Frontline (FRO) has now lost nearly 90% of its value over the last 12 months including 50% during the last three days. The loss in FRO is a result of horrible Q3 numbers and slumping demand within the shipping industry. Yet now that FRO is trading at historic lows investors must ask themselves if the shipping industry will improve and FRO is presenting value or if bankruptcy is inevitable?
The company announced a devastating earnings report on Tuesday, which contributed to its loss. The company posted a 31% loss year-over-year, with revenue of $173.9 million and an EPS of ($0.57). The net loss attributable to the company was $166.2 million including $44.7 million excluding losses on the declining value of its vessels. In addition, the company's balance sheet remains weak as it attempts to unload vessels and other assets to improve its loss, which hasn't worked. And although the company's earnings report is devastating it's not the catalyst behind the loss nor is it what investors fear most.
Along with earnings the company announced discouraging facts regarding its financial position. The bottom line is that FRO will run out of cash next year unless the shipping market improves. The company blamed weaker demand for its current situation and said that weaker demand has weighed on the shipping sector and its excess of vessel supply has outpaced global oil demand. The company expressed its concerns regarding its ability to repay creditors and added that it will seek discussions with creditors to restructure the company & reduce liabilities.
The company put itself in this situation with years of too much debt. There are many actions the company could've taken such as removing its dividend, selling vessels and assets sooner, and cutting operating costs in a more drastic manner. And although the company itself can be blamed for the financial problem that currently exists, the CEO is correct by calling it an issue within the industry. Nearly every company within the water transportation industry is experiencing similar levels of distress. And one of the main reasons for the trouble is that these companies are not fundamentally prepared to handle economic hardship.
Frontline has traded with serious fundamental issues over the last five years that would eventually catch up with any company. Frontline has over $2.6 billion in debt with $3.7 billion in assets, which means the company's debt-to-assets ratio is near 75%. I consider a debt-to-assets ratio over 40% to be dangerous, much less 75%, and considering the company's capital raising issues I believe this has been a recipe for disaster for quite some time. And then you add the fact that the company's revenue and margins have been declining and you have a bankrupt company just waiting to happen.
Overall, I fail to see any value in this company and I believe that bankruptcy is likely. In order for the company to be restructured it would have to convince its creditors that it can pay off its debt and it would have to present a strategic plan that's attainable. The situation that FRO finds itself in somewhat reminds me of Europe, and I don't think too many people are betting on Europe's immediate future. The only difference is that FRO doesn't have to survive for the well-being of the global economy. If I were an investor in this company I would sell and take my losses. I don't foresee any gains anytime soon, nor do I foresee any plan to restructure the company, therefore it appears that loss is the only path, and that investors who choose not to sell will be left with nothing as an investment.