in the tanker industry, Frontline is running out of time to begin making money again.

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