We last looked at oil transporter Frontline
After a stellar 2004, fourth-quarter operating revenues declined once again, this time retreating 18.4% year over year. Almost across the board, charter rates were lower than year-ago levels, and in many cases, substantially lower. For example, income on a time-charter basis for its Suez tankers was off by nearly 50% from Q4 2004.
With revenues down, the quarter's operating income followed suit, declining 49.7% from a year ago. In the conference call, management explained why decreases in operating profits outpaced that of its top line. First, insurance premiums for the industry are significantly higher this year in response to peak prices in 2004. A second factor is rising oil costs that effect Frontline on margins, since the price for lube oil also increased. Third, crew wages are on the rise, as the number of vessels in the market has increased substantially over the past year, creating a greater demand for laborers. And the fourth factor is from the impact of selling one vessel while taking delivery of three other ships.
The fourth quarter had tough comparisons to contend with against the blockbuster 2004. Looking ahead into 2006 may offer some renewed signs of life. Chinese demand for oil is expected to substantially outpace 2005's 3% growth in consumption. Additionally, management is optimistic that long-distance transportation needs will be higher in 2006, particularly in the latter half of the year. With fewer vessels being brought to the market this year, charter rates are likely to rise again. Management did caution, however, that if the price of oil climbs much higher than its current level, the demand for the commodity will likely be curbed, resulting in a negative impact on transports.
What's a Fool to do? The forecast for 2006 is looking solid. Throw in an out-of-sight dividend yield in excess of 15%, and combined we have a fairly solid case for taking a closer look at Frontline.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.