Has Frontline Turned the Corner Against Nordic American Tankers and Teekay Tankers?

Frontline (FRO 2.27%) released its quarterly report earlier today, and the tanker-shipping company saw its shares soar by more than 10% when the stock opened this morning. Given how tough an environment the shipping industry has been, investors have hoped that Frontline, and hard-hit rivals Teekay Tankers (TNK 0.35%) and Nordic American Tankers (NAT 0.53%), would be able to turn things around.

Whether you look at dry-bulk carriers or at the tanker business that Frontline, Teekay Tankers, and Nordic American focus on, the entire shipping industry has struggled from a glut of vessels built in response to the global economic expansion of the early and mid-2000s. For years, the industry has tried to recover from having too many vessels on the market, along with high-fuel costs that have made the slump in shipping rates even harder to weather. But with today's results, is the tide finally turning 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

Source: Yahoo! Finance.

Will Frontline earnings help the stock recover?
Prior to the report, analysts had been getting less optimistic about Frontline's long-term prospects, widening their 2014 loss projections by $0.10 per share. The stock had followed suit, sinking 15% between late August and last night's close.

Frontline's report this morning showed the difficulty that tanker-shippers have faced in the current environment. Rates were mixed, with VLCC tankers seeing daily time charter earnings rise $2,000, to $16,100, from the previous quarter, and spot day-rates jump $2,700, to $13,900. But the company's Suezmax vessels saw downward movement, with time-charter and spot rates falling $1,400, or about 10%. Overall, the company believes that it could take a while for conditions throughout the tanker market to recover to a more normal level.

Those signs of life stand in stark contrast to the dour outlook Frontline gave last quarter. Yet, it's important to put today's report in context, as even the jump in rates for VLCC carriers leaves their prices down more than 90% from their peak levels during the commodity boom in 2007. At that time, tanker companies enjoyed the benefit of having some investors use tankers to take advantage of high futures prices for crude. Conditions might never return to those heady levels, and so Nordic American, Teekay Tankers, and Frontline might well never see the huge earnings they reaped in those boom times again.

One big challenge that Frontline and its peers face is that soaring U.S. oil production has reduced the amount of crude that has to move on the open seas. China is still a major importer of oil, and that has helped Nordic American, Frontline, and Teekay keep their businesses afloat. Still, Frontline CEO John Fredriksen's call to reduce capacity by scrapping old tanker vessels might prove to be necessary in order to support the industry's long-term viability.

Looking forward, Frontline shareholders might be getting a boost today, but they'll need to see more signs of strength in the tanker market before they can have confidence in Frontline's long-term prospects. Unless rates pick up further, it'll be hard for any of the industry's players to make money.

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