A post-crash peak in tanker rates will help push some of Wall Street’s largest tanker owners to stronger than anticipated first quarter profit, Wells Fargo says.
Analyst Michael Webber explains tanker earnings have been surprisingly resilient in the year to date, with long-haul crude volumes out of the Middle East and West Africa taking rates to the highest level since 2008.
In a note to clients, Webber placed VLCC rates at $52,725 daily for the first quarter, with suezmaxes at $48,260 daily and aframaxes at $37,050 per day.
“Spot Tanker names remain poised to make some serious money, in what's turning into the best tanker market since 2008,” Webber wrote.
The strong market will help John Fredriksen’s Frontline to a profit of $0.18 per share for the period, ahead of the $0.07 per share consensus, according to data presented in the report.
Tsakos Energy Navigation is tipped for a profit of $0.43 per share by Wells Fargo, beating the $0.34 per share consensus.
Teekay Tankers, which is rumoured to be lining up a takeover for AET, will card a gain of $0.43 per share by Webber’s sums, compared with the $0.33 expected on Wall Street.
Despite the strong market, investors are still sitting back and “waiting for the other shoe to drop” in the form of over-ordering and other negative events, Webber says.
Tough to crack
He explains this stance is a “tough psychology to break, particularly with a less-than-stellar corporate governance track-record in some corners of the space, and a lingering (and valid) expectation that dilution could temper any sustained breakout in the stocks”.
“We believe many funds use tankers a hedge against crude, and while vessel supply dynamics typically play a much larger long-term role in fundamentals than marginal shifts in crude/product volumes, as far as the equities go, there's no reason to expect that trade to stop sporadically impacting the group during periods of volatility,” Webber reasoned.
ANDY PIERCE IN LONDON 17 April 2015, 14:00 GMT
Its not the stimulus so much, as there is a growing inelastic consumer demand for oil in China as more drivers, more driving...etc. The real driver will be their SOR, and indications that they wish to create a stockpile equal to the US stockpile. That will be huge demand driver, far more significant that an ecomomic stimulus.
VLCC today at $67,080
SUEZ today at $39,065
The VLCC spot rates are now higher than the 2015 Year-to-date avg of $61,749....which is quite remarkable give the typical seasonal swoon in rates that has historically occurred at this time.
Could we see $100,000/day VLCC rates by later 2H2015?
For those nimble to have added at $6.50 yesterday (Im not among those...), I would expect they
will see a doubling of their position quickly. Just 2 weeks ago , Russ traded in the lower $13 range, and the news in the interim hardly justifies the subsequent 50% downdraft.
FRO has purchase options on 4 VLCC that they currently charter-in. In the event that those are
exercised, a dividend would be delayed, imo.
It may be that a decision on the 4 options would await the merger of FR12 and FRO, ,likely to occur in 2H2015.
The stock has risen 30% over just 2 weeks, and in a strong market selloff day, the shares are pressing upwards.
These are signs that FRO has gained new confidence among traders, and that the prospects for VLCC rates, a FRO dividend, growth, are seen positively.
The removal of the overhang of the bond payment now past opens the ways to revalue the shares. FRO carries almost no ling term debt, at its obligations are tied mostly to charter agreements with SFL.
It only owns 2 vessels, and has no capital commitments at this time, making their balance sheet quite clean now that the bond is paid off.
And the prospects for a combination with FR12 will draw more interest in coming months.
FRO has little long term debt. It only owns 2 of their vessels, and they charter the remaining vessels in their listed fleet. They have obligations to pay the owners, and earn the difference. In a weak market, they struggle mightly because of those minimum obligations. But they have no captial expenses and little long term interest and payment obligations. The same is not true for DHT. DHT has other attributes,e.g. The value gained in their Newbuild fleet since ordering 12-18 months ago. They control their own fate more than FRO at this time, but have less cash flow potential compared to FRO.
What is apparent is that the global supply glut is being balanced on the backs of US shale. Since the latter crude supply is not shipped, and since US demand is growing with economy again, US will need to increase imports, and other international sources will need to increase sea borne crude shipments to meet a 1M barrel/day increase in global demand in 2015.
you forgot to post the next sentence....
"....The company trades at a substantial premium to NAV, and issuance of new shares would be massively accretive.... "
That is very good!
from a Friday 10 April assessment by SA:
Frontline Cash Flow Potential
Despite FRO's seemingly convoluted structure, the potential for strong cash flow in 2015 and onward is tremendous. Based on the most recent investor presentation (26 February 2015), the cash breakeven rates for VLCC and Suezmax tankers is $26,400 and $19,400 respectively. FRO is required to pay SFL up to $6,500/day received above these rates, so for the 17 applicable vessels, FRO does not make a "profit" until $32,900 and $25,900 respectively. FRO must also pay 25% of the exceeding amount to SFL. For example on VLCC charter rates of $50,000/day average, FRO will receive direct cash flow of $12,825/day. The structure sounds complicated, but I believe the flow chart below explains the process. The result is a highly leveraged structure with the potential for enormous returns during a strong tanker market.
The $6,500 discount (note: only a discount if the market is below the original rate) expires at the end of 2015, at which case FRO's breakeven rates will shift higher. The net result of this shift in a strong tanker market is $0. FRO is well positioned to benefit from future strength in charter rates. The key difference is that in a weak tanker market, FRO will still be liable to pay SFL up to an additional $6,500 per day regardless of the actual revenues.
Another easily overlooked factor is that FRO prepaid SFL $50M in profit-sharing in late 2011 and has yet to cross this threshold (came close in 2014). This means the first $200M ($50M is 25% respectively) of cash profits go 100% to Frontline.
Assumming 2015 VLCC ~$50K/day and SMAX ~30K/day, cash flow on their fleet is estimated to be ~$1/sh, assuming adjusted share cont of 125M. "I believe that FRO could realistically trade in a $5-$8 range within several weeks based on the aforementioned near-term catalysts and balanced cash flow projections and related equity multiples. FRO's peers, including my previous "favorite" Nordic American Tankers , are trading for far higher levels based on their feasible payouts. Once FRO proves it is capable of strong results and resuming shareholder payouts, the equity valuation shift should occur immediately thereafter.
Frontline Set For Fresh Start --- from TradeWinds
John Fredriksen’s Frontline will today write a cheque to bondholders that will end a drama which has surrounded the company for the past couple of years.
Frontline’s $225m convertible bond hurdle will be cleared and the landmark may be followed by a much-hyped merger with sibling Frontline 2012.
Eirik Haavaldsen of Pareto Securities upgraded the company to hold on Frontline’s big day which sees the bond mature.
In a report to clients this morning, the analyst said: “Bondholders are to be paid back in full - who expected that two years ago?
“With this, (nearly) all the remaining Frontline-debt is Ship Finance lease debt, where we argue that some could be converted to equity in order to lower the cash break-evens and increase net asset value.
“The tanker market is booming, and in a booming tanker market Frontline’s 14x VLCCs with average age 14 are ironically exactly what one should own.
“Adding some newbuild-spice and market-cap-flour from baby-brother FRNT 2012 would make a diversified giant.”
Haavaldsen says the Fredriksen-system must have been running several scenarios to address the convertible with a full cash repayment not high among them two years ago.
Tanker giant overnight
Having run an ATM and been aided by a sharp upturn in the crude tanker market the remaining $93m will be chalked off today, the analyst says.
“With the bond out of the way, the company can continue to reach for its target, which is ‘to rebuild Frontline into a leading tanker company,’” Haavaldsen said.
“While 14 year old VLCCs is precisely what to buy given the current tanker rates, broker quotes and bunker cost, we would argue that some kind of fleet renewal is necessary in order to reach this target.
“A merger with Frontline 2012 would fulfil this – and give Fredriksen a US listed, diversified tanker-giant almost overnight.”
Erik Nikolai Stavseth of Arctic Securities says the bond repayment will “remove a troublesome stone from management’s shoe".
“Frontline still has large obligations to the Ship Finance, and the most sensible thing for Frontline would be to continue issuing shares,” he said in a report.
“The company trades at a substantial premium to NAV, and issuance of new shares would be massively accretive and
This clarification is key from the SA article:
"Although FRO appears to have serious liquidity issues, with recently reported current assets of $233M versus current liabilities of $329M, the majority of this relates to the convertible debt which is due next week. FRO also issued 10M shares of stock in January 2015, and 900K in February 2015, for net proceeds of $37.2M. Additionally FRO has secured a commitment to leverage its 13.46M shares in F12 to provide bridge financing (up to $75M) to cover the convertible debt expiration, therefore effectively rendering the default probability moot (20-F page F-39).
With the addition of these two facets, FRO's current assets are closer to $345M, for a current ratio of 1.05. Strong cash flows discussed above should also improve this balance.
Solvency-wise, FRO has nearly zero long-term debt. The obligations under capital leases are covered through cash flows and are offset by the inherent value of vessel utilization. Remaining long-term debt is under $140M, less than the value of the two owned Suezmaxes alone. The shareholder deficit is based primarily on accounting book values and does not represent the current operating reality.
At a surface-level view, FRO's balance sheet looks to be in far worse condition than in reality, yet another factor which contributes to its present undervaluation."
highlight summary from the SA article on Friday:
Frontline has $93.4M of convertible debt outstanding as of February 2015. This debt is due 14 April 2015. I believe this default potential, albeit extremely small, has served as a major overhang on the FRO stock price. FRO issued this debt in 2010 with a conversion strike of $39 (dividend adj. to $36.56), and has repurchased significant quantities through private transactions. In March 2012, FRO repurchased $10M principal for $5.4M. On 11 October 2013, FRO repurchased $25M principal debt for $2.25M and 6.47M shares.
As FRO's financial situation improved, the discounts became much smaller. On 28 October 2014, FRO repurchased $40.8M of debt for $26.3M and 8.25M shares. On 16 December 2014, FRO bought $22.5M debt for $9.6M and 4.74M shares. The most recent repurchase was $33.3M debt for $33M on 12 February 2015.
In total FRO reduced debt obligations by $131.6M through payments of $76.55M and 19.46M shares. FRO's share capital has risen from 77.86M shares post-restructuring (Q4-11) to 123.26M shares (20-F filing). The majority of the proceeds from the 25M additionally issued shares went towards debt repurchases and to finance the two new vessels, the last of which was delivered in January 2015.
from an excellent SA article 10 April:
In late 2011, Frontline was hurtling towards bankruptcy. Enormous newbuilding-related liabilities and outdated charter contracts with Ship Finance resulted in an untenable breakeven rate. FRO's lack of liquidity and insolvent balance sheet presented no apparent survival opportunities. FRO quickly sold 6 vessels and Fredriksen, through Hemen Holdings Ltd, backstopped a major restructuring in early December 2011.
As part of this arrangement, a new company, Frontline 2012 (F12), would acquire 15 vessels and nearly $1B in related debt. Ship Finance agreed to a $6,500/day reduction in charter rates through year-end 2015 in exchange for a $106M cash payment, $50M of which would serve as an advance on profit sharing. Ship Finance's share of profits above charter-rates would increase from 20% to 25% for the remainder of the charters. FRO's surviving fleet was reduced from 50 vessels to 40 vessels. FRO invested $25M in F12 for 8.77M shares ($2.85 subscription price). Hemen Ltd. purchased 50M shares.
Frontline continued to sell off vessels and terminate contracts throughout 2012, 2013, and 2014. Operationally, FRO gained approximately $60M in cash flow during 2012, $12M in 2013, and $64M in 2014. These results are heavily obscured by the income statement where FRO has been heavily penalized by depreciation ($288.7M), impairment ($206.2M), and debt restructuring ($66.1M). This has been partially offset by equity gains ($17.4M) related to F12 market valuation.
While FRO's balance sheet has taken major hits over the past 3 years, the company itself has done alright considering the horrendous tanker environment. FRO's fleet has shrunk to 23 vessels, of which only 2 are directly owned. The rest are subject to charter agreements, of which the SFL vessels (17) carry a 25% profit-sharing arrangement. The remaining 4 vessels are chartered from Dr Peters GMBH, a German financing company, and are due to expire at the end of 2015. FRO has a purchase option for these 4 vessels.
In December 2011, FRO received 8.77M shares (8.8%) of the new Frontline 2012 entity at a subscription price of $2.85 per share ($25M investment). In May 2012, FRO bought 3.55M shares of Frontline 2012 for $3.75 per share in an offering of 56M shares. Overall ownership of the new entity decreased to 7.9%.
In January 2013, FRO purchased 1.14M shares at $5.25 per share (6.3% total ownership). In February 2013, ownership dropped to 5.4% due to Frontline 2012 issuing 34.1M new shares at $6.60.
In October 2013, FRO received 108,069 shares of Avance Gas (OTCPK:AVACF) as part of an F12 spin-off. These shares are currently worth approximately $1.5M ($13.75 quoted price on 8 April 2015). Frontline 2012 repurchased shares during 2014, increasing FRO's 13.46M shares to 5.6% ownership.
F12 agreed to merge their dry bulk fleet with Knightsbridge and received 62M shares, for total ownership of 77.7M shares. Knightsbridge has recently merged with Golden Ocean . These shares are worth approximately $390M ($5.04 quoted price on 8 April 2015). FRO's potential pass-thru (in case of a spin-off) stake is worth approximately $22M (5.6%*$390M). It's difficult to attain a full valuation of FRO's stake in F12 due to the extremely thin OTC market, but the 2014 Annual Report (20-F) suggests a 6 March 2015 valuation of $75M (page F-40).
Apparently not so dead, and a solid 20% gain for those that added after last months earnings announcement.
Biotech sector is hot, and when (not if) Yousprala gets FDA full clearance, look for these shares to race much higher.
Look at HZNP moves, as just one small-cap example.
from Dennis Gartman, Thursday aft, 2 April:
"Once the deal is completed, "you are going to see new lows in crude oil because the Iranians are going to be extraordinarily aggressive in selling. They have no choice."
In addition, Gartman said, Saudi Arabia will be sure to defend its market share and put pressure on crude prices.
John Kilduff, founding partner of Again Capital, agrees oil is headed lower, noting that Asian countries have already been aggressively buying the Iranian oil that has been allowed in the market. He expects that to continue.
"This is going to have another tremendous downward push for oil prices once it becomes realized that this oil is going to get sold fairly rapidly," said Kilduff, also a CNBC contributor.
Oil may strengthen, then hit new lows: Gartman
Between now and June, there may be strength in the crude market, but after a final deal is reached w …
He also thinks if Congress votes down the agreement, the current global coalition will come to an end. "The rest of the world is going to move on without us and normalize relations with Iran," he predicted.
Meanwhile, the trade that most interested Gartman wasn't whether to go long or short on oil. Instead, he wants to own tankers.
"There is a lot of crude oil that is going to be out there. It's going into storage, it's filling up in Cushing, it's filling up in the Gulf, and it's going to fill tankers," he said.
"If you take a look at tanker stocks, it's been one of the strongest areas of any stock market in the world," Gartman added. "That's the only thing I'm certain of at this point."
Interesting, haven't seen that. Of course, there are lots of deliveries this yr....about 30 new VLGC....ahlf to LPG and Avance