SFL Corporation Ltd (SFL) 2006 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Ship Finance first quarter 2006 presentation. My name is Lars Solbakken, and I am the CEO of Ship Finance management. With me here today I have Tom Jebsen, who is the CFO with Frontline management, and Inger Klemp, who will replace Tom as CFO of Frontline management as of 1 June.

Move to slide 2. Ship Finance has a fleet consisting of 14 Suezmax tankers, 28 VLCCs, 8 Suezmax OBOs, and 7 container vessels. 5 of the container vessels are currently under construction and will be delivered during 2007.

Move to slide 3 - Main Events of 2006. We paid a dividend of $0.50 in March 2006 for fourth quarter 2005. In November 2005, the bareboat charterer of the VLCC Navix Astral exercised an option to purchase the vessel, and delivery took place in January 2006. In January 2006, the Company acquired the VLCC Front Tobago from Frontline. Effective January 2006, this vessel has replaced the Navix Astral and will fulfill the remainder of the Navix Astral timecharter with Frontline.

In February 2006, the Company entered into a total return bond swap line with Fortis Bank. The total return swap is for a term of 12 months and will facilitate the buyback of the Company’s 8.5% senior notes in an amount of $50 million. As of today, the bank has acquired bonds for $48.5 million with a par value of $51.5 million.

In March 2006, according to a mutual understanding, a termination contract was entered into between the Company and Consafe Offshore AB, which terminated the Heads of Agreement concerning a sale and lease back deal. The parties agreed to keep a dialog with respect to potential future projects together. As a result of the termination, certain financial mechanisms which were set up for the deal were also terminated. This resulted in a small net profit for the termination transaction. In the first quarter, the Company bought back and cancelled 400,000 of its shares.

Move to slide 4 - Main Events in Second Quarter 2006. In April 2006, the Company announced that it had closed the definitive agreements and related financing arrangements to acquire five newbuilding container vessels from third parties for a sum of approximately $280 million and to place the vessels on long-term charter to Horizon Lines, LLC, a subsidiary of Horizon Lines Inc., which will guarantee the charters. The term of each bareboat charter will be twelve years with a three-year renewal option on the part of Horizon Lines, which will operate the vessel in its service from the U.S. west coast to Guam and Asia. The vessels will fly the flag of the United States.

On May 26, 2006 the Board declared a dividend of $0.50 per share which represents an ordinary cash dividend of $0.45 per share and a supplementary dividend of $0.05 per share. The record date for the dividend is June 12, 2006, the ex dividend date is June 8, 2006, and the dividend will be paid on or about June 26.

As from 2 May, 2006, I have been employed as CEO of Ship Finance. I have more than 20 years’ experience from the marine sector, both from the owners’ and financial service side. A further one or two recruitments are likely in the near future.

Move to slide 5 - Strategy. The strategy of the Company is to increase its portfolio assets and to try to diversify the risk by also investing in other shipping sectors and the tanker market. The Company is also considering investments in the oil service sector, with a particular focus on drilling rigs. Heavy-lift vessels and FPSO projects are also currently being considered, partly to seek a life extension of the Company’s single-hull vessels. The board finds this an attractive alternative that would help bridge the decline in contracted revenue after 2010 with the Company’s single-hulls. The goal is to grow the Company’s asset base by 5% to 10% per year as a minimum. With the closing of the Horizon transaction discussed above, the Company’s minimum target revenue growth for 2006 is secured.

Move to slide 6 - Profit and Loss Statement. We posted operating revenue of $84 million in the first quarter. Since GAAP only allows Ship Finance to take income, the 20% profit split, when it is certain that the minimum hire for the financial year has already been achieved, profit split for 2006 will only be booked in later quarters.

However, the Company estimates that the profit split would be approximately $29.9 million for the first quarter of 2006 compared with $33.5 million that were estimated for the first quarter of 2005. We recorded a gain of $1.1 million in first quarter 2006 as the result of the release of $1.1 million of the-- $1.9 million loss on impairment that was accrued in the fourth quarter of 2005 on the Navix Astral, which was delivered in January 2006. The Company recorded a gain of $8.7 million in the first quarter. That is attributable to the mark-to-market valuation of interest rate swaps. We had a total operating income of $52 million and net income of $33.8 million, or $0.46 per share. Including the accrued profit split of $29.9 million, the net income would have been $63 million, or $0.87 per share.

Move to slide 7 - Balance Sheet. On the asset side, the following items have changed in the first quarter. Cash and cash equivalents has increased due to receipt of the profit split amount for 2005. Restricted cash has increased since end of 2005 as a consequence of a $10 million deposit held as collateral with Fortis Bank for the bond swap. Other current assets has decreased in the quarter as a consequence of receipt of the profit split amount for 2005. Vessels and equipment show a decrease in first quarter 2006 since Navix Astral was sold in the quarter.

On the liability side, I will mention that other current liabilities show an increase in the quarter as a consequence of accrued interest, having increased as compared to fourth quarter 2005 as interest on the Ship Finance 8.5% notes is paid semi-annually and was paid in December. The reduction in stockholders’ equity is partly due to purchase of shares for $7.2 million and that the purchase price for Front Tobago being $8.4 million above the book value of the vessel in Frontline. GAAP requires book value to be used in the transfer between related parties. Effectively, the purchase of Front Tobago therefore reduced the book equity in Ship Finance by $8.4 million.

Move to slide 8 - Consolidated Statement of Cash Flow. Net cash from operating activities is $127 million, but after profit split from Frontline paid in the quarter, represents $87 million. Investing activities stands at $26 million for the quarter, and finance activities is $98 million, including dividend paid out, shares repurchased and repayment of long-term debts.

Move to slide 9 - Breakeven Rates. As you can see on this slide, we have cash breakeven rates in the right-hand column, and these are substantially lower than the contracted rates with Frontline. The average daily timecharter equivalent earned by Frontline in the first quarter was $68,491 for the VLCCs, $49,883 for the Suezmaxes, and $31,716 for the Suezmax OBOs.

This was the last slide. We will now open for questions.

Operator, could you please do the Q&A, please?

Certainly, sir. [OPERATOR INSTRUCTIONS]. The first question today is from the line of Jon Chappell. Please go ahead, and identify your affiliation, please.

Good afternoon. It’s Jon Chappell from JP Morgan. Lars, my first question is for you. You have a lot of experience in the banking industry. There was some talk in the past of Ship Finance possibly looking for a dual listing to improve liquidity. Can you speak about your experience with what you’ve seen as dual listings and what you’re thinking about with listing Ship Finance in another exchange?

Yes. I think historically there have been mixed experiences with dual listings. We are looking into this issue, and we’re discussing with investment banks to get advice on it. Of course, there is no final decision made on this issue. So, we’re looking into it, but no conclusion has been made.

Okay. And, then, Tom, one for you. Thanks a lot for your help over the years, and good luck in your new job. Just one more tough one for you before we let you go. The revenue calculation-- we’ve gone over this a couple times. But, when I just take your fleet and multiply the fixed day rates, excluding profit share, times the number of days, we’re consistently coming out high on revenue. Maybe it’s the sales/lease financing that you speak about in the appendix. But, just one more time, can you go over how we should forecast revenue in the model?

I think you have to take two things into consideration. One is if you look into the cash flow statement in our quarterly report, you’ll see on the first line under Investment Activities-- you see the component of a charter hire, which is used to pay down on the finance lease investments. Of course, that item never shows-- Or, let’s say, that component of base charter hires never shows up in the P&L. That’s the big component. The other component is related to the fact that a certain amount of vessels are on bareboat charters. Do you remember how many?

Five vessels are on bareboat charters.

Yes. And, so for those vessels, you can take five times the number of days in the quarter times $6,500 per day and also subtract out of the top line. Then you should be very close. If not, you should call us again, because then we may have to go over again or two.

I think I would be close that way. All right. Thanks a lot.

The next question comes from the line of Rory Stewart. Please go ahead, and, again, announce-- identify your company name, please.

Thanks. Rory Stewart with Simmons & Company. I had a question. You mentioned in the areas of growth the opportunity in drilling rigs. I was just wondering if there was discussions ongoing. Obviously, there’s a lot of rig-building activity amongst various Norwegian entities. I just wondered if you were particularly far along either with related entities such as Seadrill or other players in Norway on negotiations there and how that would work and how the kind of size of transaction you’d have with a drilling rig, particularly a semi-sub, would compare with your 5% to 10% growth of asset bases on a year-on-year basis.

We are currently looking at drilling rigs. We have so far focused on jack-ups, which is for a newbuilding about $200 million currently. So, that kind of size. I think that is probably the most likely to be a first project.

Okay. And, is that more likely to be with someone such as Seadrill or with other operators in Norway?

I think the only thing that I can say is that it could both be Seadrill or other operators. There are clearly opportunities in this market, and we have been looking at transactions and hope that we can close something.

Okay. But, for now, you’d say the $200 million kind of jack-up rather than a $400 or $500 million semi deal would be more appropriate?

Yes.

Okay. That’s it for me. Thanks.

[OPERATOR INSTRUCTIONS]. This question comes from the line of John Parker. Please go ahead, and identify your company name.

It’s John Parker from Jefferies. Can you provide any more details on the Horizon deal in terms of the structure of the financing and what the rate is, just for modeling purposes-- what the interest rate is on the non-recourse debt.

With respect to the bareboat rate, or the rate of the transaction, we are not allowed to give any more information due to competitive reasons. The interest on the bank financing is-- they have been fixed by swaps for the whole facility, actually. So, the interest rate there is-- when you have included the margin, it’s approximately 7%.

Okay. And, how about timing of the debt going up and the outflows of cash? Can you provide any more details on when you’re going to be putting cash into the deal and when the debt level is going to start to go up?

Well, the vessels will start to deliver in January 2007 and will be delivered over a five-month period to May 2007. There will not be any injection of more cash into this project until the start of 2007.

Okay. And, just for bookkeeping purposes, on the bond swap line, can you tell us at the end of Q1 what the amount outstanding was on both the bonds and the bond swap line?

The current size of the bond is $467 million. As of Q1, I think we had acquired $31 million. Then we have acquired another $20 million - that’s par value - to bring it up to $51, as Lars mentioned.

Okay. So, at the end of Q1, you probably had $31 outstanding on the-- Actually, you have to take the discount into effect on the bond swap line, so it would be slightly less than $31.

[technical difficulty].

At the end of Q1-- I want to get the number that was outstanding on the bond swap line.

If that was par value $31, that would be about $28 or $29 that would be outstanding on the bond line, I think.

Okay. And, on the bond swap line, what is the interest rate on that?

That’s Libor plus 1.

Okay. Thank you very much. That’s all.

[OPERATOR INSTRUCTIONS]. It does seem at this time there are no further questions. That being the case, I’ll hand the conference back to you for your further comments and remarks.

Okay. Thank you very much to everyone. I think this was all for today. So, then we close the conference call.

Ladies and gentlemen--