(RTTNews) - Friday, FBR Capital Markets upgraded Frontline Ltd. (FRO: News ) shares to Outperform from Market Perform and increased price target to $33 from $23. The brokerage raised its 2009 EPS estimate to $1.43 from $1.33, and its 2010 estimate to $1.40 from $1.09.

Analyst Robert MacKenzie upgraded tanker industry outlook to Overweight based on his expectations for marked improvement in the supply/demand balance in 2010. The analyst forecasts excess supply decreasing from 7.7% in 2009 to 3.8% in 2010 to near zero in 2011. One of the factors supporting the supply/demand improvement is that more than 40% of new orders will be offset by single-hull scrapping.

The analyst said that additionally, the secular trend of increased seaborne demand should support accelerated ton-mile expansion in this up-cycle. Based on this model, the analyst is forecasting very large crude carrier, or VLCC, day rates to increase from $29 thousand in 2009 to $33 thousand in 2010 and $37 thousand in 2011.

Furthermore, the analyst believes that OECD inventories are not as relevant as some think because OECD demand is declining as a percentage of global oil demand. Concurrent with the analyst's upgrade of the tanker space, he believes that Frontline is best positioned to capture the coming strength.
The analyst said that the company is highly exposed to the VLCC and Suezmax market as most of its vessels operate on spot. In addition, the majority of Frontline's fleet is chartered in, which increases the earnings sensitivity to changes in day rates.

A 37% increase to the analyst's forecasted 2010 VLCC and Suezmax rates would double the company's 2010 discretionary cash flow. The analyst believes this upside potential warrants a higher multiple and are thus upgrading FRO to Outperform and raising his price target to $33 based on 7.0x 2011 price/cash flow. The analyst derives his target multiple from a median historical next-12-month price/cash flow multiple.

Currently, FRO is up $0.65 or 2.56% and trading at $26.08.

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by RTT Staff Writer

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