FRO - Frontline plc: Big Question Is How Winter Will Play Out This Year

2023-08-28 05:04:30 ET

Summary

• Frontline plc reported its second quarter 2023 results, with a net income of $230.67 million and total operating revenues of $512.763 million.
• The company declared a quarterly dividend of $0.80 per share, an increase of 14% from the previous quarter.
• FRO stock performance has been strong, up 56% on a one-year basis.
• I recommend taking a partial profit (40-50%) between $18.30 and $18.85 with a possible next resistance at $19.

Introduction

Cyprus-based Frontline plc ( FRO ) reported its second quarter 2023 results on August 24, 2023.

Important note: This new article updates my June 2, 2023 article. I have been following FRO on Seeking Alpha since 2015.

The Company indicated that as of June 30, 2023, its fleet consisted of 66 vessels with an aggregate capacity of approximately 12.7 million DWT:

• 65 vessels owned by the Company (22 VLCCs, 25 Suezmax tankers, 18 LR2/Aframax tankers)
• And one Aframax tanker that is under the Company's commercial management.

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

As of June 30, 2023, the Company's owned fleet included 42 scrubber fitted vessels (20 VLCCs, 18 Suezmax tankers and four LR2/Aframax tankers), which represents 65% of our owned fleet.

Finally, as of June 30, 2023, there are no remaining vessels in the Company's new building program and no remaining commitments.

1 - 2Q23 Results Snapshot

Frontline reported a net income of $230.67 million , or $1.04 per diluted share, for the second quarter of 2023, compared to $51.28 million, or $0.25 per share, in 2Q22. The adjusted net income was $210 million, or $0.94 per diluted share.

Furthermore, Frontline reported total operating revenues of $512.763 million for the second quarter of 2023. However, total operating revenues and others were $522.154 million.

Finally, Frontline declared a quarterly dividend of $0.80 per share in 2Q23, an increase of 14% QoQ.

Quarterly Operation highlights:

We estimate industry-leading cash breakeven rates of $22,700 fleet average, including drydock cost for 8 Suezmax tankers in 2023, 4 in the third quarter and 4 in the fourth quarter. (conference call)

CEO Lars Barstad said in the conference call:

In the second quarter, we had a very untypical spike for VLCC and Suezmax towards the end. And this puts us in a position to make some extra cash and also to carry some value into the third quarter. Most interestingly, this spike was caused by minor weather delays, telling a tail of how narrowly balanced our market is. The macroeconomical headwinds seem to have a very-muted impact on our little part of the global macro puzzle

Reported spot TCEs for VLCCs, Suezmax tankers, and LR2/Aframax tankers in the second quarter of 2023 were $64,000, $61,700, and $52,900 per day, as shown below:

Q3 is expected to be lower. CEO Lars Barstad said in the conference call:

Frontline achieved $64,000 per day on our VLCC fleet, $61,700 per day on our Suezmax fleet and $52,900 per day on our LR2/Aframax fleet... we are back to a somewhat reverted earnings relationship between our segments, where the VLCC makes the most. We have secured quite firm numbers as we progress into Q3, with 74% of our VLCC days booked at $53,200 per day; 67% of our Suezmax days fixed at $48,800 per day; and 57% of our LR2/Afra days at $40,500 per day.

2 - Stock Performance

FRO stock performed well and is up 56% on a one-year basis, well above Scorpio Tankers ( STNG ), up only 23%. However, Teekay Tankers ( TNK ) outperformed both and is up 66%.

3 - Investment thesis

The tankers segment performed very well during the second quarter of 2023 and posted solid quarterly income, with continuing strength in Asia Pacific crude oil imports by VLCC. However, one big question raised by CEO Lars Barstad in the conference call:

The big question is obviously how the winter will play out this year?...

I think there's two key factors there that needs to be watched. One is obviously China. There's mixed signals coming from -- so in our little part of the world, as I mentioned, which is transport of oil, China looks to run on all cylinders.

Secondly, it's obviously the weather, and the weather we can't really control. Whether if we're going to have a repeat of last year which was fairly warm or if we're going to have a proper full-on winter, which is going to kind of affect demand on the positive side. So, I think those two are the key factors that at least I'm a little bit concerned about.

On August 22, 2023, Hellenic Shipping News indicated:

Tanker Shipping companies under our coverage have thus far reported strong financial results in 2Q23. Euronav, Teekay Tankers and DHT Holdings reported their results, wherein the TCE revenue of these companies moved up on average by 145.2% YoY on the back of higher TCE rates across vessel classes... We expect Frontline, Nordic American tankers and Tsakos Energy to report strong financial performance in 2Q23.

As expected, Frontline did not disappoint and followed the industry.

A crucial caveat emptor still applies here. The tanker industry is notoriously volatile, and it would be foolish to forget this principle.

Hence, we may have reached a temporary peak here, at least technically. I noticed that the recent oil production and export cuts impacted tanker shipping rates, reflecting a decline in July, which might indicate some downside in 3Q23 earnings.

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. The long-term risk attached to this industry is too high to justify a more aggressive long-term strategy.

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

Source: Frontline material

* Estimated by Fun Trading. Note: EBITDA indicated by the Company was $315.466 million in 2Q23.

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

1 - Operating Revenues were $512.76 million in 2Q23

Frontline announced revenues of $512.76 million for the second quarter of 2023 (see chart above).

The Company posted a net income of $230.674 million , or $1.04 per diluted share, for the second quarter of 2023 and an adjusted net income of $209.95 million , or $0.94 per diluted share.

2 - Free cash flow was estimated at $280.57 million in 2Q23

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

Trailing 12-month free cash flow is estimated at $519.21 million , with an estimated $280.57 million in 2Q23. This is the third solid Free cash flow in a row.

Frontline declared a cash dividend of $0.80 per share in 2Q23.

3 - Debt analysis: Net Debt in 2Q23 (consolidated and including current)

As of June 30, 2023, total cash was $519.14 million , and long-term debt, including current, was 2,295.16 million. Net debt is now $1,776 million.

In my opinion, the debt is uncomfortably high and needs to be cut by about 20%. Based on my data table above, the net debt to EBITDA ratio is now 1.52x. It could be a tough issue on the next downside cycle.

In June 2023, the Company repaid $74.4 million of its $275.0 million senior unsecured revolving credit facility with an affiliate of Hemen Holding Ltd., ("Hemen"), the Company's largest shareholder. Up to $199.7 million remains available to be drawn following the repayment.

Technical Analysis And Commentary

Note: The chart is adjusted for the dividend.

FRO forms an ascending wedge pattern with resistance at $18.75 and support at $17.75. One important TA component is that the RSI is now 74, showing a sell-to-strong sell signal.

Therefore, rising wedge patterns indicate the more likely potential of falling prices after a breakout of the lower trend line. Traders can make bearish trades after the breakout by selling the security short or using derivatives such as futures or options, depending on the security being charted. These trades would seek to profit on the potential that prices will fall.

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 easier with the new dividend scheme.

I suggest selling between $18.30 and $18.85 with a possible next resistance at $19. Conversely, I recommend buying between $17.8 and $16.8 on a retracement, with potential lower support at $16.

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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