Frontline Euronav merger negotiations still ongoing (NYSE:FRO) (NYSE:EURN)

HeliRy

Introduction

Frontline Ltd., based in Bermuda (NYSE: FRO) released its first quarter 2022 results on May 24, 2022.

Important note: This article is an update of my article published on February 22, 2022. I have been a FRO on Seeking Alpha since 2015.

1 – Overview of 1Q22 results

Frontline reported net income of $31.15 million, or $0.15 per diluted share for the first quarter of 2022, compared to $28.90 million or $0.15 per share in 1Q21. Adjusted net loss was $1.61 million, or $0.01 per diluted share, for the first quarter of 2022.

Additionally, Frontline reported total operating revenue of $217.44 million for the first quarter of 2022, compared to $193.99 million in 1Q21. The results are in line with analysts’ expectations.

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BOF 1Q22 Financial Highlights Presentation (Frontline Presentation)

However, the most important news is undoubtedly the private acquisition of 3.82% of Euronav (EURN) using Frontline common stock, creating a larger tanker company.

2 – Status of the fleet after the potential merger of Frontline Euronav

On June 6, 2022, Frontline has announced that it has completed the acquisition of 3.82% of Euronav.

announces that it has agreed to acquire through over-the-counter transactions with certain shareholders of Euronav NV (NYSE: EURN & Euronext: EURN) a total of 7,708,908 Euronav shares, representing 3.82% of the shares shares of Euronav, in exchange for a total of 10,753,924 Frontline shares, which is equivalent to 1.395 Frontline shares for one Euronav share.

Following the completion of the issuance of the new shares of Frontline, Frontline will have a total of 222,622,889 issued and outstanding shares.

John Fredriksen (Hemen) owns nearly 15% of the combined companies. I noticed that the swap above was done at a slight discount to the merger deal from 1.45 FRO to 1.395 FRO.

As a reminder, on April 7, 2022, FRO and EURN stated:

Signed a term sheet unanimously approved by their Board of Directors and their Supervisory Board, respectively, on a possible combination of shares between the two companies, based on an exchange ratio of 1.45 FRO share for one EURN share resulting in Euronav and Frontline shareholders own approximately 59% and 41%, respectively, of the combined group. Euronav is expected to pay aggregate dividends of up to 12 cents prior to the closing of the business combination with no impact on the exchange ratio.

Negotiations are still ongoing, and if the merger is completed, the new Frontline will own and operate a large and modern fleet that includes 67 VLCCs, 56 Suezmax vessels and 18 LR2/Aframax vessels with a market capitalization of $4.2 billion. .

A problem that could block the fusion is that the “Saverys family, which as the main shareholder of Euronav continued to oppose the operation, proposed an alternative merger with Belgian Shipping Company.”

The company said the new relationship delivers significant benefits through a larger combined fleet, leading to better overall utilization and cost synergies. Furthermore, the market capitalization of the new FRO would be almost 4 times that of Scorpio Tankers Inc (STNG) at $1.2 billion and Hafnia Ltd (OTCPK:HFIAF) at $1.0 billion.

3 – Stock market performance

Frontline underperformed its peers below and is now down 6% on a year-on-year basis.

Note: I advise you to read my recent article on SFL published on May 18, 2022, by clicking here. Also, my article on TNK was published on July 5, 2022.

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Data by Y-Charts

4 – Investment thesis

Assuming the merger between FRO and EURN is completed, the new Frontline will be considered a world leader in the tanker industry. Frontline and Euronav are part of John Fredriksen’s group, which already owns around 15% of the combined companies.

Frontline will be led by Mr Hugo De Stoop as Chief Executive and the combined group’s board of directors is expected to consist of seven members, including three current independent members of Euronav’s supervisory board, two appointed by Hemen Holding Limited ( “Hemen”) and two additional new independent directors

However, I do not see any significant change resulting from such a large merger in terms of investment. As always, bigger doesn’t necessarily mean better.

The tanker market is very volatile and investing huge sums in this sector is not a good idea. I consider FRO to be a great trading tool due to its high volatility.

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FRO 1Q22 (Frontline) Tanker Market Overview

The stock has done quite well lately, but the outlook for tanker prices has always been unpredictable. 2021 was the worst year in three decades, and after a slow start to 2022, the tanker industry saw an unusual spike in spot tanker prices at the end of 1Q22.

This increase is mainly due to the impact of the ongoing conflict in Ukraine. The mid-sized tanker segment benefited the most due to disruptions in oil trading patterns.

Thus, I continue to recommend using FRO primarily as a trading vehicle and maintaining a minimal long-term position pending a massive rebound in the sector. The idea is to maintain a central position and trade LIFO in the short term.

Lars Barstad – interim CEO, said on the conference call:

We announced the proposed combination with Euronav in early April, and since then we have been working diligently together to finalize and appropriate the transaction structure for this combination.

Frontline Ltd. – Raw Numbers: First-Quarter of 2022 and financial history

FRO 1T21 2Q21 3Q21 4Q21 1Q22 FRO 1Q22 EURN
Total revenue in millions of dollars 193.99 170.02 171.83 213.55 217.44 114.37
Net income in millions of dollars 28.90 -26.63 -33.21 19.79 31.15 -43.37
EBITDA in millions of dollars 44.64 -12.0 -17.97 41.25 48.10 38.87
Diluted EPS in $/share 0.15 -0.13 -0.17 0.10 0.15 -0.22
Cash flow from operations in millions of dollars 12:00 p.m. 29.22 -3.53 25.24 5:34 p.m. -44.21
CapEx in millions of dollars 44.33 137.65 36.85 243.57 11.19 62.56
Free cash flow in millions of dollars -32.33 -108.43 -40.38 -218.33 6.15 -106.77
Total cash in millions of dollars 154.13 143.03 124.95 115.51 113.88 169.58
Long-term debt in millions of dollars 2,133.0 2,217.9 2,258.2 2,316.2 2,230.8 1,790.54
Shares outstanding (diluted) in millions 197.78 197.82 198.03 202.45 203.53/222.62* 201.77

Source: Frontline Material

* Following the completion of the issuance of the new Frontline shares following the acquisition of 3.82% of Euronav, Frontline will have a total of 222,622,889 issued and outstanding shares.

Note: More data is only available to subscribers.

Analysis: total operating revenue, profit details, free cash flow

1 – Operating revenue was $217.44 million in 1Q22

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FRO (Fun Trading) quarterly revenue history

Frontline reported lower-than-expected revenue of $217.44 million for the first quarter of 2022 (see chart above).

The company reported net income of $31.15 million, or $0.15 per diluted share, for the first quarter of 2022 and an adjusted net loss of $1.61 million, or $0.01 per share. diluted. The decrease in adjusted year-over-year net loss was driven by higher time charter equivalent revenue due to higher TCE rates in the quarter, partially offset by other movements operating earnings and expenses.

CEO Lars Barstad said on the conference call:

So far in the first quarter of 2022, we have booked 74% of our VLCC days at $22,600 per day. We booked 70% of our Suezmax days at $32,700 per day and 58% of our LR2/Aframax days at $46,300 per day. All figures in this table are on a charge to discharge basis as usual for Frontline.

2 – Free cash flow was $6.15 million in 1Q22

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FRO Quarterly Free Cash Flow History (Fun Trading)

Note: generic free cash flow is cash flow from operations minus capital expenditures

Free cash flow over the last 12 months is estimated at a loss of $360.99 million, with a gain of $6.15 million in 1Q22.

As a reminder, FRO stopped paying dividends from 3Q20.

3 – Debt analysis: Net debt is estimated at $2.12 billion in 1Q22 (consolidated and current included)

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FRO Quarterly Cash vs Debt History (Fun Trading)

As of March 31, 2022, total cash was $113.88 million and long-term debt, including short-term, was $2,230.8 million.

Technical analysis and commentary

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Short Term FRO TA Chart (Fun Trading)

Note: Chart is adjusted from dividend.

FRO is forming an ascending channel pattern with resistance at $11.65 and support at $8.25.

The short-term trading strategy is to trade LIFO around 60%-70% of your position and hold a long-term base position for a much higher payday.

I suggest selling between $11.3 and $11.8 and waiting for a retracement between $8.3 and $8.2 with potential support below $7.65.

If the market turns bullish, FRO could break out and hit $12, but that’s not likely right now.

Instead, the risk of entering a bear market is increasing due to stubborn record high inflation and Fed tightening. We could be heading into a recession by the end of 2022, severely affecting the market and the FRO. In this case, FRO might drop to $6.25 or even lower.

Therefore, the priority is to build up a cash position and trade the short-term LIFO until a clear trend emerges.

To note: The LIFO method is prohibited by International Financial Reporting Standards (IFRS), although it is permitted in the United States under generally accepted accounting principles (GAAP). Therefore, only US traders can apply this method. Those who cannot trade LIFO can use an alternative by creating two different accounts for the same stocks, one for long term and one for short term trading.

Warning: The TA table must be updated frequently to be relevant. This is what I do in my stock tracker. The table above has a possible validity of approximately one week. Remember that the TA chart is a tool only to help you adopt the right strategy. This is no way to predict the future. Nobody and nothing can.

Author’s note: If you find value in this article and wish to encourage such continued efforts, please click the “Like” button below as a vote of support. Thanks.

Valerie J. Wallis