Tomorrow, Frontline will release its latest quarterly results. With the tanker company having reported big losses for a long time now, investors are nervous about whether Frontline can stop bleeding cash and get back to profitability.
Unfortunately, conditions in the shipping industry remain extremely difficult, and Frontline's losses appear likely to continue for the foreseeable future. With more than $1 billion in net debt on its balance sheet, the big issue is how Frontline can keep sustaining further losses while keeping its business afloat. Let's take an early look at what's been happening with Frontline over the past quarter and what we're likely to see in its quarterly report.
Stats on Frontline
Analyst EPS Estimate
Change From Year-Ago Revenue
Earnings Beats in Past 4 Quarters
Source: Yahoo! Finance.
Will Frontline's earnings sink or float this quarter?
In recent months, analysts have gotten a lot less enthusiastic about Frontline's earnings prospects, widening their loss estimates for the March quarter by $0.20 per share and expanding their full-year loss expectations by more than twice that amount. The stock, meanwhile, has been extremely volatile, with shares roughly in the same place they were toward the end of February.
Frontline has been having increasing trouble dealing with poor conditions in the tanker-shipping industry. In its previous report in February, Frontline reported that time-charter rates of $25,000 per day on very large crude carriers and $20,000 on Suezmax tankers haven't drawn much customer interest, and the current spot rate for VLCCs was much lower at approximately $5,000 per day. Although new shipbuilding activity across the industry is expected to slow in the future, the existing glut of capacity has weighed on rates.
Those conditions have forced Frontline to take some drastic measures. Last December, the company terminated two charters with Ship Finance International , under which Frontline had rented two vessels from Ship Finance in order to charter them out to its own clients. The move allowed Frontline to receive compensation of $34.5 million, but it had to return $23.5 million of it to Ship Finance as the owner of the vessels. Frontline also ended an arrangement last fall with Nordic American Tankers under which the two companies pooled almost 30 of their vessels into a single entity. With Frontline withdrawing its nine Suezmax vessels from the pool, Nordic American took full possession of the pool as of the beginning of 2013.
Since then, things have gotten even worse. In April, Frontline described the market as being in a "state of panic" as it started rejecting oil cargos due to low shipping rates. According to figures from the Baltic Exchange in London, very large crude carriers were losing about $3,000 per day running the Saudi Arabia-to-Japan route. Those losses narrowed to about $1,200 by the end of April, but the industry clearly still remains under pressure. Meanwhile, the trade association in charge of ship crews and maintenance workers has said that Frontline and its peers will struggle to retain personnel given their big losses.
In Frontline's report, pay close attention to how the company plans to deal with its extensive debt. Moreover, with CEO John Fredriksen also involved in other ventures like the Frontline 2012 tanker subsidiary as well as deepwater driller Seadrill, Frontline shareholders need to make sure that they're getting Fredriksen's full attention in getting through the current crisis.
If you're an energy investor on the lookout for new opportunities, then you should consider Seadrill. As one of the more exciting plays in the space, Seadrill deserves your attention, and we want to help you size up this stock. One of The Motley Fool's top Stock Advisor analysts has authored a premium research report on the company, covering everything from its strengths and weaknesses to what to expect going forward. Simply click here now to claim your copy and determine whether Seadrill deserves a place in your portfolio.
Click here to add Frontline to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.
The article Can Frontline Survive the Shipping Slump? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.