11/28/08

Frontline's Earnings

Frontline reported its earnings for the third quarter 2008 today. I wrote about a week ago that I would be surprised if the report were not a good one. Whether the report was a good one depends on how you look at it.

Earnings per share were $1.39, $0.20 lower than the analyst consensus and around 67% lower than last quarter. However, earnings per share this quarter were over 4.6 times higher than the same quarter last year.

Daily rates averaged $74,700 for VLCCs. This is down from $86,300 a day last quarter, but up significantly from the $36,000 daily rate recorded in the third quarter of 2007. Average Suezmax daily rates were $62,700 in the third quarter of 2008, down from $72,000 in the second quarter, but up from $25,000 recorded in the third quarter last year.

Besides the analyst earnings miss (if one looks at what the analysts say at all, it's probably better to look at the lowest estimate), the disappointing news is that the dividend will be $0.50 a share for this quarter. Some will view this as a dividend cut. That's one way to see it. But the company does not have a stable dividend, and determines its payout each quarter based on earnings and future outlook. If the recession does not turn into a depression and/or the demand for oil eventually increases, dividend payments will be higher in the future.

For November, the company reports that its costs are $34,700 for VLCCs and $24,800 for the Suezmax fleet daily. As this does not include capital expenditures and loan repayments, costs can increase if FRO is unable to refinance its loans as they mature--a possibility with today's fragile credit market. Costs can also increase if docking fees, etc go up. Avoiding Somali pirates, for example, may make trips longer and more expensive.

Lower demand for oil and more tankers competing for transporting that oil will probably lower daily rates in the coming year. Daily rates in the third quarter were very volatile. VLCC rates were as low as $29,500 per day (below current costs) and as high as $164,000 per day. Suezmax rates were as low as $41,500 a day and as high as $153,000. If rates average at the lower end of these ranges, as is likely, the dividend may be lower in the coming year.

Frontline owes around $1.4 billion for new builds that it'll pay for over the next four years, having already paid almost $400 million. The company expects to receive 18 new build ships (10 VLCCs and 8 Suezmaxes) by the second quarter of 2012. "If credit market doesn't improve before 2012 [the company's] dividend capacity [may be reduced] temporarily," Frontline stated in its most recent report.

The outlook is grim, and the share price can certainly go lower. The company's average P/E for the last five years is around 4.7. The high estimate for 2009 is $6.17 a share. The low estimate is $2.10. If FRO continues trading around 4.7 times earnings, earnings estimates suggest a share price range of around $10 to $30. Investor pessimism/optimism can, of course, alter the P/E dramatically. For example, the trailing P/E right now is under 3.

I hope the share price falls, because I want to buy some shares. I'll look to start buying small amounts after the ex-dividend day, which is December 5, 2008, but will hold off on any big purchases until the economic picture is bleaker (which would potentially signal a turnaround).