SFL Corporation Ltd (SFL) 2005 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Ship Finance third quarter 2005 presentation. With me here today I have - - my name is Tom Jebsen, and with me today, I have Oscar Spieler, CEO of Frontline Management. We will run through a few slides with you, which you should find on Ship Finance Website, www.shipfinance.bm.

I am moving on to slide two, main events for 2003 and so far in 2004. We paid out a dividend of $0.50 per share for second quarter, which was paid out in September. And we have today announced another $0.50 per share for third quarter, which will be paid out in mid-December. The record date for this is fixed at November 29, and x-dividend date at November 25. We have during the quarter, also agreed with Frontline on a sale of Front Hunter for total proceeds of $71 million. And that vessel was delivered to new owners in August 2005.

The - - we have also taken delivery of a second of two container vessels that we ordered, Sea Beta. And that vessel has been chartered out to a third party until the end of the first quarter next year. We have also bought back another $30.8 million of our own bonds in the third quarter. And so far in this quarter we've done another 1 million buyback. Leaving an outstanding amount on the bond indenture of $457 million, down from the 580 originally issued. We bought back 100,000 shares in Q3. And as announced today, we've bought back another 710,000 shares so far in Q4.

Finally, as we've discussed before, we have a, I guess you could call it a skewedness in how we account for the profit share with Frontline. Basically, U.S. GAAP states that first we have to fill up the base - - the base charter income for the full year. And when that's done, then we can account for 20% of all income above that as a profit split. And after booking approximately 9 million in the second quarter, we've been able to book 26.8 million now in the third quarter. But we still have, as of the end of September, unaccrued - - or unaccounted for, profit split of another $22.2 million. So obviously in the fourth quarter, those 22.2 will be taken to income, along with whatever profit split will materialize now in the fourth quarter. And as that looks - - it certainly looks like it's going to be a very strong fourth quarter.

Moving on to slide three, the strategy. Basically the same items that we've discussed in the past. Still aiming at a growth of 5% to 10% per ano. As we've discussed in the past it is really tough in this market where there's so much liquidity to find good projects which we can justify to our shareholders to participate in. But we are working on them. As we say in the last bullet, continuously looking into new projects. And we have also recently been looking into things to do within the offshore sector. We are still, as our strategy, we still want to participate both in corporate acquisitions and straight purchases, if that's possible.

And definitely the goal is to diversify the customer base so that we don't rely completely on Frontline Limited - - or so heavily to Frontline Limited as we do today. We are still working on trying to recruit management. We've had some progress on that since last time, though I cannot comment any more on that at this stage. And, of course, SarbOx is moving ahead where we cooperate with Frontline, Knightsbridge and ourselves, and hopefully - - let's put it this way; we are following the time line on a fine basis.

Moving on to slide four. While we don't have any projects to tell about, or new projects to talk about this time, still you can see that we've had a splendid growth during - - so far this year. We've had an increase of 18% in our revenue base during 2005.

Moving on to slide five, on accounting issues. Front Hunter, as discussed last time that has been tied one Frontline in the sense that Frontline has an option to sell one of its VLCC new buildings to Ship Finance when that is delivered next summer. And the charter rate that will be applied or calculated for the new vessel will consist of two components. The first will be approximately $67 million of that acquisition cost. We'll basically follow the charter hire that was agreed to under the Front Hunter charter. And then the incremental value, the difference between the acquisition price and the 67 million, will then be calculated on a regular annuity basis, as we've done with other projects in the past. But until that's decided whether Frontline will actually sell its new building to us, we are not able to take - - to income the gain that could have been booked on the Front Hunter sale, which would have been in the range of $25 to $26 million. So for the time being, that's sort of in the refrig, if you understand.

The other issue is deemed dividends. I have a separate slide for that following but basically there's two issues there. The first one is that, as we've discussed in the past, a number of vessels, when they are acquired by Ship Finance, will typically be on charters to third parties, that's another company in Frontline. In which case we account for the vessels as regular operating vessels. That is we account for the vessels as assets. And first when the vessels leave that charter, will they be turned into investments in financial leases. And as I'll show you, that item has slowly been decreasing and currently we only have six vessels left that are accounted for this way. But obviously the difference between the base charter rate agreed with Frontline and whatever these vessels achieves is then accounted for in full in the P&L. And then passed back to Frontline as a deemed dividend.

Another issue relates to the vessels that have been sold from Frontline to Ship Finance after the initial transaction in 2003. And in that case U.S. GAAP requires that the difference between - - excuse me, that the vessels have to be booked into Ship Finance at book value - - historical back value with Frontline. And effectively, since this market is a strong market, the difference - - or the additional dollars that are between the sales price and historical book value, then ends up being looked upon as a deemed dividend. And effectively that is actually quite big money and it has led to a reduction in book equity as I will show you in a few minutes.

Moving on to slide six, profit and loss. Income statement for the third quarter shows total operating revenues of $118 million. Out of which 26.8 relates to the profit split in the quarter. And again, at this stage, $22.2 million of profit split - - let's say accrued profit split, has not been accounted for. We have total - - I'll show you on the next slide a detailed break down of the total operating revenues.

Basically total operating expenses, $38 million. Leaving an EBIT of $80 million. And under other financial items you see that out of the $9.5 million there, 8.1 relates to interest rate swaps. And the rest is actually a small gain related to the buyback of the bonds. And of course, under interest expense you will see a similar extraordinary amortization of part of the financial fees related to the same bond. But basically, we end up with net income of $65 million or $0.87 per share. And as discussed earlier, we have decided to pay out $0.50 per share, $0.45 as a regular dividend and $0.05 as a special dividend.

Moving on to slide seven, you can see the split of total operating revenues. And basically the - - if you look at the third column from the right, you see that the top line is basically the remaining time chart revenues that we discussed that ends up being - - part of it being sent back to Frontline as a deemed dividend. There's a small increase from the second quarter to the third quarter and that is because Frontline took delivery of several vessels - - excuse me, Ship Finance took delivery from Frontline of several vessels. And then, of course, later passed them on to Frontline. But that led to an increase for some time of operations to third parties, or charters to third parties. But again, that should decline definitely now in the fourth quarter. The last line, other operating income. That's the last line before sum. 28 million consists of 28.6 million in profit sharing. And then I guess the last thing I have to say is just that; in addition to the six vessels that are still on charter to third parties that are related to Frontline, there's also two vessels - - two container vessels, that are also there in the top line.

Moving on to slide eight, the balance sheet. Looking at September 30 figures you see the third line - - excuse me, the first one shows cash and restricted cash at $71 million. Currently that stands at 75 million. And on top of that we have a number of vessels that are - - that don't have any financing attached to them, which gives us additional ability to leverage up, if we need to. And we estimate the value of a three Suezmaxes, plus the two container vessels, that don't have any debt attached, to give room for another $120 million of financing if need be. Third line, other current assets, shows in $148 million, out of which 110 million is short-term lease investment. And then I guess my last comment is; despite the fact that the Company has been making money during the period shown here, you see that stockholders equity is declining. And again, that's due partly to these deemed dividends. Especially, in the form of the difference between sales price and historical book value not being accounted for.

And that moves us on to slide nine where you can see the breakdown of the deemed dividends in the three quarters so far this year. The smallest figures for each quarter are basically the - - I guess could you call the regular deemed dividends. That's related to operations of certain vessels to third parties. While the big figures are related to the transactions of all the vessels mentioned, that the VLCC's, Front Century / Front Champion and Golden Victory in the first quarter. And then the Suezmaxes, then also the Front Target, Front Traveler and Front Transport during the second quarter. And also, the Front Scilla, which was taken out from a remote bankruptcy trust, also in the second quarter. But all of this together is in the amount of $134 million. Which is way in excess of the - - of these 60 - - excuse me, of the $126 million, which we have accounted for as net income so far this year.

Moving on to slide 10. We have the consolidated statements of cash flows. And also here you should see the deemed dividend under financing activities in the last line before the sum. Where you see the same $134 million. Next slide, slide 11, gives you the break-even rate. And as we've discussed before, the base charter rates include the ability for the Company to pay dividends and expand the Company. So effectively, the break-even rate in a rated A scenario, is obviously much lower because would you obviously scale back or stock dividends. As you can see, the average cash break-even for all of the VLCC's, that includes the vessels mentioned at the bottom of the slide, is $20,000 per day. And for the Suezmaxes, it $14,100. And for Suezmax OBO's, 18,000. And the container vessels, which we currently have no debt attached to, basically operates at $5,200 per day as a cash break-even.

So that was really all I planned to say, and with that, operator, I leave a word for questions. Please follow up.

[OPERATOR INSTRUCTIONS] First question, Mr. [Laneer], Bank of America. Go ahead, please.

Yes, thank you. Here we are again. Just one very quick question. It was all very clear. I've noticed that operating expenses have gone up quite a bit. Do you think you could break them down per ship and give us some guidance going forward?

I'm sorry, Phillip, I just need to find out - - get a hold of that slide. You're talking about on slide six?

Was it in the presentation? Sorry, I missed it if it was.

You were talking about on slide six, is that it?

Yes, just your regular vessel operating expenses. They jumped a bit from last quarter, more than I expected. I was wondering if could you give me a vessel breakdown? And was it a quarterly one-off, or is there a cost increase in the industry that's going to be a carry-forward for the next - - foreseeable future?

I guess the answer to that is basically that over time, that item - - basically the number of vessels times $6,500 per day. But the reason it increases now, is because during the second quarter we took delivery of certain vessels. And they got the full quarter in now. And that includes both three VLCC's and two container vessels. So, that probably should be something like a 10% increase really. But I - - that's really the only good explanation I can give on it.

Okay. That was my only question.

Next, Mr. Kartsonas, Citigroup.

Yes, hi again. Tom. how many vessels are still left that are bare-boat and time chartered?

You mean to third parties?

Yes to third parties.

Six vessels in total. Out of which one is bare-boat and the other five are time charters.

One and five, right. And these will be all basically the time charters?

Yest, that's right. Five OBO's and one VLCC. And the VL is a bare-boat one.

So these we should look at expiring next year, right? Most of them. And moving to a sale - -?

Yes. The VL definitely, and I think one or two of the OBO's goes first in early 2007. But that's it.

Yes, that's it. So, everything then is going to be straight lease payments, right?

Yes, that's right. And the only reason you should ever see the word deemed dividend again is if we do a transaction with Frontline and we're still consolidate with Frontline, and the vessel is on a chartered to a party at the time it's taken over. Then you would see a deemed dividend. But that would only be for a few weeks and a few - -.

I see. Also om the containers, what kind of OpEx are we looking for going forward, per day?

Yes, that's - - I thought it was around $3,000 to $3,500 per day, actually.

Okay. That's all I had. Thanks.

Okay.

Next, Justine Fisher, Goldman Sachs.

Hi. As far as where you might expand into, I know that you said that you have several plans in the pipeline but nothing ready to announce yet. I was wondering whether Ship Finance may be used to acquire the single hull vessels Sea Tankers I think recently bought from General Maritime?

That has not been discussed, and I don't think it's anything we would be interesting in doing. Because they only have - - there's too much risk to the trading life of them, if you understand.

So even if those were converted into floating offshore vehicles Ship Finance still wouldn't be interested in acquiring them?

No, that would be a different issue. That sort of relates also to as you know, Frontline has been putting up an FPSO department, in which case, we are actually are considering certain of Ship Finance vessels as potential conversion objects. And if that happens, then it would be very natural for Ship Finance also to consider participating in such a financing of the conversion upgrading. So that we have been discussing. But I think still there's - - you're talking about at least a year before you can see any solid figures on the table.

Okay. If Ship Finance were to participate in the financing of such a conversion project I guess on the Frontline call you just said that a conversion for one tanker would cost about 60 million. So, you would basically finance some of the conversions of either Ship Finance' or Frontline's other vessels on the balance sheet of Ship Finance, for that FPSO venture?

Yes, and I think that would be a very interesting project for Ship Finance. Because it would basically be backed by, obviously a charter for several years to an oil company. So unlike - - most of Frontline's vessels are currently trading in the spot market this would definitely be a contract backed.

And then the other question this is sort of related to the one that I asked on Frontline call but it relates to the amount of cash that has to be kept in that escrow account. If Ship Finance were to participate in the FPSO venture, or make another acquisition be it offshore drilling, or any other of the sectors that you may be looking at where, would the additional cash for that account come from?

You mean for that investment or - -?

Well, so the cash was $250 million when Ship Finance was created and I think now it's something like 274 million.

Yes.

So, if additional cash had to be put into that account, if Ship Finance made additional acquisitions, where would it come from?

That would be - - the lessee who would have to that. So that would - - if it - - let's say it was Frontline or Sea Tankers that were doing the - - creating an FPSO and basically selling to the Ship Finance to lease it back, then they would have to put up that money. But, having said that, way imagine that if you're talking about the rigs or FPSO's, or accommodation units, whatever, which have a longer term contract. Then I wouldn't see the same need for a cash cushion in that case as long as the asset has been put on to a third party that is creditworthy. You follow me?

Yes. Do the covenants and the bonds require that such cash be put up even though the counter party may be very creditworthy?

No, that's not one of the covenants.

Thanks.

Yes.

Next, Mr. Espen Syversen, Martin Curry Investment.

Hi, it's Espen Syversen When you talk about opportunities in the offshore market, do you also mean the FPSO's markets or could we see some kind of solution in the accommodation or drilling rig market as well?

We're - - we've been analyzing companies in all segments. I guess at this stage just as much to learn about the markets as anything else.

So not so on the FPSO market?

That's right, yes.

Is it feasible that Ship Finance would be a consolidator in some of these markets?

The idea of the Company is more to be a financier so - - but obviously, as we have discussed in the past, the structure of Ship Finance is definitely one which can be used as a vehicle unconsolidation. But we don't envision Ship Finance as the consolidator, if you understand, just offering a helping hand.

Sure. I was going to also talk about the short interest in Frontline today. Could you say something about the short interest in Ship Finance?

I actually - - I have to admit that I haven't investigated that one. I'm sorry about that Espen.

Okay. That's all. Thanks.

Okay.

[OPERATOR INSTRUCTIONS] Mr. Jebsen, no further questions.

Okay, then, we would like to thank you all for listening in and wish you the best. And, of course, hopefully a very strong fourth quarter and first quarter tanker market and talk to you again in February in connection with the fourth quarter report. All the best. Bye-bye.