Frontline's Weakness May Portend a Spill in Tanker Stocks

I was researching tanker and rig counts the other day (I know, get a real hobby!), when I noticed Frontline Ltd. (FRO) had a bad Q2. That’s strange, I thought, how can an oil tanker company have a bad quarter?

Well, it turns out they had “a soft shipping market,” and the company had to dock several vessels. There are 3,600 active tankers on the sea carrying well over 1b barrels of oil at any given time at rates that work out to approximately .10 per barrel per day.

Was Frontline just a poorly run company? No, General Maritime Corp.'s (GMR) revenues dropped 30% from Q1, Overseas Shipholding Group Inc.'s (OSG) 30%, and Teekay Shipping Corp. (TK) was so far off S&P put them on credit watch.

All of these companies have defied gravity and stayed near their all-time highs in anticipation of hurricane season once again forcing the US to pay triple rates to bring oil into the country, so I see some nice short opportunities here.

If we don’t get those hurricanes the OSG Oct $65 puts for $1.95 may be in play. But I also like the Jan $60 puts for $1.50 as a pre-roll. GMR is less overbought and can be used as a buy/sell signal on the OSGs.

So why would there be less tanker traffic during our “energy crisis?” Perhaps we are simply making more of our own…

Rig counts are through the roof, literally hitting 20 year highs. And that doesn’t tell the whole story, as modern rigs are more efficient than the older models. There is a very direct relationship between oil price and rig count, and rigs have gone way past the point where they usually begin to drive down oil prices (perhaps because we have cut back on imports so quickly).

According to Baker Hughes, there are now 1,732 currently active rigs, a 20% increase over last year! If the relationship between rig count and oil normalizes, we may be heading for a serious correction!

Speaking of Baker Hughes, let’s keep an eye on those rig counts as Baker Hughes Inc. (BHI), Schlumberger Ltd. (SLB), Halliburton Co. (HAL), Transocean Inc. (RIG) and Diamond Offshore Drilling Inc. (DO) ALL fell 50% OR MORE between November 1998 and August 1999!

And if all this indirect evidence isn’t enough to calm the oil bulls, how about this little gem of a study from CERA which says:

A) Current global oil capacity is 88.7m b/d, not the 84m b/d figure that is often cited.

B) In just 9 years we will be producing 110m b/d

I’ve been saying it all Summer and it’s finally here!

Maybe I’m right about some of this other stuff too…

Comments

[Joe McCann]

How do you think SFL will be affected by Frontline's potential demise?

[Philip Davis]

They are likely in the same boat (so to speak).

I like them because they have 28 VLCCs which have a cost advantage in operation but a cap 1/2 of FRO (30 VLCCs).

While I wouldn't buy them, they are not my choice for a short either with a forward p/e at 1/2 FRO's.

[Philip Davis]

Yeah I think I got that right!

8-)

finance.yahoo.com/q/bc...;s=GMR&l=on&am...

[Ed O in PA]

I bought FRO a couple of years ago because of div%. Still pays a nice div. Why not hang on? It may be down but not going to 0 ?