Frontline's earnings call sent its stock up over 25% (Part 5 of 5)
New builds delay could be positive
New build construction activity is progressing slowly. This could be positive because if delivery can’t be met, Frontline won’t have to pay the remainder and could earn a refund. This would improve Frontline’s liquidity and keep it from defaulting. Lower risk means accepting a lower investment return, which is share price–appreciative.
While the company couldn’t specify a start date for when companies can cancel delivery or when shipyards need to pay ship buyers, Jensen says they typically range from seven to nine months after the delivery date.
Unlikely to purchase new vessels
When asked whether the company is in talks with shipyards to order new vessels, as other firms have done recently, Jensen noted that there’s plenty of ships on the water to look for instead. This appears to be because second-hand vessels are priced at a pretty significant discount in the market to new builds. Also, it could bring forward more balanced supply and demand dynamics in the years to come. (In a weak market, everyone wants the modern fleet. But when rates are rising, anything that floats could be contracted.)
Jensen had expressed that scrapping activity certainly helped with the industry supply and demand balance. But since rates have risen, there’s less incentive to scrap vessels now, which is negative. He does believe scrapping will pick up again.
Other companies like NAT, TNK, and TNP did benefit from Frontline’s more positive earnings discussions, but they didn’t rally as much—likely a reflection of Frontline’s more volatile returns due to its riskiness. If the supply and demand balance continues to tighten or the sentiment surrounding crude tankers continues to improve, investors could expect higher share prices for these companies.
Investors who prefer less volatile investments can consider the Guggenheim Shipping ETF (SEA). DryShips Inc. (DRYS) is another stock to consider, since it has a few crude tankers that operate in the spot market, while its main fleets are dry bulk ships.
Browse this series on Market Realist:
- Part 1 - Must-know: Frontline rallies more than 25% after its earnings call
- Part 2 - Why Frontline’s 3rd quarter 2013 earnings beat analysts’ estimates
- Part 3 - Why Frontline says shipping owners are now making positive plans
- Investment & Company Information