Oil prices are sky-high, but a glut in the number of ships built to transport the commodity led Frontline (FRO), the world’s largest operator of the biggest oil tankers, to warn on Nov. 22 that it may run out of cash next year. The Bermuda-based company, which has $1 billion of bonds and public loans maturing in the next decade, may need more funding in 2012 and there are “significant uncertainties” about meeting some loan terms at the end of this quarter, it said in a statement. John Fredriksen, the Norwegian-born billionaire who controls a 34 percent stake in Frontline and serves as its chairman, “has the funds available and he is prepared to go in and try to find solutions” if creditors go along, says Tor Olav Troim, one of his aides.
Day rates for leasing tankers have slumped 47 percent since the start of 2010, according to London-based Clarkson, the world’s biggest ship broker, as growth in oil demand has been slowed by the global economic downturn. General Maritime (GMR), the second-largest U.S.-based owner of crude carriers, filed for bankruptcy protection in mid-November. And forward freight agreements, traded by brokers and used to bet on future transport costs, anticipate unprofitable charter rates for at least two more years.
“The industry is struggling substantially today with vessels that are not generating any cash flow at all,” says Herman Hildan, an RS Platou Markets analyst in Oslo. “A lot of companies are going to need to go through restructuring in 2012. Frontline is doing it now before everyone else is in the same position.”
Shares of Frontline have plunged 88 percent so far this year, leaving its market value at only about 1.39 billion kroner ($241 million), off from as much as 27.7 billion kroner in June 2008, data compiled by Bloomberg show. The company operates a tanker fleet with a combined capacity of 18.6 million deadweight tons, enough to haul about 140 million barrels of oil. It’s a leader in so-called very large crude carriers—each VLCC can hold about 2 million barrels of oil, more than France consumes daily. Frontline’s 43 VLCCs represent about 7.7 percent of the global fleet, according to data from researcher IHS Fairplay (IHS). But rates for such mega-tankers, which haul about 20 percent of the world’s oil, were $28,829 a day in mid-November, according to Clarkson. That’s a shadow of the $229,000-a-day rate peak in 2007. Frontline’s largest tankers need to bring in $30,200 a day to break even but made only $17,000 in the third quarter.
Frontline says it has orders for seven new oil tankers, including five very large crude carriers and two smaller ships that haul 1 million-barrel cargoes. Five of those vessels are not yet financed. The ship owner reported a third-quarter loss of $166.6 million, compared with net income of $12.72 million a year earlier, and it says it will pay no third-quarter dividend. Frontline said in early November that it would sell three vessels.
That may not be easy. The global tanker fleet has expanded 11 percent to 555 vessels since the end of 2008, and shipyard orders still equal almost 15 percent of existing capacity, IHS Fairplay says. “The main problem right now is there are too many ships, which means we need to increase the demand,” says Jens Martin Jensen, chief executive officer of Frontline’s management unit. The alternative isn’t pretty for Frontline. “If the market doesn’t improve,” Troim says, “we may have a breach in the covenants package, and we may run out of cash in the first half of 2012.”