Tanker Stocks: Frontline Slashes Dividend

After paying dividends of $2.75 and $3.00 for the first two quarters of 2008, Frontline Ltd. (FRO) has elected to pay only 50¢ for the 3rd quarter to shareholders of record on Dec. 9. As the largest publicly traded oil tanker company, Frontline has been popular with investors due to their generous dividend policy. Since 2001, FRO has paid out over $53 per share in dividends.

As I have cautioned many times when discussing tanker companies, these companies pay out dividends on the amount earned in the quarter by leasing their ships on the spot market. These dividends will vary wildly and the patient investor will be rewarded, but there will be some bumps along the way.

Looking at Frontline’s 3rd quarter numbers, the daily charter rates for their VLCC, Suezmax tankers, and Suezmax bulk carriers were not much below the 2nd quarter numbers. The net income is a little hard to decipher with shares issued, ships bought and sold and some one-time gains and losses in the quarter. My bottom line analysis is that the company is conserving cash rather than continuing the generous payouts. Tanker daily charter rates have started to fall significantly in November and FRO has an aggressive new building program that will require over $1 billion in additional cash or borrowing in the next 3 years.

My interest in Frontline mainly comes as a shareholder of Ship Finance International Ltd. (SFL). Frontline leases the majority of their tankers from Ship Finance (FRO spun off SFL about 5 years ago) and Ship Finance participates in the per ship profits of the leased vessels. I was happy to see the profit sharing paid to SFL in the 3rd quarter was $28.5 million compared to $33 million in the 2nd quarter.

Ship Finance will report earnings later today and I am very interested in their results.The stock has been knocked down by 2/3 recently.

A final note on tanker company and stocks: Frontline is the big gorilla in the tanker market and their long term fleet growth plans will eventually reward shareholders with piles of dividends. However, FRO has a daily break-even of $24,800 for their Suezmax tankers. Nordic American Tanker (NAT) with their small, all Suezmax fleet has a break even of less than $10,000.

Disclosure: Long SFL

Comments

[Ishortyou:]

well not so sure but it seems that the oil market will go down for a little while, even more so with a democratic government, investments in alterntive energy will take market share from fossil fuel markets and that means that most of the 'tanker' companies will need to shift their business from oil to other source of commodities, not so sure what would be the next wave of commodities to look for but certainly oil might not be the one to look into.

2008 Nov 28 08:24 AM

[silverwood:]

I too hold SFL, the whole tanker complex has been severly beaten down. I suspect that this has been the fate of most of the high dividend paying stocks as they were the ones that were more likely to have been involved in the Yen carry trade.

2008 Nov 28 08:25 AM

[13958:]

I am also an SFL & VLCCF holder......however, we need to take into consideration that there are other countries around the world that still need supplies shipped-in, and while tanker rates will definitely be lower for the coming 2009 period, I believe that once the world turns around, tanker etc,. rates will start their upward movement.

when, well I dont know, but end-2009/early 2010 would be my "guess". In the meantime I will hold share and enjoy the "sadly-lower" dividend period!

2008 Nov 28 08:33 AM

[Sailor Stocky:]

Well Frontline revenues are exposed 65% in the declining spot frate market for oil. The rates have been rapidly falling as the demand for oil has been falling affected by less trasportation, less industrial production less cars less.. less.. less.., the unfolding of the global crisis. Meanwhile FRO has the highest breakeven levels (34k/d VL and 24/d Suez) in their industry which will turn negative if the rates slip more. If you add the 1.4billion orderbook and demanding repayment schedule. I would much rather hold to the Shipfinance until that gets affects too. You can't expect any high leverage players exposed to market headwinds to sustain their dividents and withstand its shareprise until we are out of this slump.

2008 Nov 28 09:14 AM

[notsosmart:]

is .50 @ share so bad? i would gladly take this amount for all my holdings.bear in mind that the dividend has paid for all my shares.the ceo of this co. takes no pay.just dividends.more or less oil has to move.

2008 Nov 28 09:35 AM

[Lee 99:]

.5$ is still over seven percent.
Mr Fredrickson knows cash is king. We'll be better off for it later.
SFL increased their div by 2c. Now over 20%.
SDRLF not paying for a while.
GDOCF ??

2008 Nov 28 10:24 AM

[Astral6006:]

It's going to be 10 years before any realy change will happen in terms of moving off of oil.


On Nov 28 08:24 AM Ishortyou wrote:

> well not so sure but it seems that the oil market will go down for
> a little while, even more so with a democratic government, investments
> in alterntive energy will take market share from fossil fuel markets
> and that means that most of the 'tanker' companies will need to shift
> their business from oil to other source of commodities, not so sure
> what would be the next wave of commodities to look for but certainly
> oil might not be the one to look into.

2008 Nov 28 10:37 AM

[NOWHEREMAN:]

I do not own any of the aforementioned companies but do own TNK which increased its payout from .90 to $1.07 for the 3rd quarter.

I expect this payout to decrease by 2/3rds next quarter but that will still be more than adequate by my standards of a 10% return after taxes. I hope to see it drop back down to its lows when I plan on finishing my accumulation, maybe in January, early Feb. of 09 when expectations will be very low again. Their fleet is very young, modern and nimble and their parent is TK.

IMHO

2008 Nov 28 12:05 PM

[User 309196:]

NAT did the same thing earlier in the year. Things are now back to normal.

2008 Nov 29 12:23 PM

[PeteK:]

Best time to get ship stocks.
Maybe this is once in a life time
opportunity.

2008 Nov 29 03:54 PM

[Anthony Alfidi:]

SFL seems like a better shipping play than FRO. Why buy a leveraged carrier when you can just buy its leasing pool? Same argument with railroads vs. GATX (GMT).

2008 Nov 29 07:53 PM

[b3rkut:]

According to Yahoo Finance, the yield on TNK is 49%. Despite them raising their dividend, this rings big alarm bells for me.

Can someone shed some light on this for me? They're paying the dividend on Dec. 10. Once they have publicly committed to a dividend, can they still cancel it??




On Nov 28 12:05 PM paultaut wrote:

> I do not own any of the aforementioned companies but do own TNK which
> increased its payout from .90 to $1.07 for the 3rd quarter.
>
> I expect this payout to decrease by 2/3rds next quarter but that
> will still be more than adequate by my standards of a 10% return
> after taxes. I hope to see it drop back down to its lows when I plan
> on finishing my accumulation, maybe in January, early Feb. of 09
> when expectations will be very low again. Their fleet is very young,
> modern and nimble and their parent is TK.
>
> IMHO

2008 Nov 29 08:38 PM

[b3rkut:]

Also, in this article (biz.yahoo.com/iw/08112...), they say: "Teekay Tankers intends to distribute on a quarterly basis all of its cash available for distribution, subject to any reserves established by its board of directors".

Isn't a 100% payout ratio dangerous for the longevity of a dividend??

Thnx!

2008 Nov 29 08:42 PM

[iNVestorUnrest:]

shipping stocks are money makerzzzzz

2008 Nov 29 11:51 PM

[NOWHEREMAN:]

TNK is 54% owned by TK. TK also started a separate two other entities, TOO and TGP which are similarly structured. I think it has something to do with the way income is taxed vs the way dividends received are taxed.

This is why almost all of the income is paid as a dividend. It has nothing to do with problems at the companies involved. The Street does not have many analysts covering these spin offs. Additionally there was some concern regarding the accounting involved.

That was resolved as being non-cash.

TNK may also have to contend with the purchase of two Suezmax tankers from its parent in the middle of 2009. But I am quite sure that this will be accomplished without much ado, and postponed if necessary.

Meanwhile, if I read the news releases correctly, FRO is going to have to come up with $1.4 Billion over the next two years to complete constuction of a number of vessels. They know they will have shortfalls. The company has recently received approval to expand the total number shares authorized from 125 million to 625 million. I wouldn't be too eager to jump into these shares until I was sure oil was on the rise again.

IMHO

2008 Nov 30 06:13 AM

[Zoo:]

When will frontline split 5 to 1 ?

Does anyone know the email address for FRO ?

2008 Dec 05 12:05 AM