VLCCs are still the key to Frontline’s earnings, DNB says in a research note.
So far this year, VLCC rates have been “relatively unexceptional”, in line with the 10-year average, according to the Norwegian bank. Instead, strong midsize tanker rates have supported earnings.
But DNB believes VLCC markets will improve.
“We expect fundamentals to tighten as the 2.6% VLCC orderbook-to-fleet ratio is met with high renewal requirements, as 17% of VLCCs are above 20 years old,” equity analyst Jorgen Lian said in a note.
DNB says every $10,000 per day improvement in VLCC earnings will add $0.66 per share to annual earnings. An equivalent increase for suezmax rates will contribute $0.39 per share and for LR2 rates $0.23 per share.
“Hence, more substantial earnings are likely to stem from the VLCC segment (62% of current fleet value), while the value of Frontline’s suezmax (23%) and LR2 (15%) are supporting earnings in the interim,” Lian said.
He forecast benchmark VLCC earnings of $60,000 per day for 2025.
Frontline will report results for the fourth quarter on 29 February.
DNB expects the John Fredriksen-backed company to post an adjusted Ebitda of $192m, 10% below consensus, and a quarterly dividend of $0.28 per share, reflecting a “modest” run-rate yield of about 5%.
“We believe the main focus will be on its Q1 2024 guidance, where we remain 7% below Bloomberg consensus Ebitda,” Lian said.
DNB reiterated “buy” and raised the target price to NOK 264 ($25.30) from NOK 257, on higher rate and vessel value estimates.
The bank raised the estimate for 2024 Ebitda by 3%, on revised forward rates, but cut the estimate for next year by 6% after five vessel divestments and making minor modelling adjustments.
