Frontline - Correction in stock prices offers opportunity to accumulate

The year 2022 began on a sluggish note for the crude tanker shipping market amid the Omicron-led demand concerns, coupled with high oil prices (a result of curtailed supply from OPEC+) that limited the seaborne trade. However, as we moved forward, the Russia-Ukraine conflict led to higher spot TCE rates of crude tankers in general and of mid-sized vessels, in particular, which completely changed the industry’s prospects.

Heightened geopolitical risks coupled with high inflation and expectation of reduced economic growth led to a decline in key market indices. On the contrary, the Drewry crude tanker equity index remained largely on an uptrend, registering growth of 24.8% between the last week of February and end May. However, starting June, the index reversed its pattern and started to fall, showcasing seasonal weakness which resulted in the normalisation of spot earnings of mid-sized tankers, especially in the Black Sea and the Mediterranean. Cumulatively, the index registered a growth of 28.7% YTD (vs 49.1% YTD till May end). The stock price of Frontline Limited (FRO) mirrored a similar trend and recorded a gain of 23.6% YTD. Nearly 92% of the company’s fleet operates in the spot market, which proves to be an advantage for the company ahead of the potential recovery in tanker market.

Moving forward, we believe rates will undergo correction during weak seasonal demand that could squeeze FRO’s stock price over the next three months, but the company is poised to benefit from the proposed merger with Euronav (announced on 7 April 2022) right before the potential recovery in the tanker market.