Frontline’s only friend

Most equity analysts urged investors to move to the sidelines when Frontline first unveiled a financial and structural overhaul but one guru still believes shares of the John Fredriksen-backed shipowner are a solid bet.

David Beard of New Orleans-based boutique Iberia Capital Partners has emerged as a lone wolf of sorts in telling clients to “go long” despite the widely held expectation that many New York-listed tanker stocks will struggle to gain momentum in a market plagued by perpetually weak rates.

“Frontline may be down but it’s not out,” the analyst told clients Friday in a note that followed a related report in which he raised VLCC rate estimates. “The company still has considerable earnings power and can generate free cash flow.”

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The analyst says the company is “very levered” to tanker rates and believes a $5,000 shift in daily spot prices amounts to a $1.00 change in the Frontline’s earnings per share (EPS) power though he admits this would not manifest until “leases are reset higher”.

“We agree that Frontline’s predominantly leased operating model and levered balance sheet make it difficult for it to grow, however, Frontline retains substantial Ebitda and EPS potential, even after upward lease adjustments,” he explained.

Beard says Frontline’s largest tankers need day rates of around $40,000 to generate substantial earnings and positive free cash flow- which would amount to approximately $450m in Ebitda, $2.75 in EPS and $0.50 per share in free cash flow- based on the assumption that a $5,000 change equates to $60m in Ebitda.

The analyst claims these metrics could support a stock price of around $10.00 per share and is encouraging clients to “watch Frontline and own it on pullbacks”, a reference to days in which the stock slips, but believes a price target of $8.00 is more realistic.

By comparison, shipping sages at Deutsche Bank, FBR Capital Markets and Evercore Partners stamped shares of Frontline with price targets of $5.00, $5.50 and $3.00, respectively, after the company reported a better-than-expected fourth quarter loss.

Beard believes VLCCs in the spot market could fetch daily rates of $24,000 in the first quarter as a result of strong Opec production and an uptick in Chinese imports but admits fleet capacity growth will still outstrip demand and expects levels will drift lower in the second half of 2012.

“If our forecast for lower rates proves correct and spurs another round of scrapping, we expect 2013 to be the inflection point for the tanker market, with 2014 potentially being stronger than expected,” he said. “We encourage investors to own the stocks ahead of the improving fundamentals; significant returns can be captured as investors anticipate a better market.”

Today, shares of Frontline climbed 5.13% to $5.54 in the hour leading up to the closing bell.

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