Since the world runs on oil, one quick way to determine whether the worldwide economy is humming is to check out the companies that haul that oil. Based on third-quarter results from Frontline
Operating revenue for the quarter fell 27.5% from the comparable year-ago quarter. Despite robust oil demand, and OPEC pumping at record levels, time charter rates -- in this case, for Suez tankers -- fell from $45,900 to $26,200 per day. Operating income followed suit and tumbled 33.9%.
Shipping rates were sky-high in 2004 because oil demand was strong and scrap metal prices were high. Shippers, who in 2010 face significant bans on single-hulled ships, sent ships to the scrap heap. The combination of rising oil demand and limited shipping capacity created a lot of problems. Such a situation is not present today.
The good news is that Frontline expects to earn $570 million this year. That's above the $523.8 million analysts had expected. And based on strong future prices, the company sees a strong basis for 2006 earnings.
What could go wrong? For one, the single-hull ban is a wild card. The company has formed a business unit to explore the use of its single-hull ships for offshore floating production and storage offloading (FPSO). But until the economics of the FPSO market can be determined, the asset value and long-term future of the company's single-hulled ships are in question. Furthermore, political problems that withhold oil from the marketplace, perceived capacity improvements as new ships are built, and economic downturns (oil price-related or not) are just some of the troubles that, if encountered, could shift rates. There's no free lunch for shipping companies or investors.
Frontline also has a large $2.2 billion debt. The net interest expenses ran $39.4 million last quarter. That's no problem for now. Heck, the company is going to pay a $1.50 dividend, which amounts to a 3.7% return for this quarter. Ah, life is good for shippers these days, although the stock prices of Frontline, Tsakos Energy Navigation
The bottom line is that Frontline pays a hard-to-ignore dividend and that 2006 looks extremely good. But shipping rates are as much a commodity as the oil that's being moved. That's why the company's dividend yield greatly exceeds the average market yield. Investors are not confident that the next economic downturn, or the increased production of ships, will not sink charter rates.
More on oil shipping:
- A look at Frontline's first-quarter results.
- Are high dividend yields tanking?
- Bon voyage to a tough quarter.
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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.
