The oil markets have hit a very turbulent time in recent weeks. A bidding war between Saudi Arabia and Russia has caused a crisis in the oil markets and caused the price of oil to collapse. While these countries have continued to bid each other down, there have been pleas for peace from other countries. The price war is just the latest challenge for oil after a significant reduction in use resulting from the COVID-19 pandemic. This includes many disruptions and the fact that oil futures are trading at 20-year lows. It seems that many different factors are converging at the same time to put oil-related industries in a bind. However, means that some stock may be available at steep discounts relative to value. One of the companies that may suffer in the short-term is Frontline Ltd. (FRO), the world’s largest oil tanker company. All of the recent turmoil makes this company an interesting option.
Lost at Sea
The oil shipping industry is known for its large variance and return risks. It is not uncommon for high dividends of 12%-18% to be the norm with rapid price fluctuations in the interim. This is one aspect that makes FRO so appealing. Though it is not for the faint-hearted. This is an investment that will continue to fluctuate substantially in the coming weeks and months. There has been a significant drop in the demand for oil, so it is logical to expect revenue shortfalls in the coming reporting periods. The economy was humming along quite nicely until a nasty surprise from China. While spectators have been hesitant to blame the country for all industry woes, anger does seem to be a common theme. This primarily stems from the fact that many feel that China did not do enough to protect various industries that would be affected by the pandemic. This sentiment is unlikely to change anytime soon.
One of the advantages that FRO has is its large and exclusive fleet- one of the most prominent in the world. When considering investing in a company, it is always important to determine the moats that company has. What are the edges that the competition would have a hard time cracking? For FRO it seems that its fleet would be very hard to replicate. This particularly the case given that one of these tankers can cost up to $460,000 a day to operate. This means that any entity getting into the business would need very deep pockets, and there doesn’t seem to be a large interest given the drop in oil demand. While this does not fare well for the short-term outlook of the company, it means that the long-term could offer great money-making opportunities for investors who are not afraid to take on risk.
Weathering the Storm
Though there does seem to be an alternate hypothesis for how oil prices will affect the flow of tankers. Some argue that lower prices could actually increase demand and require additional shipments. If this is the case, then FRO could see a rebound sooner rather than later. The costs of the ship don’t depend on the price of the product, so it is unlikely that they get negotiated down in a bear market. From this perspective it is possible that the lower prices in oil could be workable for the company. This is something that will be determined in the coming months as the company needs to prove that it still has its sea legs. Though, investors should expect the most from it, given that it operates in the sea. There is no doubt that the company is accustomed to large swings in operating income and revenue.
Another aspect that work in the company’s favor is a low P/E ratio, indicative of steady revenue. After the recent market drop the current P/E sits at approximately 8.73. Looking at the income statement, it is possible extrapolate the expected income to an extent. The company still has a $1.47 billion market share, it is unlikely that they are going anywhere soon. It is unlikely that the fleet will be sold anytime soon either, particularly if shipments are still needed. It may be possible that the company needs to reel in costs to make the shipments more economic. This could be a way to offset possible business upsets during this most recent economic downturn. It is important that the management steps up and stays current on the situation as it is ever-evolving. The ability to navigate this well will make all the difference for investors in the long run. In the short term there is much pain in the market, but there still is much long-term appeal for investors who are willing to hold.
Every company is currently facing the squeeze of the most recent economic downturn. It seems that Frontline Ltd. is better positioned than most to take advantage of this new economic climate. There are hopes that the bidding war between Saudi Arabia and Russia come to a halt soon. There could be a sharp uptick in oil prices if this is the case. Regardless of the specifics of the economy, it seems that FRO is well positioned to succeed in a variety of economic climates. This should make people take a second look at them, if they are interested in investing in the oil sector.
It is not a bad idea to put several traditionally well-performing oil stocks in a portfolio. They make a nice balance to the other sectors of the economy and will be available at a solid discount for the time. It makes sense to invest in solid companies that have been disproportionally hit by the downturn. This gives the investor the most bang for the buck. The oil sector is a great place to look, and if you’re looking at oil it’s hard to ignore FRO. This is something to keep in mind for the future.