Frontline's earnings call sent its stock up over 25% (Part 3 of 5)
Third quarter hits bottom
Frontline’s management commented that the third quarter was pretty bad for the crude tanker market. While crude demand rose and ton mile (the distance that ships have to travel to carry a ton of goods) improved, rates for VLCC vessels (very large crude carriers) hit a bottom in the middle of the third quarter. The market for Suezmax (one size smaller than VLCCs) also hit close to zero earnings a day, largely due to lack of cargo to be shipped from Libya and West Africa—Suezmax vessels’ traditional starting points.
Scrapping and turnaround
Companies also scrapped as many vessels as the number of new builds that were delivered, a sign of a depressed market with excess supply. Depressed rates also took a hit on ship owners’ sentiment. But owners’ sentiment has changed “from being in the mood not to attend any Christmas parties to now making positive plans to attending all,” according to chief executive officer Jens Martin Jensen.
This change has been driven by improved rates and increases in activity around the Caribbean and Atlantic basins, which cover trade routes from West Africa and the North Sea to Asia. VLCC rates rose to ~$42,500 a day, and Suezmax followed.
New build price and orders
New build prices (prices for new ships) are rising, and recent orders for VLCCs suggest prices of ~$93 million. This is often a positive indication of higher future rates. But the company is cautious and disappointed that the “recent newbuild orders raise questions on the fleet balance going forward.” On the Suezmax end, CEO Jensen also said, “It’s only a matter of time before we see Suezmaxes being ordered again. [But] this is not really what the market needs right now.”
However, with limited dry docking in 2014, and exposure to the spot market, the company could be in a pleasant market surprise, said the CEO. This is a stark contrast with what he said in the last earnings call, when everything looked pessimistic.
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 4 - Retail investor takeaways from Frontline’s 3Q2013 earnings Q&A
- Company Earnings