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Why Frontline’s 3rd quarter 2013 earnings beat analysts’ estimates

Xun Yao Chen

Frontline's earnings call sent its stock up over 25% (Part 2 of 5)

(Continued from Part 1)

Quarterly improvement

For the third quarter ending September 2013, Frontline reported -$35.4 million, equivalent to -$0.46 a share in the third quarter of 2013. This is an improvement from -$120 million, or $1.54, the preceding quarter.

Excluding impairment

Excluding one-time items, which were due to the impairment of two vessels (Front Champion and Golden Victory), net loss would have been -$18.99 or -$0.24 a share, beating analyst estimates of -$0.45 a share. We exclude one-time items to get a clearer picture of the company’s core business. (Impairment occurs when the future cash flow generated from an asset is expected to be less than current asset value on the book.)

Rates and operating expenses

Higher rates and lower operating expenses of approximately $6 million also contributed to better earnings. Frontline’s VLCC fleet earned $16,100 per day on average in the third quarter, which was above the $14,100 per day in the second quarter of 2013. Increases in VLCC rates had largely offset the decline in Suezmax rates, which fell from $13,800 per day in the second quarter to $12,400 in the third quarter.

Operating expenses are referred to as “the direct costs associated with running a vessel,” according to the company’s 20-F filing listed with the SEC. This includes costs like crew, vessel supplies, repairs and maintenance, dry-docking, lubricating oils, and insurance. For the third quarter, the average operating vessel expense a day for VLCCs fell to $10,000, down from $12,500 in the second quarter.

Lower vessel operating expenses were largely due to less dry-dock activity. Only two vessels were dry-docked in the third quarter, compared to four in the second quarter. (Dry docking is done a few times in a ship’s life cycle to inspect for damage, conduct necessary repairs and maintenance, and comply with safety standards.)

Lower cash cost break-even

As Frontline Ltd. (FRO) has sold and terminated its oldest fleets as well as fleets with upcoming expensive dry-docking, Frontline’s operating expenses are expected to remain low for the remainder of 2013 and 2014, which is positive from a cash standpoint in this depressed market. As a result, its estimated average cash cost break-even rates for the remainder of 2013 are down to $22,400 per day for VLCC and $16,700 for Suezmax, from $25,500 and $18,500 in the second quarter, respectively. (Cash cost break-even rates are rates that Frontline must earn to cover estimated operating costs, interest expenses, bareboat hire, and corporate overhead costs—essentially, to generate positive cash flow from operating its vessels.)

Continue to Part 3

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