SFL Corporation Ltd (SFL) 2009 Q1 法說會逐字稿

Good day and welcome to the Ship Finance International Q1 2009 earnings release conference call.

Today's conference is being recorded.

At this time I would like to hand the conference over to Ole Hjertaker, Chief Financial Officer.

Please go ahead, sir.

Thank you and welcome everyone to the Ship Finance International first quarter conference call.

From the Company here, today, we have the Chairman, Mr.

Hans Petter Aas.

We have the Chief Executive Officer, Mr.

Lars Solbakken.

And my name is Ole Hjertaker and I'm the Chief Financial Officer.

Slide two of the presentation.

Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995.

Words such as, expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements.

These statements are based on our current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements.

Important factors that could cause actual results to differ include conditions in the shipping, offshore, and credit markets.

For further information, please refer to Ship Finance's reports and filings with the Securities and Exchange Commission.

Furthermore, this presentation does not constitute an offer to sell, or the solicitation of an offer to buy shares in the Company's securities.

Slide three.

Today, we will discuss the first quarter 2009 highlights, and we will also look into the financial results for the quarter.

Afterwards, we will open up for a question and answer session.

Slide four.

The Board of directors has declared a cash dividend of $0.30 per share this quarter.

This represents $1.20 per share on an annualized basis, or 12% dividend yield based on closing price yesterday.

We have now declared dividends for 21 consecutive quarters and more than $10 per share in total aggregate cash dividends.

Net income for the quarter of $50 million or $0.69 per share before $7.3 million of non-cash mark-to-market of swaps.

The reported net income after mark-to-market was $42.7 million or $0.59 per share.

Most of our interest rate swaps are now restructured to hedge accounting based on strict SEC guidelines.

This means a lower variance in mark-to-market than we would otherwise have with our significant interest swap portfolio.

We also had a very strong profit share contribution in the first quarter with $14.5 million or $0.20 per share contribution.

On average, since 2004, we have $88 million per year, or $1.20 per share in annual aggregate profit share contribution.

The expectations for the spot tanker market in the remainder of 2009 is expected to be lower than for the first quarter of 2009, based on ship broker estimates and based on forward rates as quoted by Imarex.

However, as Frontline had sub-chartered several vessels at high rates and the breakeven level -- makes the breakeven level for the vessels in the spot market lower than our base rates in our charters with Frontline.

And the base rates are currently on average approximately $26,000 for the VLCCs.

Slide five.

We have, during the first quarter, renegotiated delivery and payment terms for five feeder size container ships under construction in China.

These were previously scheduled to be delivered in 2010, and we have now agreed to up to 18 months delayed delivery.

This also means that more than $70 million of installments are pushed into 2011 and 2012, which is of course is very positive for the Company.

We have a very low remaining net CapEx after committed sales of two Suezmax tankers as we will comment on a little bit later in the presentation.

In the second quarter, we will have full effect from the new -- of the new ultra-deepwater drilling rigs as the second semi-submersible rig was on location in Brazil, and commenced the sub-charter to Petrobras from mid-February 2009.

We therefore now receive the full base charter hire.

This represents close to $100 million per quarter from these three ultra-deepwater rigs.

These rigs are all accounted for as investment in associate.

And therefore, only the net income from these wholly owned subsidiaries appears in our consolidated income statement.

We also want to inform our investors and analysts that our Chief Executive Officer Lars Solbakken has informed the Board that he wishes to relieve the Company to pursue other interests.

He will remain with the Company until the end of July, and our Chairman Mr.

Hans Petter Aas will take the position as interim chief executive officer in the management company, until a permanent replacement for Mr.

Solbakken is found.

Slide six.

With respect to the dividend for the quarter, shareholders can elect to receive this in stock instead similar to the dividend with respect to the fourth quarter.

Then 55% of shareholders elected to take the stock dividend and the effective subscription price was $5.68 per share.

2.1 million shares were issued in a non-dilutive way for existing shareholders, and it has been a very nice performance since that with 77% increase in share price compared to close yesterday.

Companies indirectly controlled by Mr.

John Fredriksen have informed us that they want to take the stock dividends also for the first quarter of 2009 dividend.

Slide seven.

We have a unique order backlog.

Companies with a large charter backlog typically have five to seven-year coverage.

Well, Ship Finance in a -- is in a different league with more than 13 years weighted average charter backlog.

We have $7.8 billion fixed rate order backlog and EBITDA equivalent is $6.8 billion or more than $90 per share.

These numbers are before any profit-sharing contribution, and on a fully diluted basis, net of the stock dividend in the first -- with respect to the fourth quarter of 2008.

Also, it does not include any re-chartering after the end of the current charters.

This charter backlog is, of course, very important also for our financing banks in the current economic climate where access to capital is not as easily available as in the previous few years.

Slide eight.

Ship Finance generates a very significant cash flow per quarter.

This overview, which is the operational performance includes all 100% owned vessels irrespective of accounting treatment.

And therefore also includes vessels classified as investment in associates.

The EBITDA equivalent cash flow before profit share for the quarter was $181 million, which is up 18% compared to the previous quarter.

$196 million or $2.69 per share was the EBITDA contribution after profit share.

The main difference from the fourth quarter of 2008 until the first quarter 2009 was that we now have full revenues for the two latest ultra-deepwater drilling units, West Hercules and West Taurus.

The increased rate on West Taurus commenced mid-February at a rate of approximately $320,000 per day.

If we look into the second quarter, we will then have full cash flow effect from all these rigs, and we therefore expect the fixed charter hire to increase further into the second quarter.

Slide nine.

If we look at normalized contribution from our projects, net interest in the quarter was $0.68 per share, and ordinary debt installments from the Company's projects was approximately $93 million or $1.28 per share.

This excludes $47 million of payments relating to adjustments under revolving credit facilities and related party loans.

The net contribution from our projects in the quarter will stand $53 million or $0.73 per share, which is slightly lower than the fourth quarter contribution of $0.82 per share.

But still significantly higher than the declared dividend of $0.30 per share.

Slide 10.

In the profit and loss statement, we want to highlight some items for you.

First of all, due to our very extensive charter backlog, most of our assets are accounted for as finance leases.

Therefore, the charter revenues are classified into repayment of investment in finance leases, which is not included in operating revenues and interest income and service income, which is included.

As we can see from the highlighted section at the top of the profit and loss statement here, we have illustrated the effect and -- the amounts that are not included in the operating revenues, which are $45.8 million only for the fully consolidated subsidiaries only.

You have a similar treatment also in those subsidiaries that are accounted for as investment in associates.

On the line below operating income, we have the results in associate.

This represents the contribution from three ultra-deepwater rigs and also a Panamax bulker.

This is effectively the net income from these subsidiaries, and we expect, as I mentioned earlier, that we will have full effect of the revenues from all three ultra-deepwater units in the second quarter after west -- after the second ultra-deepwater rig went under full charter hire in mid February.

Otherwise, we want to mention that the ship operating expenses are stable and slightly down from the previous -- from previous year.

And this is also a basis where we see the fruits of our deliberate avoidance of avoiding operating expense risk.

All the vessels to Frontline are operated at fixed rate operating expenses at $6,500 per day, which includes dry-docking.

And Frontline reported $12,000 per day average operating expenses for 2008.

The depreciation in the quarter was also stable compared to the fourth quarter.

Slide 11.

On the balance sheet, we want to point your attention to the line called investment in associate, which is effectively the investments in the ultra-deepwater rigs and the Panamax bulker classified as investment in associate.

And slide number 12, on the cash flow statement, we want to point your attention to the line under investing activities called repayment of investment in finance leases.

For assets that are accounted for as finance leases, this is the element of the cash charter hire that is deducted before we get to operating revenues on the income statement.

Also, further down under investing activities, we have a line called cash received from and invested in associates.

This is the net payment to and from these investments in associated.

And for the first quarter, we had net cash contribution from these subsidiaries up to the parent company of $12 million.

Slide 13.

This is an overview over the assets that are classified as investment in associate.

SFL West Polaris limited is the owner of one ultra-deepwater drill ship.

SFL Deepwater is the owner of two ultra-deepwater semi-submersible rigs and Frontshadowing is the owner of a Panamax bulker.

All these assets within their separate accounts are -- also have finance lease accounting.

And therefore, a significant portion of the charter hire are subtracted before you get to operating revenues also in these subsidiaries.

Approximately, 50% of the revenues are excluded from the operating revenues on that basis.

Also, we just want to highlight here for you that the net income, the aggregate net income from these subsidiaries of $20.5 million is the equivalent of the results in associate that appears on our consolidated income statement.

In the balance sheet, the aggregate consolidated stockholders' equity is approximately the amount that is classified as investment in associate in our consolidated balance sheets.

Slide 14.

We have a portfolio of loans consisting of approximately $2.6 billion, which is classified under -- on our balance sheet.

In addition, we have $2.1 billion of loan and subsidiaries that are accounted for as investment in associate.

We have demonstrated the ability to source capital in an otherwise difficult financing market for most companies.

And also with our portfolio long-term charters, our strategy has been to hedge a substantial portion of this through interest rate swaps, or through interest compensations with our charterers.

Currently, approximately 80% is effectively hedged.

We had $50 million of cash on our balance sheet as of the first quarter, and in addition to that, we had $54.3 million of restricted cash predominantly linked to our swap agreements.

In the year, we expect to receive additional cash from the sale of Suezmax new buildings, and also as we mentioned earlier, we have rescheduled cash payments to yard this year linked to the container newbuildings, which also adds to the net cash contribution for the year.

We are in full compliance with our bank covenants, and we have no near term refinancing needs.

Slide 15.

After the two drilling rigs have been delivered we have only a very marginal remaining investment program compared to our fleet size.

Net of the sale of two vessels, we estimate that there will actually be a positive cash contribution from vessel investments in 2009 and 2010.

Where the five container vessels previously scheduled in 2010, a significant portion of yard payments have been pushed into 2011 and 2012.

And we also expect parts of this to be funded by borrowings through banks for export credit solutions.

The exact delivery of vessels under construction is always uncertain and timing of the investments above may therefore be adjusted over time.

Slide 16.

Our two large counterparts are Seadrill and Frontline.

And we have a very robust charter backlog close to $800 million estimated for 2009, and we do provide full details on an asset by asset basis upon request to the e-mail address ir@shipfinance.no.

If you look at our two main counterparts, Seadrill charters which is the largest, is in the basis of a 100% guarantee from the ultimate parent, the listed Seadrill Limited.

All the ultra-deepwater units, which is the majority of this cash flow are sub-chartered to major oil companies such as the Petrobras, Husky Oil, and Exxon, sorry.

We also have a frontloaded charter rate structure and loan repayment profile, which reduces our financial exposure to these assets very quickly over time.

The Frontline charters have a slightly different structure.

These are based on the various conservative base rates, because this deal was structured before the market really took off in 2004.

The 20% profit split agreement we have relating to these assets have generated on average $88 million of aggregate incremental cash flow per year.

And there is also $260 million charter reserve, a security for charter payments in case the market should be lower than the base rate.

Slide 17.

As we mentioned, the profit share agreement for Frontline has generated a lot of additional cash flow for ship finance.

It has been $88 million on average for more than $400 million over the last five years.

This has enabled the Company to fuel significant growth and based on the market outlook, we expect there to be a profit share contribution also in 2009.

The breakeven level -- sorry, the base rate on -- for the VLCCs under our agreements with Frontline is approximately $26,000 per day.

But due to the extensive sub-chartering by Frontline, we anticipate that the average breakeven levels for this spot VLCCs is closer to $10,000 for the year 2009.

Slide 18.

Therefore, as a summary, we want to highlight that this has been a strong quarter from a cash earnings perspective fuelled by a substantial profit share contribution also this quarter.

We have increased fixed rate charter revenues in the quarter, and we expect a further increase in second quarter when all ultra-deepwater drilling rigs are on full charter rate.

We have successfully renegotiated delivery dated and payment schedule for five feeder size container newbuildings by up to 18 months and effectively postponing more than $70 million previously -- of installments previously scheduled in 2009 and 2010 until 2011 and 2012.

We will look for transactions opportunities that may arise in the financing environment we see currently.

And our main focus will always be the long-term interest of our shareholders.

And not the least, we continue our policy of paying a significant profit share -- I'm sorry, a significant dividend and we announced $0.30 per share effectively 12% dividend yield annualized this quarter.

And then we open up for questions.

(Operator Instructions).

We take the first question from Jon Chappell from JPMorgan.

Please go ahead.

Thank you.

Good afternoon.

Ole, on the sale of the two Suezmaxes for 4Q '09 and 1Q '10 I know that the purchasers put down $33 million, but I'm also aware that asset prices have probably been falling pretty significantly since that deal was arranged.

Have you spoken to the counterparty, and do they still plan on acquiring those assets, and if they do try to back out of it, what's the options for Ship Finance?

I'd imagine you probably keep the $33 million in down payments, would you look to sell those ships to someone else?

You just talked a little bit about how that's progressing?

Yes, I would say that we have a -- we have, of course, an ongoing dialog with the buyer there.

They have fulfilled all their legal obligations.

They paid in -- they've been paid in 15% of the purchase price as cash deposits.

The last 5% was paid in back in November when after the financial turmoils kicked in.

They have an active inspection team at the shipyard and they're actively participating in the construction of the vessels.

So we have no indications that they're not there to fulfill their obligation under the purchase contract.

Of course, if you talk about what are our options, we have not disclosed who the buyer is.

We cannot do that based on the agreement.

But there is a -- it is a buyer with substance; with other assets.

And as you pointed out they have deposited more than $16.5 million per vessel in cash deposit.

So if worst comes to worst, the net cost price for us would then be fairly attractive I would say.

Okay.

Sticking on the after price decline or likely asset price decline, you mentioned a couple of times you're in compliance with all your bank covenants.

When was the last time that you had asset values to remain in compliance?

Was that December 31st or is that March 31st?

For most of our asset, it was March 31st, but also some assets are only valued two times per year.

Okay.

That's good.

And then it seems like as long as these Suezmax sales go through, you'll be net cash positive from a investment versus sales perspective.

I know this is something the Board probably talks about every quarter, and then there's probably not much insight you can give, but the $0.30 dividend looks to be fairly or easily covered by contracts.

Would it be safe to assume that this is the type of run rate we should look at going forward as far as distributions are concerned?

We cannot commit to any future dividends, that is set -- that's the Board's discretion every quarter.

We do, of course, have a very substantial charter backlog and a fairly predictable cash flow as we see it.

So, of course, from the management perspective, we hope that we can continue to pay a distribution.

But again, we cannot make any specific commitments to what kind of amounts that would be.

All right.

I expected that, I just felt -- I need to ask one last question.

You mentioned you're looking at some projects still.

Can you talk about the potential to-do projects?

Have the asset values come down enough that the returns looked attractive, or do you think at this point in the cycle, you'd probably just want to stay a little bit conservative and then stay on the sidelines for a couple more quarters.

We have decided -- as you have seen, we have not announced any deals during the first quarter.

We -- I think it's fair to say that we think the timing is still not right to go in and invest heavily.

We think there will be very interesting opportunities coming up.

So we will continue to monitor the situation, and we hope to -- hope, of course, over time to demonstrate that we can do very nice accretive transactions for the shareholders.

Okay, thank you very much, Ole.

Thank you.

Next question comes from John Parker from Jefferies, please go ahead.

Hi, Jonathan beat me to most of my questions.

But I just want to confirm the Suezmax tankers are still expected the fourth quarter and the first quarter?

John, it's -- that's correct.

There's been no further delay that you're aware of.

That's the estimate we have today.

Okay.

And can you comment on the Montemor -- Montemar Europa status, I see you have it on your annual report as an operating lease expiring 2009, when does that expire and --

Okay, it expired and we have re-chartered it, but more on short-term charters.

Okay.

So that's renewed for another month now.

Okay.

And also if you look at your ATM filing, you could've filed it -- the market went way down, obviously, the equity markets, and then -- now they've come back -- come up to a level where you filed them in terms of the value of the stock.

And I'm just wondering, at what point would you think to take advantage of your option to raise more equity?

We don't have a specific strategy relating to that.

We did file the ATM program back in December.

As a -- more a link to the fact that we had to file a shelf statement at the time, because we lost our status with the SEC as a "WKSI" as they call it, Well Known Seasoned Issuer.

We think it's a very meaningful instrument to have in the toolbox.

And as we also stated in the press release, we -- to date, we have not sold any shares under the program.

It is, of course, a potential source of additional equity as is the subscription by investors for share dividend instead of cash dividend.

Okay.

Well, that's all I have, thank you very much for your help, bye-bye.

Thank you.

Next question comes from David Shapiro from BGB Securities, please go ahead.

Good morning gentlemen, I guess, good afternoon where you are.

On the financing, when you talked about perhaps looking at new projects or a little down the road looking for opportunities, maybe you can give me a sense of where the financing market is for shipping assets.

If you were going to let's say go out and buy a tanker or a bulker, and plan on putting that into the spot market, or maybe on a one-year, two-year term, how much financing could you get on that, on a LTV, a loan to value type basis?

I think that's a very difficult question to answer.

And the reason for that is that the financing is very project related.

It has to do with asset type, it has to do with who the counterparty is in terms of chartering, and also who you are in terms of the owning company.

So it is virtually impossible to give a guideline for a percentage leverage.

What we have done in our most recent deals, for instance, we did two ultra-deepwater drilling rigs last fall, we structured those in single-purpose subsidiaries.

We restructured $700 million of loans against $855 million of acquisition price, which is around 80% and -- but we only provided a part of that as guarantees from the parent company.

So of the $700 million debt there, we only guarantee a $100 million.

So -- and that's of course, also because those rigs had very strong charters in the first place, and then also sub-charters, again, which enhances the credit.

So it all depends on how you package the deal.

That said, the banking market, of course, is not as active asset as been in the past.

But the banks are still there.

They're still doing business.

But I would say they're more cautious now than they used to be, I would say, in looking at new projects than in the past.

I mean, take those projects you mentioned for instance, let's say we fast-forward to today and that same deal was available, is there any way you think you can get that type of leverage under that deal today, or do you think you'd be more at a 50% or 60% type LTV, just assuming the same deal, same sub-charters, what's your best guess?

Well, it's fair to say, we think the leverage would probably be lower, but it's impossible to give you a specific guidance for where that would be.

Okay.

Maybe if we can move onto some of your sub-charters.

With the rates sinking pretty dramatically at least on the tanker side, have you heard any grumblings from the sub-charters now that the customers at Frontline are leasing to -- that they're trying to get out of their contracts or pay a little bit of a termination fee and get out of any long-term charters, or -- you don't hear any of that in the industry and everybody is really making good on their tanker commitments?

I would say that if we look at the 39 vessels we have chartered to Frontline, we have not heard that there've been any material renegotiations on that basis.

Of course, they do -- as in an ordinary course of business, they do negotiate with their counterparts and they change and they do different things.

And of course, from our side, we have a fixed base rate, which is strong, and if they should do any changes, of course, most of the effective cost of that will be absorbed then by Frontline as we only have 20% of the upside, whereas Frontline has 80% of the upside, over and above the base rate.

But I would say -- and in the normal course of business, you -- I'm sure for a company like Frontline with a very significant fleet operating in the market, there will be discussions and negotiations with the counterparts in all market cycles.

I think it's fair to say that there's been much less of that in the tanker market than we would have in the dry-dock market.

Okay.

Okay.

So there's -- there hasn't been a lot of key faults or hardball negotiations going on?

Not in the tanker market.

Okay.

(Off mike) basically.

Okay.

And then on the $216 million reserve, did you guys borrow against that reserve.

I recall seeing something, I think, in the 20-F filing, that there may've been a borrowing against that reserve post quarter end?

Yes, what we did was that we restructured the reserve relating to five single hull VLCCs, and by doing that we effectively borrowed the money directly from Frontline, or that Frontline subsidiary who is our charterer.

And we did that against reducing leverage to the banks to ensure that we have more buffer on asset values.

But apart from that the charter reserve remains fully in place, and if -- all the -- these assets are all chartered out by Frontline to sub-charterers at a level significantly above the base rate.

But if there should be a need to dip into that, it will -- the reserve will be adjusted accordingly.

So from the reserve perspective, there is no change.

That is only $26 million of the $216 million.

Right.

The -- so the rest remains as cash deposits.

Okay.

And when you take a look at the question raised earlier about raising equity, you have a business that's long-term leased much akin to real estate or a long operating type lease business.

Given where the debt is and your cost of capital or your implied cost of capital in the market, is the market sending you a message that maybe you'd be rewarded for raising equity?

I know a lot of other firms that have raised equity lately to de-leverage themselves a bit have actually been rewarded on their share price, is that something you guys are considering?

Well, we have noted that for some companies who had a very significant gap in their financing plan, they're -- they've had a very nice performance as to raising equity to effectively demonstrate to the market that that is reached.

I think we are -- we have a lot of assets and our assets are essentially all financed.

So we, of course, monitor the market, we saw our share price fall significantly during the first quarter, and then of course came up again as you have noted.

But right now, we -- I would say that if we look at projects of course and we discuss how those should be potentially be financed, but so far we have not announced any transactions.

Okay, thank you gentlemen.

Okay, bye-bye.

(Operator Instructions).

We'll take the next question from C.J.

Baldoni from Evergreen Investments.

Hi.

Thanks.

Hello.

When I look at your statement cash flows, the footnote about the $49 million, is that tied to what you were just talking about about the charter reserve restructuring?

Yes, but it's -- it is actually -- if you look it on a website, there was an error in the footnote, so that is actually not accurate.

It is all included under financing activities, under proceeds from and repayments of debt.

Okay.

And you talked a little bit about the covenants and what not, but is it possible to tell us what kind of cushion you have under the covenants from the last valuation date?

We have a very substantial debt portfolio and -- with more than -- I think we have 29 banks.

So of course, that differs from loan to loan facility --

But --

But in most examples, we -- if you take the largest facilities, for example, the tanker facility of course, we had a very low debt, because this was financed back in 2005 when the values were much lower.

And then of course, we have had very, very large buffers there.

We did basically financing last summer below 30%.

We still have a reasonable -- even we -- if we -- values have come down, you still have quite large buffers.

Okay.

Great, thank you.

(Operator Instructions).

As there are no further questions, I'd like to hand the call back over to you for any additional closing remarks.

Thank you very much, and thank you for participating at the Ship Finance International first quarter conference call.

And we hope that you will stay with us and continue your support.

We will, of course, do our part to ensure that this Company's developed in the best fashion as it can and that we will bring you some additional accretive deals over time when we believe timing is right.

Thank you.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen, you may now disconnect.