Morgan Stanley Upgrades Frontline, Sees 'Large Upside'

In a report published Wednesday, Morgan Stanley analysts upgraded the rating on

from Underweight to Equal-weight, with a price target of $3. The company's risk/reward profile is now more balanced and there is significant upside to the stock. "After 5 tough years, FRO's liabilities are finally manageable, allowing shareholders to benefit from the thriving tanker market," the analysts said, adding, "We believe its current fleet of 23 crude tankers has the capacity both to serve its debt and capital lease obligations and to generate high profits as tanker markets are thriving." Crude tanker rates have seen a significant increase in 2015, while increased oil flows have continued to tighten the supply/demand balance, mostly driven by higher sea-borne exports from the Middle East and West Africa. Global demand is also rising. The analysts expect sea-borne crude supply to see additional growth, with increasing Libyan and Iranian oil supply reaching the market, while fleet supply growth is likely to be muted till year-end 2015. "As a result, we expect FRO's spot and highly levered fleet to be positioned to generate significant profits this year," the Morgan Stanley report stated. Frontline continues to be a highly levered company with a high percentage of older assets, despite the improvements in the tanker market and the restructuring of the company's balance sheet. The analysts believe that the company could take advantage of the stronger tanker marker to scrap older vessels. This could in turn lead to a significant decline in its earnings capacity, due to the lack of ability to reinvest and/or issue new equity. "At the same time, a weaker-than-expected tanker market next year could again raise FRO's financial risk. That said, there is also the possibility of a combination with affiliate Frontline 2012, which owns 41 modern tankers, that could again transform FRO into one of the largest tanker companies in the world," the analysts added. Having restructured its liabilities over the past three years, the analysts believe that Frontline's financial risks are easily manageable, going forward.