TNK - Frontline: China Is Helping But Will It Last?

2023-06-02 04:41:05 ET

Summary

• Frontline reported a net income of $199.63 million, or $0.90 per diluted share, for the first quarter of 2023. Another solid quarter.
• Frontline's Q2'23 outlook looks very positive.
• Frontline declared a cash dividend of $0.70 per share in 1Q23.
• I recommend buying FRO between $13.9 and $13.5 on a retracement, with potential lower support at $12.9.

Introduction

Cyprus-based Frontline plc ( FRO ) reported its first quarter 2023 results on May 31, 2023.

Important note: This article updates my article published on March 4, 2023. I have been following FRO on Seeking Alpha since 2015.

The company indicated that as of March 31, 2023, its fleet consisted of 69 vessels with an aggregate capacity of approximately 13.1 million DWT:

• 66 vessels owned by the Company (22 VLCCs, 26 Suezmax tankers, 18 LR2/Aframax tankers)
• Three vessels are under the Company's commercial management (one Suezmax tanker and two Aframax tankers).

In the press release , Frontline indicated that 65% of the fleet would have scrubbers installed in 2023:

As of March 31, 2023, the Company's owned fleet included 41 scrubber fitted vessels (19 VLCCs, 18 Suezmax tankers and four LR2/Aframax tankers). Following the additional scrubber installation planned on one owned VLCC in 2023 and the sale of one Suezmax tanker, 65% of the vessels in our fleet will have scrubbers installed.

Note: In May 2023, the Company sold the 2010-built Suezmax tanker, Front Njord, for gross proceeds of $44.5 million. The vessel is expected to be delivered to the new owner in the second quarter of 2023. After the repayment of existing debt on the vessel, the transaction is expected to generate net cash proceeds of approximately $28.2 million, and the Company expects to record a gain on sale of about $9.4 million in the second quarter of 2023.

Finally, the company has no remaining new building commitments. The completed delivery of the two last business unit buildings, Front Orkla and Front Tyne, was achieved in January 2023.

1 - 1Q23 Results Snapshot

Frontline reported a net income of $199.63 million, or $0.90 per diluted share, for the first quarter of 2023, compared to $31.15 million or $0.15 per share in 1Q22. The adjusted net income was $193.32 million, or $0.87 per diluted share.

Furthermore, Frontline reported total operating revenues of $497.33 million for the first quarter of 2023. However, total operating revenues and others were $511.62 million.

Daily rates were solid in 1Q23 and are expected to decrease slightly in 2Q23.

We expect the spot TCEs for the full second quarter of 2023 to be lower than the TCEs currently contracted, due to the impact of ballast days at the end of the first quarter. The number of ballast days at the end of the first quarter was 359 for VLCCs, 429 for Suezmax tankers and 216 for LR2/Aframax tankers. (press release)

Quarterly Operation highlights:

The outlook for 2Q23 looks very positive. CEO Lars Barstad said in the conference call :

We have secured quite firm numbers as we progressed into Q2, with 78% of our VLCC [days] [ph] booked $75,000 per day, 71% of our Suezmax days booked at $65,000 dollars per day, and 63% of our LR2/Aframax days at a very respectable $65,700 per day.

Spot TCE was solid in 1Q23, albeit a little lower sequentially. The spot TCE is expected to increase significantly in 2Q23, as shown below:

CEO Lars Barstad said in the conference call:

We've had a seasonally strong first quarter of the year. Russia still has an impact on the market or there are sanctions on Russia, but I think kind of the key part of the action in Q1 was related to China. The strong Q1 has given us ability to book quite strong numbers into Q2 as well as the Frontline team relentlessly growing to create shareholder value.

2 - Stock Performance

FRO stock performed well and is up 50% on a one-year basis. It has been followed closely by Scorpio Tankers ( STNG ). However, Teekay Tankers ( TNK ) outperformed both and is up 78%.

3 - Investment thesis

The tankers segment performed very well in the first quarter of 2023 and posted solid quarterly income. Chinese demand was strong and helped tremendously.

However, the tanker industry is notoriously known for its volatility, and it would be foolish to forget this crucial principle.

Thus, I consider FRO an excellent trading tool because of its ever-changing characteristics. However, I only recommend owning a small or medium long-term position since the company restarted paying dividends.

As indicated in my preceding article, we have entered a "Possible start of a new bull market" for the tanker industry.

Thus, I recommend using FRO as a trading vehicle coupled with a medium long-term position.

Frontline plc - The Raw Numbers: First Quarter Of 2023 And Financials History

Source: Frontline material

* Estimated by Fun Trading

** Indicated by FRO in the presentation.

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

1 - Operating Revenues were $497.33 million in 1Q23

Frontline announced revenues of $497.33 million for the first quarter of 2023 (see chart above).

The company posted a net income of $199.63 million, or $0.90 per diluted share, for the first quarter of 2023 ( the highest first-quarter profit since 2008) and an adjusted net income of $193.32 million, or $0.87 per diluted share.

CEO Lars Barstad said in the conference call:

in the first quarter Frontline achieved $52,500 per day on our VLCC fleet, $64,000 per day on our Suezmax fleet, and $56,300 per day on our LR2/Aframax fleet. And we are, in fact, back to a somewhat reverted earnings relationship between our segments with the Suezmax is outperforming the VLCCs and the same for LR2s.

2 - Free cash flow was estimated at $112.0 million in 1Q23

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

Trailing 12-month free cash flow is estimated at $155.28 million, with an estimated $112.0 million in 1Q23. This is the second solid Free cash flow in a row.

Frontline declared a cash dividend of $0.70 per share in 1Q23.

3 - Debt analysis: Net debt in 1Q23 (consolidated and including current)

As of March 31, 2023, total cash was $458.47 million, and long-term debt, including current, was 2,382.63 million.

Technical Analysis And Commentary

Note: The chart is adjusted for the dividend.

FRO forms a descending channel pattern with resistance at $16.0 and support at $13.6.

Descending channel patterns are short-term bearish in that a stock moves lower within a descending channel, but they often form within longer-term uptrends as continuation patterns. The descending channel pattern is often followed by higher prices, but only after an upside penetration of the upper trend line.

In my preceding article, I recommended selling FRO due to its high valuation, and I was right. FRO retraced significantly this quarter, and my rating changed to Hold.

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 convenient with the new dividend scheme.

I suggest selling between $15.4 and $16.5 with possible next resistance at $18.5. Conversely, I recommend buying between $13.9 and $13.5 on a retracement, with potential lower support at $12.9.

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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