TNK - Frontline: 2022 A Golden Year For Tankers

Summary

• Frontline announced multi-year record revenues of $530.14 million for the fourth quarter of 2022.
• The tankers did exceptionally well during the fourth quarter of 2022 and posted the highest quarterly income since 2Q18.
• The demand is expected to fall slightly from 8% in 2022 to about 5% in 2023.
• I recommend selling partially between $19 and $19.5 with potential higher resistance at $20.

Introduction

Bermuda-based Frontline plc ( FRO ) reported its fourth quarter and full-year 2022 results on February 28, 2023.

Important note: This article is an update of my article published on January 9, 2023. I have been following FRO on Seeking Alpha since 2015.

The company indicated that as of December 31, 2022, its fleet consisted of 70 vessels with an aggregate capacity of approximately 13.1 million DWT:

• 66 vessels owned by the Company (21 VLCCs, 27 Suezmax tankers, 18 LR2/Aframax tankers)
• Four vessels are under the Company's commercial management (two Suezmax tankers and two Aframax tankers).

In the press release, Frontline indicated that 64% of the fleet would have scrubbers installed by February 2023:

As of December 31, 2022, the Company’s owned fleet included 40 scrubber fitted vessels (17 VLCCs, 19 Suezmax tankers and four LR2/Aframax tankers). Additional scrubber installations are planned on two owned VLCCs in 2023. Following these scrubber installations, including the delivery of two scrubber-fitted vessels under our newbuilding program in January 2023 and the sale of two vessels with scrubbers in January and February 2023, 64% of our fleet will have scrubbers installed.

Note: In January 2023, the Company sold the 2009-built VLCC, Front Eminence, and the 2009-built Suezmax tanker, Front Balder, for gross proceeds of approximately $61.0 million and $39.5 million, respectively. The vessels were delivered to new owners in January and February, respectively.

1 - 4Q22 and Full-year 2022 results snapshot

Frontline reported a net income of $240.03 million, or $1.08 per diluted share, for the fourth quarter of 2022, compared to $19.79 million or $0.10 per share in 4Q21. The adjusted net income was $215.50 million, or $0.97 per diluted share.

Furthermore, Frontline reported total operating revenues of $530.14 million for the fourth quarter of 2022.

Daily rates were solid in 4Q22 and are expected to decrease slightly in 1Q23.

Quarterly Operation highlights:

CEO Lars Barstad said in the conference call:

Scrubber spreads continue to incentivize investments hovering north of $200 per metric ton, and we are installing scrubbers on two additional wheels [technical difficulty] only two of these left without a scrubber. The average age of our fleet is a comfortable five years Frontline is well positioned in CRI terms and also for the upcoming EU ETS considerations.

2 - Stock Performance

Frontline has underperformed its peers below and is up 92% on a one-year basis, whereas Scorpio Tankers ( STNG ) and Teekay Tankers ( TNK ) show a tremendous uptrend above 230%.

3 - Investment thesis

The tankers did exceptionally well during the fourth quarter of 2022 and posted the highest quarterly income since 2Q18. Chinese demand was strong and helped tremendously.

However, the tankers industry is notoriously known for its volatility, and it would be dangerous to forget this crucial principle. Thus, I consider FRO an excellent trading tool because of its ever-changing characteristics. I only recommend owning a small or medium long-term position since the company restarted paying dividends.

The tanker market turned bullish in the second part of 2022, and CEO Lars Barstad correctly called it a "Possible start of a new bull market." during the last quarter's conference call. On January 9, 2023, Seatrade Maritimes news wrote :

The tanker market enjoyed a dramatic turnaround in fortunes in 2022 as the Russian invasion of Ukraine and resulting sanctions saw spot rates ramp up and a redrawing of trade flows

Seatrade Maritimes news said that the tankers market saw double deadweight demand due to a jump in tonne miles. Furthermore, it expects this trend to continue in 2023, albeit with some "slowing in trade growth." The demand is expected to fall slightly from 8% in 2022 to about 5% in 2023.

Finally, we will not have to worry about the merger between FRO and EURN anymore. On January 9, 2023, Frontline plc announced that it terminated its $4 billion merger agreement with its rival oil tanker owner Euronav (NYSE: EURN ), which was favorably received by the market.

On January 17, 2023, FRO received from Euronav an emergency arbitration request for urgent interim and conservatory measures, which the Emergency Arbitrator entirely dismissed on February 7, 2023.

CEO Lars Barstad said,

Frontline will with its efficient operations continue to capture value as this cycle unfolds, and remain focused on maximizing dividend capacity per share

Thus, I recommend primarily using FRO as a trading vehicle but suggest keeping a medium long-term position.

Frontline plc - The Raw Numbers: Fourth Quarter Of 2022 And Financials History

Source: Frontline material

* Estimated by Fun Trading

Note: More data are available to subscribers only.

Analysis: Total Operating Revenues, Earnings Details, Free Cash Flow

1 - Operating Revenues were $530.14 million in 4Q22

Frontline announced multi-year record revenues of $530.14 million for the fourth quarter of 2022 (see chart above).

The company posted a net income of $240.03 million, or $1.08 per diluted share, for the fourth quarter of 2022 and an adjusted net income of $215.50 million, or $0.97 per diluted share. Total operating revenues of $530.1 million for the fourth quarter of 2022.

CEO Lars Barstad said in the conference call:

Although the implications of Russia's invasion of Ukraine caused most of the headlines, we believe, from a tanker market perspective, China was the catalyst to Frontline posting the best quarterly result in over 14 years. We finally fired on all cylinders throughout the quarter

The new bull market potential benefits the company's bottom line. Higher rates are crossing the Average Fleet 2022 break-even rate of $20,300, including dry dock costs for 2023.

2 - Free cash flow was estimated at $140.50 million in 4Q22

Note: Generic free cash flow is cash from operations minus CapEx.

Trailing 12-month free cash flow is estimated at $52.93 million, with an estimated whopping $140.50 million in 4Q22.

As a reminder, FRO stopped paying dividends starting in 3Q20. However, the company decided to restart its dividend payment in the second quarter and declared a cash dividend of $0.15 per share.

In 4Q22, Frontline confirmed a cash dividend of $0.30 per share for 3Q22 (after canceling the merger with Euronav) and declared a cash dividend of $0.77 per share for 4Q22.

3 - Debt analysis: Net debt is estimated at $1.88 billion in 4Q22 (consolidated and including current)

As of December 31, 2022, total cash was $490.81 million, and long-term debt, including current, was 2,370.82 million.

Liquidity: $556 million in cash and cash equivalents, including the undrawn amount of unsecured facility, marketable securities, and minimum cash requirements bank as of December 31, 2022.

Technical Analysis And Commentary

Note: The chart is adjusted for the dividend.

FRO forms an ascending channel pattern with resistance at $19.5 and support at $18.

As I said in my preceding article. Ascending channel patterns are short-term bullish moving higher within an ascending channel, but these patterns often form within longer-term downtrends as continuation patterns. RSI is now 70, which is a sell signal. The TA chart suggests we are now flirting with a top, and it is time to take profits. About 50% minimum is reasonable.

The short-term trading strategy is to trade LIFO for about 50% of your position and keep a core long-term position for a much higher payday. This task is made more accessible with the new dividend scheme.

I suggest selling between $19 and $19.5 with possible next resistance at $20. Conversely, I recommend buying on retracement between $18 and $16.5 with potential lower support at $14.6 in case of solid retracement.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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