SFL Corporation Ltd (SFL) 2006 Q2 法說會逐字稿

Welcome to Ship Finance second-quarter 2006 presentation. My name is Lars Solbakken and I am the Chief Executive Officer of Ship Finance Management AS and with me here today I have Inger Klemp, who is acting as part-time CFO for the Company through a management agreement with Frontline Management AS and Harald Gurvin, who has been employed as Vice President of Ship Finance Management.

Moves to Slide 2. Ship Finance has a fleet consisted of 14 Suezmax tankers, 28 VLCCs, eight Suezmax OBOs, seven Container Vessels and one Jack Up Rig. Five of its container vessels are currently under construction. Further, we have entered into an agreement to acquire a 1997 built Panamax bulker, which is expected delivered from the seller in September 2006.

Move to Slide 3, Main Events of Second Quarter 2006. In April 2006, we entered into agreements to acquire five newbuilding container vessels from third parties for a sum of approximately $280 million. The vessels will enter into long-term charters with Horizon Lines, a subsidiary of Horizon Lines, Inc., which will guarantee the charters. The term of each bareboat charter will be twelve years from delivery with a three-year renewal option on the part of Horizon Lines. Horizon Lines will operate the vessels from the service in the service from the U.S. West Coast to Guam and Asia. The aggregate annual charter hire for the vessels is approximately $32 million. Horizon Lines has been granted fixed-price purchase options after 5, 8, 12 and 15 years. The acquisition has been financed by a non-recourse debt facility of 210 million. The first vessel is expected delivered in November 2006 and the remaining four vessels during the first half of 2007.

In June 2006, we entered into an agreement to acquire the 2006 built jack up rig, SeaDrill 3, for a purchase price of 210 million. The rig is bareboat chartered back to the seller, SeaDrill Invest I Ltd. for a period 15 years. The parent company, SeaDrill Limited, has guaranteed the charter party. We will receive a charter hire of $112,500 per day for the first three years, $51,500 for the years four to seven, $43,500 for the years 8 and 9 and $40,000 for the years 10 to 15. The charter rates are based on a US dollar LIBOR interest rate of 5.6% per annum on the outstanding loan amount and rates will be adjusted to reflect changes in interest rate level. In addition to the fixed charter rate, we will receive a profit split element of 5% above certain threshold levels after year 3. The seller has been granted fixed-price purchase options after three, 5, 7, 10, 12, and 15 years. The first purchase option after three years is at $135.5 million and the last purchase option after 15 years is at $60 million. The purchase of the rig is part financed by $165 million term loan facility, of which we have guaranteed 10 million.

Move to Slide 4, Main Events of Second Quarter 2006, continued. In June 2005, we sold the Suezmax Front Hunter to an unrelated third party for a net gain of $25.3 million, which was deferred. The Charter and management agreements with frontline relating to this vessel were terminated and we paid Frontline a $3.8 million termination fee, in addition to Frontline having the right to sell to us a newbuilding VLCC and charter it back at reduced charter rates. In June 2006, the parties agreed to cancel the agreement, and to split the profit in accordance with a profit share agreement that is 80% to Frontline and 20% to Ship Finance, but adjusted for the residual value belonging to Ship Finance. The cancellation of this agreement resulted in a net payment of 16.3 million to Frontline, in addition to the earlier termination payment of 3.8 million. We booked a net gain of $9 million relating to the sale of Front Hunter and a cancellation of the option agreement in the second quarter.

In June 2006, we entered into a $25 million revolving credit facility for the financing of the vessel Front Tobago, which was acquired in January 2006. The facility was fully drawn at the end of the second quarter.

As from the 2nd of May, 2006, I have been employed as Chief Executive Officer of Ship Finance. Further, Harald Gurvin was hired as Vice President of Ship Finance in June 2006. The intention is also to employee a CFO on a full-time basis.

We paid a dividend of $0.50 per share in June 2006 for the first quarter 2006.

Move to Slide 5, Main Events in Third Quarter 2006. In July 2006, we entered into an agreement to acquire the 1997 built Panamax Rainshadow for $28.4 million. The vessel will be chartered to Golden Ocean Group Limited for a period of 10 years at a bareboat rate of $10,000 per day for the first five years and $8,250 per day for the remaining five years. The charter rates are based on a U.S. dollar LIBOR interest rate of 5.6% per annum on the outstanding loan amount and rates will be adjusted to reflect changes in interest rate level.

As part of the agreement, Golden Ocean has provided an interest free and non-amortizing seller credit of $2.6 million. The vessel is expected to be delivered in September 2006. Golden Ocean has been granted fixed price purchase options after 3, 5, 7, and 10 years. At the end of the charter, Ship Finance and Golden Ocean have agreed put/call options at $10.4 million and $12.5 million, respectively. We are in the process of securing paying a U.S. $22.7 million term loan facility in connection with the acquisition, of which we were guaranteed $2.1 million.

We're in discussion with the banks in the $1,131 million main term loan facility in order to increase the facility by $219.7 million to the original loan amount of $1,131. The increase will be available on a revolving basis and the intention is that the proceeds will be used to fund the equity portion of new projects and for general working capital purposes.

On the 22nd of August, 2006, the Board declared a dividend of $0.52 per share, which represents an ordinary cash dividend of $0.45 per share and a supplementary extraordinary dividend of $0.07 per share. The record date for the dividend is 31st of August, 2006, the ex dividend date is 29th of August, 2006 and the dividend will be paid on or about 18th of September, 2006.

Move to Slide 6, Strategy. The strategy of the Company is to increase its portfolio of assets and to employ its assets on long-term contracts. The Company will try to reduce the risk by investing in different sectors of the shipping and oil service industry and also by having a diversified client base. Investment opportunities in both second hand assets and newbuilding projects will be considered.

Move to Slide 7, Profit and Loss Statement. We posted operating revenue of 90.9 million in the second quarter. Please note that repayment under finance lease is 30.3 million is deducted from the total charter hire in order to arrive at the reported total operating revenues.

The operating revenues include a profit share of 5.5 million taken to income according to U.S. GAAP. The accounting issues relating to the profit share will be further discussed later in the presentation.

We recorded a gain of 9 million in the second quarter relating to the sale of the Front Hunter in 2005. The gain is a result of Ship Finance and Frontline agreeing to cancel the option for Frontline to settle a leaseback in newbuilding VLCC to us as a replacement for the Front Hunter.

The Company also recorded a gain of 3.8 million in the second quarter that is a ship builder to the marked to market valuation of SOPs. We had total operating income of 65.1 million and net income of 43.4 million in the second quarter, or $0.60 per share. For the first half, we had total operating revenues of $175 million. Please note that repayment under finance leases of 62.4 million is deducted from the total charter hire in order to arrive at the reported total operating revenues.

Operating income was 117.3 million and net income, 77.3 million or $1.06 per share, including the accumulated profit share of 38.2 million not taken to income during the first half. The net income would have been 115.5 million or $1.59 per share.

Move to Slide 8, Balance Sheet. Cash and cash equivalents were $44.2 million and includes restricted cash of 10.8 million mainly related to a cash deposit in connection with a bond swap agreement with Fortis Bank. Investment in associates of 45.9 million relates to the investment in Rig Finance, which is the owner of the jack up rig, SeaDrill 3, acquired in June this year. In accordance with U.S. GAAP, we have been required to deconsolidate Rig Finance, Ltd. and have accounted for the transaction as 100% equity investment.

Move to Slide 9, Consolidated Statement of Cash Flow. Net cash flow from operating activities during the second quarter was 1.6 million. Net cash used in investing activities was 13.5 million and net cash used in financing activities was 43.2 million, including dividends paid out and repayments on long-term debt. Consequently, cash and cash equivalents was reduced by 55.1 million during the second quarter.

Move to Slide 10. 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. Further, the actual average time charter equivalent rates earned by Frontline in the second quarter were substantially higher than the base charter rate payable to Ship Finance. The fixed charter rates on a time charter equivalent basis for Sea Alfa and Sea Beta under their respective charter partners are also well above the breakeven rates as these vessels do not have any more mortgage debt attached. Sea Alfa is on a time charter at 28,350 per day and Sea Beta on a bareboat charter at $15,000 per day. The jack up rig on charter to SeaDrill earns a bareboat charter rate of $112,500, well above the breakeven rate.

Move to Slide 11, Profit Share. For the tankers on fixed charter to Frontline, we earn a 20% profit share on any earnings Frontline earns in excess of fixed charter rates. The profit share is determined on an annual basis.

According to U.S. GAAP, the profit share can only be recognized in our accounts when the actual year-to-date earnings when the time charter equivalent basis exceeds the fixed charter income from Frontline on an annual basis.

For the first half of 2006, $43.7 million has accumulated under the profit sharing agreement, of which $5.5 million was recognized in the second quarter. The remaining $38.2 million will be recognized in the third and fourth quarter, provided that our vessels continue to earn in excess of the fixed charter rates received from Frontline for the rest of 2006.

Move to Slide 12, Historic Financials. This slide shows our historic net income including profit split. The net income for the first half 2006, adjusted for the accumulate profit share of $38.2 million so far not taken to income is $115.5 million, representing an adjusted net income per share of $1.59.

As this was the last slide we will present, we will now open for questions.

(OPERATOR INSTRUCTIONS). Mr. Chappell, JPMorgan.

A question on something you mentioned in the presentation and in the press release, on the accounting for the rig. It seemed that most of this was addressing the balance sheet. But I was just wondering on the P&L statement, profit and loss, are you going to be actually showing the revenue from the rig that you just purchased or is that only going to show up below the operating income line in the equity method? Hello?

Just one moment please. (technical difficulty). Please hold, there is something wrong with the line to Ship Finance. Hold on, please.

Hi, just one second. We tried to put you on the loudspeaker so the others could also hear you. Hello?

All right, my question was about the accounting for the rig that you just agreed to purchase. You mentioned the equity method and that's how it would be accounted for on the balance sheet, but I'm curious about how it's going to be accounted for on the profit and loss statement. Will we actually see the revenue and operating costs in those two line items or will this only show up in a below the operating income line item?

It will only show as the result in the associated company. You no longer will see the net result. We had the discussion with auditors about this and I think it's not finally concluded but it was concluded now for the third quarter. This has been discussed now with our auditors and this was the preliminary conclusion.

That's helpful. Then a question on the dividend policy this quarter. The supplementary dividend was $0.07 versus $0.05. Two questions on that. Number one, why the increase and why that magnitude? And number two, have you thought about just making that supplementary dividend part of the normal dividend? It appears to our modeling that you have plenty of cash just based off the time charter contracts. Without profit share, that $0.50 or $0.52 could be something that people can view as sustainable going forward?

I think that we view it as very important to have a high unstable dividend and I think the increase by $0.02 this quarter kind of underlines our confidence in the market going forward. Of course, we have to balance the dividend also as against our growth ambitions. And of course, we have made several in new investments and we have more investments under consideration. So, I think we have now paid $0.50 for a number of quarters and now we make a small increase. And I think that's --

I was just going to say, it seems that that $0.50 versus $0.45 certainly has not hindered your expansion policy. So I just think maybe it's confusing sometimes to maybe investors to see the $0.45 and then the $0.05 and the $0.07 they can think that it's maybe some special dividend as opposed to someone who's been following the Company for awhile, realizes that you'll be paying that type of number going forward. So just thought I would throw it out there, the difference between just one dividend and then the two can be somewhat confusing.

Mr. Mavrinac from the company Jefferies, please.

Yes, following up on the previous question, I was just curious what is your thought process whenever you're thinking about your optimal dividend payout? In your minds, do you have a targeted percent of cash flow payout that you want to achieve? Or is it a little bit more subjective than that whenever you are trying to balance your growth objectives with maintaining a high yield?

I think that the $0.50 that we have paid is clearly, with the current markets we're seeing now, where that is the dividend we would like to pay and I think that now with the markets we have today, we saw room to increase it somewhat.

Okay, good. Would you, I guess as you get comfortable with the outlook, as you continue to expand your business, I would imagine that perhaps -- I know it's been awhile since the last increase -- but potential further increases could be in the offing, as your cash flow base increases?

Of course, the new investments that we're making, of course, our fixed charter revenue is increasing. On the other hand, of course part of our income is also from the profit split, which is more volatile. So, we have to balance this, both looking at the market, our growth ambitions going forward. But I think everyone should be confident that we will -- it is absolutely our ambition to maintain the high dividend payout.

Okay, great, great. And then kind of transitioning to a slightly different topic. You, consistent with your strategy that you guys have laid out a couple of years ago, you've continued to diversify your asset base and your customer base with your recent acquisitions. Do you have a targeted asset mix in mind or a customer mix in mind that you would like to achieve in terms of your percent of revenues coming from tankers versus non crude oil shipping sectors?

No, not any particular mix that way, but of course when we look at new projects, of course, we look at the risk reward in the different sectors during the cycles. And of course we see that it's easier to find and attract a project in certain sectors than in others. Of course, we try to avoid the sectors that are most, where you have most inflated values. But of course, we're looking at the risk/reward in each transaction we're evaluating.

Right, fantastic. And then final question, you mentioned in your release that you're negotiating a $220 million increase to your main debt facility. What are your thoughts on your targeted leverage levels? I mean do you have a targeted net debt to cap that you would like to stay under? Or whenever you're looking at incremental projects, is it more of a project by project basis that you're making your financing decisions on?

Of course, today, depending on how you look at our leverage, it's important -- of course there is a tremendous increase in the market values of the vessels that we have on charter to Frontline. Of course, this makes -- the debt has substantially reduced the risks in those transactions. And of course making it comfortable to have a slightly higher leverage, but still the leverage is very, very low on those vessels compared to the market value. We are only now increasing it again to the original level, which is -- and this will be a facility that we have available. You know, compared to market values, we are in the low 30s today in leverage. So it's very, very low leverage on those vessels.

Mr. Fisher, Goldman Sachs.

Hi, the first question is just a piggyback on the last question that was asked about the new revolvers. So you said that you're increasing the level of debt from the revolver to help fund the equity portion of new projects. So you're basically using debt to fund the equity portion so now those projects will just be more heavily debt financed. Is that the right way to look at it?

Yes, you can say that we are leveraging on some of the old vessels in order to fund the equity portion of the new projects; that is correct. You have to bear in mind that we also have five vessels that is totally debt free that have not been leveraged at all.

Which ones are those?

They are the Sea Alfa and the Sea Beta, you know, the two container vessels (multiple speakers). It's 3 Suezmaxes, single hull vessels. So that is a vessel with a market value of about $170 million or something in that --.

Are those new Suezmaxes or--?

No, it's single hull Suezmaxes built --

Oh, the three single hull Suezmaxes?

Yes, three single hull Suezmaxes and two container vessels; they are debt free.

And you said the single hull Suezmaxes were worth $70 million?

No, no. I said in total, those were worth about $170 million.

Okay -- I thought you were talking about a single Suezmax, 170 (multiple speakers). That's a great ship. Now, that's fine.

Then the second question that I had was about the rig-related debt and the Golden Ocean-related debt. In the press release you talk about the guarantee that Ship Finance gives to that debt, i.e., Ship Finance guarantees 10 million of the 165 million rig debt. But is that rig debt in the event that just, hypothetically, the event that things are liquidated? Is that debt recoursed to Ship Finance, because of the wholly-owned (multiple speakers)?

No, that's what it means, is that of the $165 million in debt, we only have guaranteed $10 million. And of the $22.7 million that we then finance on the Rainshadow, the bulk carrier, we are only guaranteed $2.1 million. The rest is totally nonrecourse.

Okay, but the debt related to the rest of the vessels, i.e., the rest of the debt that is consolidated in Ship Finance's balance sheet, is guaranteed 100%?

No, not the Horizon transaction of $210 million is totally nonrecourse. So as you can see the original debt, but of course, that was recoursed to Ship Finance. And that of course is very low risk transaction today because of the substantial increase in the ship values. So the new debt we have taken up now is either nonrecourse or has only very limited recourse except for the Front Tobago, the 25 million, that is guaranteed because that was a more corporate facility.

Okay. And then have you had to increase the cash on hand in the reserve funded Ship Finance as you grow the fleet? Because as you've acquired I guess the container vessels and then on the Golden Ocean vessel and the rig, of the original cash that had to be set aside as guaranteed for the charter payments, I guess --?

You see that these new assets are not to Frontline. The two container vessels are to unrelated third parties. And so there, we basically have different counterparties. And of course, the rig is the SeaDrill and the bulk carriers will be to Golden Ocean. And both SeaDrill and Golden Ocean, for example, they are fully guaranteeing the charters. There is not only cash deposit for those charters. It's fully guaranteed by the counterparties.

Okay. And then the last question I had actually is somewhat related. Someone mentioned on this call earlier today that the rate that it saw for single hull Suezmaxes during the quarter was around $18,000 a day; at least that's what I thought I heard. I was wondering how did the charter payments work between Frontline and Ship Finance this quarter? Because that 18,000 is actually below the guaranteed Suezmax rate. Did Frontline just pay Ship Finance the guaranteed rate for those single hulls despite the fact that the rate recognized in the market for those single hulls is actually lower?

Of course, we have a fixed charter rate to Frontline on those and it only -- if it should come below that fixed charter rate, we only have implication on the profit share.

So basically, the differential between the 18,000 or so that the single hulls earned in the market and then the sort of 21,000 that Frontline was obligated to pay to Ship Finance, so that was taken out of the profit share that Ship Finance with recognize?

No, at the end -- we will only get payment under profit share at the end of the year. And of course then we will basically get 20% of any excess earnings above the agreed fixed charter rates.

Right, but I just wanted to clarify because this in my memory is the first time that the market rates recognized by some vessels have been below what the guaranteed base rates are for Frontline. So I was just wondering how that played out during the quarter? So you're saying that Frontline actually was okay taking a $3,000 day loss on those single hull Suezmaxes because it simply just sucked up the $18,000 rate and paid Ship Finance $21,000?

Of course, they were far above all the other vessels. So, it didn't really matter.

Okay, so they didn't really mind even though technically they were paying out more for those vessels than they earned, because just the averages are higher?

Yes, it is not in a direct implication on us.

Mr. Parker, [Antiferes].

I'm just wondering with the Front Sunda of action, does that impact the charter payments at all from Frontline?

No, it does not impact the charter payments to us.

And I understand they are thinking of doing conversion on that vessel and potentially other single hull vessels. Will those conversions -- how do you envision that working during the period they are being converted? Will there continue to be charter payments or will those be suspended during the conversions?

That has not been agreed so far. We have preliminary discussions, of course, about a conversion and that basically those discussions, it's more that, where we -- they then finance the conversion. You know, no agreement has been entered into.

No further questions. That was the last question.

Okay, then I want to say thank you for everyone for listening in. And then I think we end this [phone] conference. Bye-bye.