Paid Search to Oil Tankers

While playing with the Yahoo! stock screener yesterday I did a search for companies with high yields. One of the first things I noticed in the results was a company that yielded 28%!

Frontline Ltd is a Bermuda registered company involved in the ownership and operation of oil tankers. The high demand for oil tankers last year led to revenues growing by 60%. When FRO make money they return most of it to the shareholders, hence the sky high dividend yield last year.

Is the high yield also due to the share price being hammered? Not really. The share price at $46 is well below the December 04 high of $64 but actually has risen very nicely since late 2002 in line with improving market conditions.

FRO is in a cyclical market and most analysts obviously think the market has reached the top of its cycle, hence the P/E of less than 4! The market hates uncertainty and FRO’s dividend fluctuates as much as most companies’ share price as their profit fluctuates depending on what daily rate they can get for their tankers.

For their big tankers they need to charge about $25000 a day to break even. Last year they were charging over $60000 a day! This leaves quite a lot of room for market deterioration.

Am I tempted? Most definitely! I think all the risks are more than priced into this stock. I don’t believe crude oil demand is going to decrease any time soon. The availability of oil tankers is only going to increase slowly as these things can’t be built overnight. And all of the single hull tankers are being phased out as they will be banned by 2015, helping maintain the global shortage. The huge dividends show no sign of ending at present. At the current rate the shares could pay for themselves in 4 years!

The share price appears to be in free fall at the moment so I will wait until it stabilises, take a deep breath and maybe plunge in.