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John Fredricksen, Frontline's (NYSE:FRO) largest shareholder, sounded a cautionary note for the oil shipping industry, noting that a large spike in ship deliveries over the next two years will, in all likelihood, drive charter rates down.

According to an article that appeared in the weekend issue of the Financial Times, 180 VLCCs (Very Large Crude Carriers) are scheduled to be delivered over the next two years. This is the equivalent of 33 percent of the existing fleet!

Because Frontline has always dealt primarily in the spot charter market, this will weigh on earnings, and by extension, the share price. Fredricksen's announcement that third quarter earnings would be "materially below" the $81.3M earned in the second quarter, caused a 4.6% drop in share price on the Oslo exchange.

According to the article, Frontline needs, on average, $30,900/day to cover operating costs for their VLCCs. During the second quarter, FRO's average rate was $46k/day, but last week's rate for VLCCs running between the Gulf, and the UK had dropped to as low as $7426, causing the company to pull some tonnage out of the market.

Over the last 4 quarters, FRO paid dividends of:

  • 9-9-09 $0.25
  • 12-4-09 $0.15
  • 3-5-10 $0.25
  • 6-2-10 $0.75

Interestingly enough, JP Morgan recently (on July 21) raised FRO to overweight, from underweight, saying that they expect rates to start to recover in the 4th quarter of 2010.

Given John Fredricksen's years of experience, and notable reputation as a savvy operator, I'd give more weight to his outlook on the sector.

Sources:

  • Financial Times
  • MarketWatch Pulse

Disclosure: Author is long TNK, TOO, DHT

Source: Frontline Sees Stormy Seas Ahead