UPDATE 2-Frontline's Q3 profit sinks, sees buoyant cash

* Q3 EBIT falls 84 percent to $28 mln vs $32 mln forecast

* Says to return to Q4 net profit, shares pare losses

* Says to create substantial cashflow if market recovers

* Scraps purchase options for three VLCCs

(Adds CEO comment, details on dividend prospects; shares)

By Richard Solem

OSLO, Nov 27 (Reuters) - Frontline (FRO.OL), the world's biggest independent oil tanker shipping group, reported an 84 percent fall in third-quarter operating profit on Friday but said it would create substantial free cashflow for dividend payments as the tanker market begins to improve.

"The market in the third quarter was difficult, among the worst ever, but we are out of the tunnel and there's light," Chief Executive Jens Martin Jensen said, after reporting a net loss of $6 million for the quarter.

Frontline shares were up 1.7 percent at 149 crowns by 0924 GMT, when Oslo's main index .OBX was down 0.02 percent.

"Based on the results achieved so far in the quarter, the board expects that the company will return to net profitability in the fourth quarter," the company said in a statement.

Earnings before interest and tax (EBIT) at the Oslo-listed shipping group dropped to $28 million from $173 million a year earlier, hit by weak oil demand, missing the average forecast of $32 million given in a Reuters poll of 13 analysts.

The firm said it would pay a dividend of $0.15 per share for the quarter, just short of the consensus forecast of $0.18.

NEWBUILDS

Frontline said the net required equity investment in its shipbuilding programme had been reduced to around $94 million and it should be in position to generate positive cash flow after debt service and payment of newbuilding instalments with the current charter coverage if average spot rates are above around $30,000 per day and $25,000 per day for Very Large Crude Carriers (VLCCs) and Suezmax tankers, respectively.

"Under improved market conditions the company will generate substantial free cash available for dividends," Frontline said.

Frontline said it had outperformed the market and peers in the third quarter with spot earnings for the double hull VLCCs and Suezmax tankers of $26,800 per day and $14,866 per day, respectively.

In November Frontline did not exercise purchase options for three 1999-built double hull VLCCs, with long term leases expiring at the end of this year, it said, adding it had agreed to charter in the vessels on one-year time charters at $29,000 per day.

Frontline, controlled by Norwegian shipping tycoon John Fredriksen, said it estimated its fixed charter coverage to be 39 percent and 25 percent of the fleet in the fourth quarter 2009 and in 2010, respectively.

It said crude oil inventories had lately started to draw but still remained at seasonal highs and the tanker industry still had a record amount of expected tanker deliveries in the next 12 months, with the orderbook currently representing around 35 percent of the world fleet of VLCCs.

However, there was still some cause for hope that the market would improve, the company said.

"The market balance for 2010 will be pushed in a positive direction by the phase out of approximately 12 percent of the fleet due to single hull restriction, and is likely to be further strengthened by the expected increases in OPEC production volumes and delays/cancellations of newbuilding orders," it said.

"Furthermore, floating (oil) storage is still an attractive option, which is likely to continue to give fundamental support to the trading market. According to industry sources approximately 50 VLCCs were employed for this purpose throughout the third quarter." the firm added. (Additional reporting by Ole Petter Skonnord; Editing by Greg Mahlich) ((richard.solem@thomsonreuters.com; +47 22 93 69 71; Reuters Messaging: richard.solem.reuters.com@reuters.net))