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Why Frontline’s 3Q2013 comments support peers while it rose most

Xun Yao Chen

Frontline's earnings call sent its stock up over 25% (Part 5 of 5)

(Continued from Part 4)

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.)

Scrapping helping

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.

Improving sentiment

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.

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