On the same day that crude oil prices fell by 20% and oil giants like ExxonMobil and BP slid by 10%, there was a rare winner amid the energy sector carnage.
Shares in Frontline Ltd. (NYSE:FRO), the oil tanker giant controlled by Norwegian billionaire John Fredriksen, closed up 7.3% at $7.56 today, a 20% jump since hitting a low last Thursday. All the tanker operators did well, with Teekay Tankers (TNK) and DHT Holdings (DHT) both up 4%, and Euronav (EURN), up 7%.
The reason for the share price divergence has everything to do with the surprise Saudi move to flood their customers with an extra million barrels a day of ultracheap oil.
“Saudi’s surprise move to lower oil prices in April and signalling production increases has instantly affected tanker demand,” wrote Frontline CEO Robert Hvide MacLeod in an email to Forbes today. “The oil curve has also moved into contango, prompting oil traders and majors to request offers for storage.”
Contrary to normal market behavior, where a barrel in hand today is worth more than the promise of a barrel in the future, the Saudi move has put the market into what’s called contango — when there’s so much supply that the price of a barrel in the future is more than for one today.
A quick-witted trader today could have bought 2 million barrels at $31/bbl, then turned around at sold the crude today for June delivery ($35/bbl on futures exchange CME) and had plenty of margin to lease a supertanker for about $30,000 per day (~$1.5 per barrel) and store the oil on the water until delivery, locking in a gain on the order of $2.5 per barrel, or about $5 million per supertanker. “So the current moves we find very compelling,” writes MacLoed.
Frontline has 24 very large crude carriers, 28 suezmax tankers, and 20 aframaxes, with an average age of just 4 years. It bought a handful of tankers last year from oil trader Trafigura in exchange for 8.5% of Frontline shares.
There are risks. In June 2019 one of their oil tankers Front Altair was traversing the Persian Gulf when it was hit by a blast, presumably an Iranian mine. Designed to withstand such an incident, there was no spill of oil. It wasn’t the first time Fredriksen’s ships have been attacked before — back in the early 1980s, when he was moving Iranian oil as the Ayatollah’s lifeline during the Iran-Iraq war, three of Fredriksen’s ships were hit by Iraqi missiles.
It’s a rollercoaster business that has generated billions of dollars in dividends for Fredriksen (75) during the good years (circa 2008) then required a $500 million equity injection when tanker rates collapsed alongside America’s fracking boom in 2012. Last year tanker rates surged 90% in October to more than $100,000 per day after the U.S. sanctioned Chinese shipper COSCO for moving crude oil out of Iran, only to drop in January. Will this turn around continue. “It’s too early to speculate how far this will run, but it’s safe to say we’ve had a busy day!”
The value of Fredriksen’s 46% stake in the company is nearly $600 million. The bulk of his $10.4 billion fortune is in diversified investments, including a $1.5 billion stake in leading salmon farmer Mowi.
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