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Frontline: A Giant Is Reborn

Summary

Frontline is a large oil-transport firm, focusing on both the crude and product segments with a massive semi-modern fleet with deliveries through mid-2017.

FRO is backed by John Fredriksen, one of the world’s most successful shipping magnates, who has successfully traded the oil markets since the 1970s.

FRO got caught with massive debt and a large order book as the market crashed in 2008, which led to a long and painful process of restructuring. Many peers went bankrupt.

During 2015, FRO began to produce substantial cash flow and completed a merger with sister-firm Frontline 2012.

Frontline now has one of the world’s largest tanker fleets and is poised to consolidate. Prime takeover targets include Gener8 Maritime and DHT Holdings.

Overview & History

Frontline (NYSE:FRO) has gone through a massive transition over the past year, avoiding a potential bankruptcy catalyst in April 2015, then announcing a major restructuring of its Ship Finance (NYSE:SFL) legacy charters, and finally concluding an enormous merger with Frontline 2012. Most recently, FRO bagged a key $500M term loan facility and swallowed the painful, but absolutely necessary, pill of a 5-1 reverse split.

The new Frontline entity owns 52 vessels and charters in an additional 25 on fairly attractive terms. FRO also controls a strong management and pooling venture, which will allow them to rapidly scale up if they pursue merger activities. The new FRO is more equally split between product and crude operations, unlike the original variant which was almost purely a crude tanker play.

Despite their recent progress, Frontline has been fighting a massive negative image among retail investors, who justifiably feel 'burnt' by the painful period of restructuring chaos from 2010-2015.

History Synopsis: 2010-2015

In late 2010, FRO traded at a split-adjusted price of nearly $140/sh, and investors watched in horror as the stock plunged towards $27/sh just a year later. Bankruptcy loomed large, and it was at this point, in October 2011, that I published a sharply worded avoid report, one of my first heavy forays into the shipping analysis sector.

However, John Fredriksen swooped in and bailed out FRO from what otherwise would have been a 99% certainty of bankruptcy. The same financial engineering that led FRO from $22/sh in 2002 to a peak of $350/sh in 2008, plus another couple hundred dollars in dividends (all numbers adjusted for 5-1 reverse split), had led to FRO's undoing as the shipping sector collapsed along with the economy and oil prices.

Fredriksen is a shrewd businessman, so of course, he structured the rescue package in a form that would make his risk of capital attractive. Investors have a valid reason to feel 'screwed' by his dealings (essentially splitting the most promising modern assets into a private vehicle); however, without his restructuring package, FRO would have gone to $0 by mid-2012.

Frontline bobbled along, barely above water, for 3 years until the tanker markets finally rallied. Fredriksen seized this opportunity to restructure FRO's disastrous charters with SFL and to bring his tanker assets back under one public roof. What resulted was significant dilution to the surviving holders from 2011, but the fleet also grew immensely and the cash flow picture also turned viable for almost any market. The final 'insult-to-injury' was in the form of the 5-1 reverse split, which reduced FRO's shares from 782M down to 156M. Legacy shareholders (from late 2010) now owned only 10% of the new FRO. However, 10% of a viable world-class tanker entity is far better than 100% of a bankrupt shell.Many other shipping giants, such as the Peter Georgiopoulos-led GenMar, sacrificed equity holders at the first chance...


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