FRO, Frontline

February 5, 2015February 5, 2015 Hamilton

See also a previous blog on this company.

Frontline has quite a few VLCCs in its fleet and there is a glut of these ships and more on the way, consequently business has not been all that good as is obvious from the stock that has fallen from a little over $70 to almost a single dollar. However since October of last year the stock has shot up almost fivefold in a few months. Why? Oil.

These things carry about 2 million barrels apiece and used to cost about $35,000 to $40,000 a day to lease/rent (including crew and fuel). Oil is in contango, that is the price down the road is higher than the spot price . For instance today (see http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html ) the spot price or march contract is trading at $50.84 and the Nov. contract at $58.27, a difference of about $7.43 and 240 days. You buy 2 million barrels spot and sell them forward for a gain of $14.86 million. You have no position in oil so you run no risk on that score, but you do have to put the stuff somewhere. Rent a VLCC, at $35,000 a day that comes to $8.4 million. Take home pay is about $6.5 mln (before interest costs!, where applicable) for doing absolutely nothing. As every other oil trader and his brother have this figured out all the time they bid up the rental of the ship to $90,000 per day and the stock shoots up.*

By the looks of the stock it would appear that an initial 5-wave 1st wave was completed followed by a wave 2 or b. We would expect at least a c wave or a wave 3. A target, if c=a would be around $6.25 but in the event this is a wave 3 it could go to as high as $9.

Obviously this kind of trade, done either with futures alone or by the actual purchase of oil serves to “flatten” the oil curve. That the entire opportunity is not arbitraged out completely is the result of a lack of storage space, either on land or on these VLCCs.

* In this example the trader would not bid up the rent more than to $62,000 as at that point he would start losing money. But it does not have to be for the whole 240 days.

OSG, now OSGIQ, Overseas Shipholding Group Inc. update FRO

November 18, 2012November 18, 2012 Hamilton

Then (July 3d) and now charts;

Our guess at the time was about $6. We were wrong as it is now $ 0.65, but at least we got the direction right. At 65 cents the count is essentially irrelevant as it can only go down another 65 cents. Notice also that the ticker was changed, the stock now has an IQ and trades on the “pink” sheets.

The company filed for chapter 11 last week, November the 14th. It did so on a voluntary basis and hopes that this will allow it to clean up it’s balance sheet. It has enough cash on hand to tide it through. This company is one of the largest, the second largest to be precise, in the oil tanker business with a very modern fleet of about 110 tankers. It operates under US flags and consequently benefits from the preferential treatment provided for by the Jones Act.

The stock made a low of 48 cents last week. That would fit the count nicely. Analysts, for what they are worth, are pretty upbeat on the company.

Talk to your broker and when you do buy be careful with the ticker symbol , specify the pink sheets, as there are a few other OSGIQ’s , JP Morgan Mid Cap A Fund being one of them. By the way, FRO, Frontline and EXM are in a similar position but have not filed. See previous blog. Also as noted in earlier blogs , these boats are just fine but there are too many of them. This is what happens when you invest in overcapacity. You have to write it off. Now China has stimulated its economy by investing in capital goods to the tune of 46% of GDP, guess what is going to happen there.

Baltic Dry Index. FRO, Frontline XEM, Excel Maritime

December 24, 2011December 24, 2011 Hamilton

The Baltic Dry Index is constructed in such a way that it gives one an immediate idea of what it costs to move (dry) goods by sea. It is compiled in London and apart from historical connections with the Baltic, has nothing to do with that specific area as it is a world wide barometer. Charts are hard to get and it does not express the value of certain stocks like the Dow Jones Transport index, which recently made an all time high. This index provides a measure of the costs to move freight, or, from the other perspective, what shippers can charge.The Philadelphia Exchange has a similar index SHX, shown below.

The charts are very similar and they both indicate that charter rates have dropped by almost 4/5 over the past three years. The rates for VLCC’s, Very Large Crude Carriers, have reportedly dropped even more dramatically to under the cost of operating the vessels. This essentially explains the situation below;

The fleet has grown much larger and the amount of oil gas stayed about the same. Worse yet there are a good number of these VLCC under construction so capacity will grow even further by about 14%;

But it is not just oil transportation that is suffering as a quick look at EXM (Excel Maritime Carriers) makes abundantly clear. This company’s motto is, like Atlas, “We carry the World” and it certainly looks very painful.

Bank of America almost went under in the late sixties early seventies as a result of bad loans to the shipping industry. Not only does the income dry up fast but the value of the ships themselves can drop even faster. The moral of the story is that one has to be very careful when investing in capital intensive industries that have questionable growth prospects. Things can and do change fast not only as a result of Schumpeter’s creative destruction but also simple as the result of cyclical over capacity. Think airlines, pipelines, perhaps infrastructure in the wrong place (China) etc. etc.

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