Frontline Ltd.: Possible Start Of A New Bull Market (NYSE:FRO)

Introduction

Bermuda-based Frontline Ltd. (NYSE:FRO) reported its third quarter 2022 results on November 30, 2022.

Important note: This article is an update of my article published on August 26, 2022. I have been following FRO on Seeking Alpha since 2015.

The company indicated that as of September 30, 2022, its fleet consisted of 69 vessels with an aggregate capacity of approximately 12.8 million DWT:

• 65 vessels owned by the Company (20 VLCCs, 27 Suezmax tankers, 18 LR2/Aframax tankers)
• Four vessels that are under the Company’s commercial management (two Suezmax tankers and two Aframax tankers).

However, with the Euronav merger early next year, the new FRO is expected to be much bigger.

1 – 3Q22 results snapshot

Frontline reported a net income of $154.44 million, or $0.69 per diluted share, for the third quarter of 2022, compared to a loss of $33.21 million or $0.17 per share in 3Q21. The adjusted net income was $82.86 million, or $0.37 per diluted share, for the third quarter of 2022.

Furthermore, Frontline reported total operating revenues of $382.2 million for the third quarter of 2022.

Finally, as I have already explained in my preceding article, Frontline Ltd announced the signing of a definitive combination agreement on July 11, 2022, for a stock-for-stock combination between Frontline and Euronav NV (EURN) to create a leading global independent oil tanker operator.

The combined company will be held roughly 55% by existing Euronav shareholders and 45% by existing Frontline shareholders, assuming all Euronav shares are tendered in the tender offer.

Frontline intends to launch the tender offer in 1Q23 formally. The company will deposit a file with the Belgian Financial Services and Markets Authority (“FSMA”), including a draft prospectus.

The Euronav Supervisory Board will examine the draft prospectus and present its detailed opinion in a response memorandum. If Frontline decides not to proceed with the Tender Offer, it will report this by its legal obligations.

The dividend for the third quarter has not been determined yet and is subject to the Euronav tender offer expected to be launched and completed in 1Q23.

The quarterly dividend is expected to be 80% of the 3Q22 adjusted net income or $66.3 million. Based on the shares outstanding in 3Q22, I estimated the quarterly dividend to be $0.29 per share. A significant increase from $0.15 per share in 2Q22.

Quarterly Operation highlights:

CEO Lars Barstad said in the conference call:

In the third quarter, Frontline achieved $25,000 per day on our VLCC fleet; $41,100 per day on our Suezmax fleet; and $40,200 per day on our LR2/Aframax fleet. So far, in the third quarter of 2022, we have booked 75% of our VLCC days at the solid $77,200 per day; 76% of our Suezmax days at $65,400 per day; and 70% of our LR2/Aframax days at a cool $58,000 per day.

2 – Stock Performance

Frontline and SFL Corp. (SFL) have underperformed their peers below and are up 102% and 17% on a one-year basis, whereas Scorpio Tankers (STNG) and Teekay Tankers (TNK) show a tremendous uptrend. On a side note, SFL is not a pure tanker but has a Tanker segment.

Note: I recommend reading my recent article on SFL, published on November 15, 2022, by clicking here.

SFL has a fleet of 18 crude oil, product, and chemical tankers, including announced transactions, with the majority employed on long-term charters. The vessels generated approximately $42.4 million in gross charter hire during the quarter.

3 – Investment thesis

The tankers market remains highly unpredictable, and investing considerable cash in this segment is not recommended due to the risk involved and high volatility. It would not be brilliant to forget about that. However, I consider FRO an excellent trading tool because of its characteristics, but owning a small or medium long-term position also makes sense.

The tanker market turned bullish in the second part of 2022, and CEO Lars Barstad is correct to call it a “Possible start of a new bull market.”

FRO has performed well this quarter, and the outlook points to better rates. However, tanker rates have always been unpredictable, even if the near-term outlook looks encouraging.

On November 22, 2022, the Hellenic Shipping News wrote that the tankers are expected to emerge as winners in 2023.

[S]hipbroker Intermodal said that “the tanker market has been gathering momentum over the recent months and freights are moving on an upward trajectory. Looking forward, the current market snapshot paired with the mid-term drivers, which shape the seaborne oil trade, is pivoting toward a bullish market in the coming months.”

So, it is tempting to keep a medium long-term position, especially after the possible merger between FRO and EURN, which creates a more stable and reliable company in the tankers segment with room for significant synergies.

Thus, I recommend primarily using FRO as a trading vehicle, but suggest keeping a medium long-term position expecting a potential massive rebound in the sector. The idea is to keep a core position and trade short-term LIFO.

Frontline Ltd. – The Raw Numbers: Third Quarter Of 2022 And Financials History

FRO	3Q21	4Q21	1Q22	2Q22	3Q22
Total Revenues in $ Million	171.83	213.55	217.44	300.44	382.19
Net Income in $ Million	-33.21	19.79	31.15	47.10	154.44
EBITDA $ Million	-17.97	41.25	48.10	103.56	219.34*
EPS diluted in $/share	-0.17	0.10	0.15	0.23	0.69
Operating cash flow in $ Million	-3.53	25.24	17.34	65.17	68.64
CapEx in $ Million	36.85	243.57	11.19	148.45	79.08
Free Cash Flow in $ Million	-40.38	-218.33	6.15	-83.28	-10.44
Total cash $ Million	124.95	115.51	113.88	286.00	340.61
Long-term Debt in $ Million	2,258.2	2,316.2	2,230.8	2,328.4	2,349.3
Quarterly Dividend $/share	0	0	0	0.15	~0.29 (on hold)
Shares Outstanding (Diluted) in Million	198.03	202.45	203.53	204.77	222.62**

Click to enlarge

Source: Frontline material

** As of September 30, 2022, the Company had an issued share capital of $222,622,889 divided into 222,622,889 ordinary shares (December 31, 2021: $203,530,979 divided into 203,530,979 ordinary shares) of $1.00 par value each. (press release)

* Indicated by the company Presentation 3Q22 page 5.

Note: More data are available to subscribers only.

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

1 – Operating Revenues were $382.19 million in 3Q22

Frontline announced record revenues of $382.19 million for the third quarter of 2022 (see chart above).

The company posted a net income of $154.44 million, or $0.69 per diluted share, for the third quarter of 2022 and an adjusted net income of $82.86 million, or $0.37 per diluted share.

CEO Lars Barstad said in the conference call:

In the third quarter, we saw all the asset classes, Frontline trades, starting to perform. I say starting, as there has been some water under the bridge since end September. There are three key headlines I’ll talk more about later in this presentation: crude and product displacement due to the sanctions on Russia; Chinese imports starting to recoup lost terrain from COVID-19 lockdowns; and the U.S. export situation.

The new bull market potential benefits the company’s bottom line. Higher rates are crossing the Average Fleet 2022 breakeven of $20,900.

2 – Free cash flow was a loss estimated at a loss of $10.44 million in 3Q22

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

Trailing 12-month free cash flow is estimated at a loss of $305.9 million, with a loss estimated at $10.44 million in 3Q22.

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. As I have explained earlier, the quarterly dividend for the third quarter will be announced in 1Q23.

3 – Debt analysis: Net debt is estimated at $2.09 billion in 3Q22 (consolidated and including current)

As of September 30, 2022, total cash was $340.61 million, and long-term debt, including current, was 2,349.3 million.

Liquidity: $406 million in cash and cash equivalents, including the undrawn amount of unsecured facility, marketable securities, and minimum cash requirements bank as of September 30, 2022.

Technical Analysis And Commentary

Note: The chart is adjusted for the dividend.

FRO forms an ascending channel pattern with resistance at $14.5 and support at $11.1. 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 not meaningful at 54. However, the 50MA is close to the mid-support and could be used as a trading indicator.

The short-term trading strategy is to trade LIFO about 50%-60% of your position and keep a core long-term position for a much higher payday.

I suggest selling between $14 and $14.7 with possible next resistance at $15.75. I recommend buying on retracement between $11.25 and $10.3 with potential lower support at $9.45 in case of extreme retracement.

If the market turns bullish as expected, FRO could break out and reach $15.75-$16.5, but it seems unlikely.

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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