This week’s Stock of the Week is a company that benefits from low oil prices and gives investors a way to invest in the energy sector without buying the stock of an oil producer or distributor.

Oil at Sea

Frontline Ltd. (FRO) is attractive for investors looking to be in the energy sector without buying directly into oil producers and distributors. It is a shipping company whose 79 vessels transport crude oil and oil products worldwide.

Its business is very poorly understood. It does not do well when oil prices are high, because then domestic production ramps up and there is less need for overseas transport of the commodity. But when prices are low and there is a glut—as there is now and will likely be for some time to come—Frontline’s ships become storage facilities of last resort. There are simply not enough places to store oil on land with US inventories around 450 million barrels last year and likely to be 520 million this year. Despite that, Frontline’s stock price has dropped 70% since early 2015, which makes it more of a bargain.

Frontline did a major fleet upgrade in 2014—average ship age is now seven years, down from more than 13—and related costs will temporarily keep earnings down even as revenue rises. Revenue was $459 million last year and should be $666 million this year and $681 million in 2017. The dividend of $0.80/share/yr. recently yielded 11.3% and is likely sustainable.

Earnings per share: 2017 est./$0.86…2016 est./$1.23…2015/$3.92.

This Week’s Expert

james_david-4cDavid James is senior vice president and director of research at James Advantage Funds, Xenia, Ohio, and portfolio manager of the $85 million James Small Cap Fund (JASCX). JamesFunds.com