Frontline Ltd. (FRO) reported Friday a loss for its third-quarter ended September 30, 2009, driven by significant decline in revenues, reflecting weaker spot market. Notwithstanding the current setback, the group expects to return to profitability in its fourth quarter.
The Hamilton, Bermuda-based group is engaged in ownership and operation of oil tankers, including oil/bulk/ore, or OBO carriers. The Company operates tankers of two sizes: very large crude carriers or VLCCs, which are between 200,000 and 320,000 deadweight tons, or dwt, and Suezmaxes, which are vessels between 120,000 and 170,000 dwt.
Frontline posted quarterly net loss of $5.61 million or $0.07 per basic share versus net profit of $107.85 million or $1.39 per basic share a year ago. On average, nine analysts polled by Thomson Reuters expected the company to report a loss of $0.12 per share for the quarter. Analysts' estimates typically exclude special items.
The group's quarterly total operating revenues declined to $233 million, yet came in above Street consensus of $195.65 million, from $577.26 million last year.
In the immediately preceding quarter, the company reported net income of $27.8 million or $0.36 per share, on revenues of $281.54 million.
Earlier this month, FBR Capital Markets upgraded Frontline to "Outperform," raising its price target to $33 from $23 and lifting earnings estimates.
During the latest third-quarter under review, total operating expenses almost halved to $207.91 million from $404.66 million, reflecting a decline in voyage expenses and commission, profit share expense, ship operating expenses, charterhire expenses and administrative expenses. Charterhire expenses were lower during the quarter, owing to weaker spot market, resulting in reduced expenses on floating rate charters and profit share payments. However, depreciation charge rose to $60.21 million from $56.29 million.
In the recent third-quarter, average daily time charter equivalents, or TCEs, earned in the spot and period market by the VLCCs, Suezmax tankers plunged to $32,100 and $15,900, from $74,700 and $62,700, respectively, while Suezmax OBO carriers were down $42,200 from $44,100 a year earlier. Average daily spot earnings for the double hull VLCCs, Suezmax tankers and Suezmax tankers in the Gemini Suezmax pool were $26,800, $12,800 and $14,866, respectively.
In November, the Company had average total cash cost breakeven rates, on a TCE basis, of around $32,900 and $27,100, for VLCCs and Suezmaxes, respectively.
The group's losses related to the five Suezmax tankers chartered in from Eiger were $14.6 million. Early November, it redelivered two of the vessels and expects to redeliver two vessels in December and the remaining vessel in the first quarter of 2010.
On November 26, the group declared a dividend of $0.15 per share. The record date for the dividend is December 8, ex dividend date is December 4, and the dividend will be paid on or about December 22.
For the first nine-month period, the group's net income plunged to $98.77 million or $1.27 per basic share from $647.21 million or $8.53 per basic share in 2008. Year-to-date revenues fell to $871.14 million from $1.65 billion in the comparable period a year earlier.
Industry Terends
Frontline's results are no different from peers in the industry, including Ship Finance International Ltd. (SFL), Nordic American Tanker Shipping Ltd. (NAT), Overseas Shipholding Group Inc. (OSG), Teekay Corp. (TK), affected by overall weakness in spot tanker market demand amid global economic meltdown.
According to reports from IEA, in November 2009 average OPEC oil production, including Iraq, was 28.8 million barrels per day during the third quarter of the year, a sequential increase of 320.000 barrels per day. IEA further estimates that world oil demand averaged 85.1 million barrels per day in the third quarter of 2009. IEA predicts that the average demand for 2009 in total will be 84.8 million barrels per day, a 1.7% decline from 2008. However, in 2010 demand is expected to improve 1.7% to 86.2 million barrels per day.
At the end of third-quarter, VLCC and Suezmax fleet totaled 524 vessels and 381 vessels, respectively, while orderbook counted 188, or 35% of VLCC fleet and 127 vessels of Suezmax fleet, or 32% of total fleet, respectively. Further, throughout 2009, it is estimated that 61deliveries of VLCC and 57 deliveries of Suezmax fleet will take place.
Outlook
Looking ahead, the company noted, "the fixed charter coverage and low cash cost breakeven rates, however, create a solid platform for Frontline's operations. This platform has now been further strengthened by a reduction of the new building commitments and a process which is likely to lead to a more efficient use of the large cash deposits for vessels on long term leases."
Based on the results achieved so far in the quarter, the company expects to return to net profitability in the fourth quarter. Fixed charter coverage is estimated to be 39% and 25% of the fleet in the fourth quarter of 2009 and in 2010, respectively.
"The market balance for 2010 will be pushed in a positive direction by the phase out of approximately 12 percent of the fleet due to single hull restriction, and is likely to be further strengthened by the expected increases in OPEC production volumes and delays / cancellations of newbuilding orders," added the group.
FRO finished Wednesday's trading at $26.99, on the NYSE.
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