Analyst Expects A Q2 Loss, Zero Dividend From Frontline

Frontline Ltd. (NYSE: FRO) is projected to post a loss in the second quarter, translating to a zero dividend, Credit Suisse said in a Tuesday note. Notwithstanding the negative opinion, the shares of the company were up in reaction to the possibility of a deal being struck.

Soft Spot Prices

The loss estimate was predicated on the spot Very Large Crude Carrier, or VLCC rates, at $10,000/day, just above the operating expenditure. Frontline had already booked about 60 percent of the second quarter VLCC/Suezmax days at $25,000/day and $16,000/day, respectively, said analyst Gregory Lewis. The rates, though representing a 30 percent sequential drop, were above the spot prices, Lewis said.

DHT Deal Unlikely

Frontline might be evaluating a new tanker company target such as Gener8 Maritime Inc (NYSE: GNRT), away from DHT Holdings Inc (NYSE: DHT), Lewis said. This was substantiated by the fact that Frontline sold 1.7 million shares of DHT in March, followed by 2.4 million shares in April and May. Though Frontline holds about 6.8 million shares of DHT, the Credit Suisse analyst said a deal is unlikely.

The company remains committed to fleet growth, with a preference for ships on the water, the analyst said. Of the $728 million in capital expenditures, Credit Suisse said Frontline obtained $543 million in financing, while $225 million came from a third-party affiliate loan from Hemen Holdings.

On the balance sheet, Credit Suisse said it expects Frontline's net debt-to-capital ratio to peak at 55 percent by the fourth quarter of 2017.

"We expect FRO to generate $472 million in OCF through 2018 [average VLCC rate of [$32,000 a day over this period]. That points to over $1 in dividends (assuming 100 percent NI payout) and should provide about $200 million to deleverage the balance sheet and/or fund growth," the firm said.

Lowering Estimate, Price Target

The firm lowered its 2017 earnings estimate from $0.16 to $0.05, reflecting near-term spot rate assumptions.

Credit Suisse maintains a Neutral on Frontline and lowered its price target from $8 to $6.

At the time of writing, Frontline shares were up 7.21 percent at $5.80.

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