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Shares of oil tanker company Frontline Ltd (NYSE:FRO) rallied 8% on Friday following a better than expected earnings report. However, shares are still down nearly 70% over the past year.

Earnings Report

  • Profit of $7.18 million or 9 cents per share.

  • Operating revenue dropped 29% to $167.3 million.

  • Operating expenses dropped 26%.

Analysts had been expecting a loss of 10 cents per share. This earnings report was much better than expected and the reason FRO shares rallied on Friday.

Oversupply Of Ships

FRO continues to face a difficult business environment due to the oversupply of ships. The oversupply of ships has dominated the market place as increases in demand have done little to increase shipping rates. However, over time, the supply of ships should decrease as many of the older tankers are no longer profitable at current rates.

Short Interest

Currently, short interest in FRO stands at 11.68 million shares or 22.7%. The high short interest represents the possibility of a squeeze higher if any more good news comes out on FRO. Some of the move on Friday was likely shorts deciding to lock in profits.

Debt

The reason the short interest is so high is in part due to the fact that FRO has a major debt load. Though the company did go through a major restructuring that cut its debt load by half, FRO still has debt of $1.5 billion. This is a major debt load when considering FRO has equity of just $418 million. If shipping rates were to decrease further, FRO would likely have a difficult time turning a profit. In the long run, FRO would then be unable to service its debt.

My Take

I would use the rally on Friday as a chance to sell FRO. While the company may have reported a strong quarter this time, I do not believe this is the start of a major uptrend in the industry. Simply put, there are too many ships. Another potential headwind for FRO is the slowdown of the global economy, especially China. However, for investors looking for exposure to the space, I would recommend owning Nordic American Tankers (NYSE:NAT) as it the strongest company in the industry.

Source: Frontline: What You Need To Know