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Morgan Stanley: Frontline back in top form

After five rough years, John Fredriksen's Frontline is back in good shape, according to Morgan Stanley prior to the financial report Friday, which is expected to show the dawn of new times supported by the recovery in the tanker market.

- Photo: Richard Drew/AP/POLFOTO/arkiv

The past five years have been turbulent for one of the world's largest tanker-carrier groups, the John Fredriksen controlled companies Frontline and Frontline 2012.

The original tanker carrier Frontline has been carrying out a restructuring in recent years, as well as a trimming of the fleet of big tankers by a third and the issuing of new shares, which correspond to 70 percent of the share capital. Frontline is currently down to 23 ships that sail with crude oil, which would have been a challenge one year ago, but today with the rally that is in the oil market, this is right where most shipping players want to be.

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In an analysis of Frontline, Morgan Stanley writes, that the carrier is in an advantageous position where it can both live up to its own capital commitments and deliver a big profit. The US-based bank assesses that the rates for 2015 for VLCCs and Suezmax vessels will be at 47,000 and 35,000 per day respectively, which is the actual reason why the share is worth betting on for investors and why Morgan Stanley is slightly increasing the rating. The daily prices are set conservatively and below the spot prices of the day, and if the current daily rates are sustained for the next 12-18 months, the earnings will be even better in the carrier.

"Higher oil flows continue to tighten the supply/demand balance, driven by rising seaborne exports from the Middle East (+1.5mbpd YoY) and West Africa (+0.4mbpd YoY), while global demand is expanding. Seaborne crude supply should grow even further as more Libyan and Iranian barrels are likely to come to the market just as fleet supply growth is expected to be muted through year-end 2015," writes Morgan Stanley and points to Frontline in this market, potentially being able to double the company's worth within a year.

Continued risk

The financial house emphasizes at the same time however, that Frontline continues to face a number of risks. This includes the fact that the carrier's fleet is mainly made up of older vessels and the company will presumably exploit the strong market to scrap the oldest vessels, which could lower Frontline's earning capacity at a time where the carrier does not currently have the possibility to invest in new tonnage or issue new shares.

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However, if necessary, Frontline can join forces with affiliate company Frontline 2012, which owns 41 modern tankers, assesses Morgan Stanley.

Frontline 2012 beat its competitors as well as analysts' expectations in the final months of 2014, where the company achieved an operating profit, EBITDA, of USD 41.6 million - significantly above the market consensus of USD 32.9 million. Analyst agency Fearnley, which rated Frontline 2012 an absolute top pick and potential market leader in crude oil transports, noted following the financial report that the carrier's ships sailed at much higher time charter rates in the fourth quarter than expected.

Pareto: Fredriksen could reconquer tanker market

Fredriksen eliminates final obstacle for tanker giant

Morgan Stanley: Iran deal could send tanker rates soaring

Frontline 2012 surpassed all expectations in 2014

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