Smoother Seas Ahead for Frontline?

| About: Frontline Ltd. (FRO)

The last two years haven’t been great for Frontline (NYSE:FRO), a Bermuda-based company that owns and operates oil tankers. In late 2004, the price was up in the low $60s; it has been decreasing pretty steadily since and is now in the high $30s (which is up a bit from its 52-week low back in April). But the numbers are firming and we should see a turnaround. Frontline charter rates have rebounded -- what was $40,000 per day a year ago have so far in the third quarter averaged about $80,000 per day, the company said.

Yes, revenues haven’t looked so great. In 2005 they dropped nearly 50% from the previous year, and so far 2006 looks only slightly better than 2005. The entire sector suffered in the second quarter of 2006, so those numbers aren’t terrible, but the company has been lagging behind the industry in sales growth. Its balance sheet also seems a bit high in debt.

On the other hand, Frontline’s profit margins are higher than its competition, and its costs were lower in 2005 than in 2004. Frontline’s management expects revenues to jump later in this year as demand for heating oil increases, and it continues to deliver a solid dividend.

Personally, I will buy this stock. It is trading at about the mid-point of its 52 week range, and well off its all time two year it hit in 2004. There’s a new CEO, Bjoern Sjaastad, who may help energize the company, and there should be pretty steady demand for oil shipments. This means there may be room for growth, and its size should protect against any catastrophic drop in the price. But even with a high debt load and soft revenues for five consecutive quarters, I have insight from my European oil tanker friends that we will see some serious upside as we hit the cold weather season and demand returns.

Type of stock: A large oil-tanker company with a market cap of $2.8 billion, Frontline is in a business that should enjoy steady demand, but is coming off more than a year of soft revenues.

Price target:
As I mentioned, Frontline's numbers have been poor and it may seem to be a losing sector, but in the $30s and a dividend of 16%, you might find yourself sailing in green seas.

FRO 1-yr Chart

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