SFL Corporation Ltd (SFL) 2009 Q3 法說會逐字稿

Good day and welcome to the Ship Finance International Q3 2009 earnings release conference call.

Today's conference is being recorded.

At this time, I would like to turn the call over to your host today, Mr.

Ole Hjertaker.

Please go ahead, sir.

Thank you very much, and welcome, everyone, to Ship Finance International and the third-quarter conference call.

My name is Ole Hjertaker, and I am the CEO in Ship Finance Management.

And with me here today, I have Harald Gurvin, who is Senior Vice President, and Magnus Valeberg, who is the Vice President.

Turn to page 2.

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 or other securities of the Company.

Page 3.

The Board of Directors has declared a cash dividend of $0.30 per share.

This is in line with the previous three quarters.

This represents $1.20 on an annual basis or 9% dividend yield based on the closing price yesterday.

We have now declared dividends for 23 consecutive quarters and total dividend payouts of $10.78 per share on aggregate.

The adjusted net income for the quarter was $36.3 million or $0.47 per share.

This is excluding negative noncash mark-to-market of derivatives relating to our interest rate swaps.

The reported net income was $34 million or $0.44 per share.

We have a continued profit share contribution despite a weaker tanker market environment.

In the third quarter, the spot VLCC market, as reported by Clarkson's was $23,400 per day for modern VLCCs.

This is below the day average base rates we have from Frontline.

The reason why the profit share continues to be strong is that Frontline, as a combination of the trading and also subchartering of the vessels, have been able to generate returns in excess of the base rates.

Over the first nine quarters (sic) of the year, $27.3 million of profit share has accumulated, and the full profit share for the calendar year 2009 will be payable in March 2010.

Since 2004, the Company has generated on average $82.2 million per year or $1.05 per share in profit share contribution, and this has fueled continued growth in the Company and also built on the dividend capacity of the Company.

The expectations for the spot tanker market in the fourth quarter -- flip to page 4.

In July, Seadrill exercised the purchase option for West Ceres and simultaneously sold it to an unrelated third party.

The vessel was previously in so-called warm stack.

It was not employed on a contract.

But we earned the base rate -- fixed base rate from Seadrill all the way through that period based on our fixed bareboat rate agreement.

The sale transaction generated $40 million of net cash proceeds after repaying $95 million of associated debt.

There was no P&L effect in our accounts relating to that sale.

We have also continued to reduce the number of single-hull tankers in our fleet.

The Front Duchess was delivered to new owners in September, and the transaction generated $2.5 million of net cash proceeds after debt repayment.

Following adjustments to the single-hull values in the second quarter, this transaction did not have a material impact on our profit and loss statement.

On average, if we exclude one vessel that has been sold on bareboat higher purchase terms, the average book value of the remaining single-hull vessels are $13.8 million.

And several of these vessels are on continued charter to Frontline at a high rate well into 2010.

Page 5.

The first of the Suezmax tanker newbuildings have been delivered from the shipyard in China.

The net yard cost was $68 million after the compensation for delayed delivery by the shipyard.

The next vessel is scheduled for delivery in the first quarter of 2010.

In July 2008, we announced an agreement to sell the vessels, but we have subsequently agreed to change the deal into a five-year bareboat charter with very significant upfront payments and a purchase obligation in the end.

North China Shipping Holdings is a Hong Kong-based privately owned tanker and bulker operator.

For each of the vessels, we will receive an upfront payment of $44.5 million net, and the bareboat rate will be approximately $16,700 net per day.

At the end of the charter period, there is a purchase obligation of $40.7 million net.

There are annual purchase options first time after one year.

The net purchase option prices are $51.2 million after year one, $49 million after year two, $46.6 million after year three and $44.1 million after year four.

If you exclude upfront payments and the purchase obligation, the transaction represents a $61 million net increase in our charter backlog.

These vessels have so far been funded from our cash position, but we plan to finance these vessels with approximately $40 million to $42 million per vessel.

Page 6.

With respect to the dividend, shareholders can enact to receive this in stock instead, similar to the dividends in the previous three quarters.

This is a nondilutive way for existing shareholders to build up continuous buffer and also investment capacity in the Company.

So far, approximately 4 million shares have been issued in a nondilutive way for existing shareholders in 2009 at an average subscription price of $9.94 per share.

It has been a very nice performance for those shareholders who have elected this in each of these instances, and the return has been 57% to date for those investors.

Companies indirectly controlled by Mr.

John Fredriksen and his family will take stock also for the third-quarter dividend.

Page 7.

One of the very important features with Ship Finance is our long-term charter portfolio that gives us a transparent and secure cash flow.

Ship Finance is in a different league than most of the shipping and offshore companies, with close to 13 years' weighted-average charter coverage.

We have a very unique charter backlog, as you can see, and all our charter counterparts are performing.

We have as of September 30 $7.2 billion fixed-rate order backlog or $92 per share, and the EBITDA equivalent is $6.3 billion or $80 per share.

These numbers are before any profit share and on a fully diluted basis.

And it does not include any rechartering after the end of the current charter periods, and also, it does not include the charters for the two newbuilding Suezmax tankers.

Our charter backlog is 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.

And we think this will also be a very important feature for our Company when we will continue to build that going forward.

Page 8.

We generate a very significant cash flow per quarter.

This overview includes all 100%-owned vessels, including vessels classified as investment in associate based on US GAAP.

The EBITDA-equivalent cash flow before profit share was $179 million, and it was $184 million or $2.44 per share after profit share.

From the second to the third quarter, the main change has been the West Ceres that was sold and delivered in July 2009, with an EBITDA effect in the region of $4 million compared to if it had been included.

And also, we sold the Front Duchess, which had a contribution in the region of $500,000.

From the third quarter to the fourth quarter, there will be no contribution from the Front Duchess in the quarter.

And also, as we now have delivered the Front Vanadis, which was on purchase option exercise, there will be a slight reduction also in charter revenues from that vessel.

However, as the first newbuilding Suezmax, Glorycrown, was delivered to the charterer at the end of November, there will be a positive contribution from that vessel in the quarter.

We provide a full breakdown on our charter hire per vessel upon request to ir@shipfinance.no.

Page 9.

If you look at normalized contribution from our projects, and this includes vessels accounted for in investments in associate, the net interest in the quarter amounted to $45 million or $0.59 per share.

The ordinary debt installments from the Company's projects was approximately $105 million or $1.35 per share.

This means that the net contribution from our projects in the quarter was $34 million or $0.44 per share, which is similar -- which compares to a slightly higher net cash flow in the second quarter.

However, it compares also to the $0.30 dividend declared for the quarter, of which we know that a good portion will be paid in the form of newly issued shares instead of cash.

Page 10.

If you look at the profit and loss statement, we just want to highlight some lines in the statement here.

Due to our extreme charter backlog, we have different accounting treatment than most other shipping companies.

Most of our assets are classified as investments in finance lease.

And therefore, a very significant portion of the charter hire from those vessels are not recognized in the operating income of the Company.

Therefore, on this page, you can see at the top here in the mark area, and for the three months ended September 30, $40 million of charter revenues was excluded based on the Company's -- sorry, based on the vessels that are consolidated into the Company.

In addition, we want to highlight that due to accounting treatment, particularly for the three ultra-deepwater rigs, which are not fully consolidated into our accounts despite that we own them 100%, the effect on the profit and loss statements from these assets appear in the line called results in associate.

For the three months ended September 30, the contribution from those units were $18.25 million.

Page 11.

As a consequence of the accounting treatment for the ultra-deepwater rigs, they are not consolidated on our balance sheet.

Therefore, if you look under long-term assets, you will see a line called investment in associate.

That is effectively stockholders' equity in those subsidiaries that are accounted for as investment in associate.

We also want to highlight that with respect to the Company's stockholders' equity, there is $109.9 million of so-called deferred equity, which is being recognized over time.

This relates to the purchase of the tankers from Frontline five to six years ago, where the Company paid in excess of book value -- a price in excess of book value in Frontline at the time.

The Company was not allowed to recognize the full purchase price on the balance sheet, and therefore, this difference between what the Company paid and the book value in Frontline's accounts at the time is being amortized back to equity over time.

Page 12.

In the cash flow statement, we want to point your attention to the first item under investing activities.

This is where you will see the cash flow that has been excluded from the operating income of the Company and which forms a part of the Company's cash flow.

The three months ended September 30, this amounted to $39.6 million.

We also want to highlight another line under investing activities, which is called cash received and investments in associate.

This represents the net cash flow to or from the subsidiaries accounted for as investment in associate.

Page 13.

We do provide full accounts also for the subsidiaries classified as investment in associate.

On this slide, we have highlighted some numbers for the third quarter, but you can find the accounts for these with more details on our webpage.

All these subsidiaries have also lease accounting.

And therefore, as you can see at the upper bar there, a very significant portion, actually more than half the charter hire, is being excluded from the net income in those subsidiaries.

At the same time, the net income, that is the number that appears in our consolidated profit and loss statement under results in associate.

And correspondingly, with respect to the balance sheet in these subsidiaries, the stockholders' equity from these subsidiaries are effectively what is classified as investment in associate in our balance sheet on a consolidated basis.

Page 14.

We have $92.9 million of cash available as of September 30.

Our financing consists of $2.2 billion of consolidated interest-bearing debt in our consolidated books.

And this includes the bond loan.

In addition, there was $1.9 billion of bank loans in subsidiaries accounted for as investment in associate.

We don't have any refinancing needs in the near term, and we have full compliance with all the bank covenants.

If you look at our loan portfolio, we have a very significant -- very different structure than many other companies out there.

Most of the projects we have done over the last three years have been in subsidiaries with limited or no recourse to our balance sheet.

As an example, we have five container vessels to Horizon Lines, where we don't guarantee any of the bad debt obligation in those subsidiaries.

For the ultra-deepwater drilling rigs, we only guarantee $100 million of originally $700 million.

So out of the approximately $4 billion of aggregate financing in our Company, if we include investments in associate, we only have around $1.8 billion, which is against our balance sheet.

With our portfolio of long-term charters, our strategy is to hedge a very substantial portion of our interest exposure.

This we have done through swaps, through fixed interest and also through interest compensation through charters.

Currently, approximately 80% of our financing is effectively hedged.

If you look at our capital commitments, it is fairly limited compared to our Company size.

We had previously mentioned the two Suezmax newbuilding tankers, of which the first has been delivered to us already.

And the second is expected to be delivered in the first quarter 2010.

If you look at the other newbuildings, which represent $146 million of remaining investments, these are relating to feeder-size container vessels between 1700 and 2500 TEU, with delivery basically in 2011 and 2012.

We are evaluating options relating to these vessels, including potentially conversion to other vessel types for some of these newbuildings.

But we will, of course, report to the market if and when we make any changes.

Page 15.

As we mentioned earlier, we have a very significant cash flow backlog.

And this slide illustrates where most of that cash flow is coming from over the next five years.

As we can see illustrated here, the two largest counterparts we have in terms of EBITDA-equivalent cash flow are Seadrill and Frontline.

With respect to Seadrill, these charters are all with 100% the Seadrill Limited backing.

And all the ultra-deepwater units are subchartered to major oil companies at very attractive rates, and there is a frontloaded charter rate and loan repayment profile, which effectively takes down our exposure to those assets very, very quickly.

The Frontline charters are structured differently with a fairly conservative base rate, and where there is also a profit split above those base rates.

As I mentioned earlier, this has generated on average approximately $80 million of incremental cash flow per share per year since 2004.

Also supporting the Frontline charters are $216 million of charter reserves, which are sitting in the subsidiaries who charter in these vessels as a security for the payment of charter hire in case the market rates for those vessels should be lower than the base rate.

Since the Company's inception in January 2004, we have never, ever dipped into that charter reserve from the Company.

Page 16.

There has been 23 quarters of profit share for the Company.

And as the original charters were structured fairly low in the tanker cycle, this of course has generated very nice profit share contributions in the periods where the tanker market was strong.

The $82 million aggregate annual incremental cash flow has generated more than $450 million of cash flow for the Company over the last five and a half years, which has of course enabled the Company to fuel significant growth.

Because of Frontline's subcharter profile for many of the vessels, the average breakeven time charter levels for the spot VLCCs are closer to $10,000 for the vessels that we own.

In 2010, based on our estimates, we believe the average breakeven level for our vessels is in the region of $15,000 per day on average.

Page 17.

So therefore, when we sum up the quarter, we can report still a significant net income of $0.44 per share, or $0.47 per share if we adjust for noncash mark-to-market of derivatives.

This is including the third-quarter profit share of $4.8 million or $0.06 per share.

We have declared a new quarterly dividend of $0.30 per share, which represents a 9% dividend yield compared to the closing price yesterday.

And the shareholders may elect to take the dividend in stock if they like to.

We are continuing to reducing our single-hull exposure, and simultaneously we increase our double-hull vessels through the delivery of the two new Suezmax tankers.

And we will continue to look for transaction opportunities for the Company that may arise in this financing environment.

But of course, our main focus is and will always be the long-term interest for shareholders and building a stable foundation for dividend capacity going forward.

And with that, we open up for questions.

(Operator Instructions) John Parker, Jefferies.

Your administrative expenses came in a little higher than they have in the past.

Can you give us any indication if that will continue going forward, or were there some one-time items in your admin expenses?

There were some one-time items in the admin expenses.

There were some items relating to the previous Chief Executive Officer and the agreement he had with the Company.

He left the Company in July this year.

And there was also an adjustment made relating to the Company's bonus scheme where some options were canceled and then other options were reissued to management.

So I would, as a guiding, I would look more to previous quarters than this specific quarter for the G&A level.

Was the options expense, though, if we add back the share-based compensation, does that account for all the options expense, or was there some other expense in there beyond what is shown in your cash flow statements under share-based compensation?

If you don't have the answer right now, we could talk about that later.

Yes, yes.

The accounting for the options is a pretty complicated methodology based on US GAAP.

But there were some expenses relating to the termination of the old options and then the issuance of the new one.

Okay.

Now, on the Suezmax tankers, I just want to be clear.

When you show your CapEx schedule, that doesn't reflect the fact that you're getting the upfront payments of $40 million upon delivery to the bareboat charterer, right?

So really, your net CapEx will be less than what you are showing there.

Is that accurate?

That is accurate.

The CapEx schedule we are showing here represents the gross investments, what we are going to pay to the shipyard.

So any other transaction we may have with a charterer or financing that we may secure is, of course, netting off these numbers.

So that is also why I commented that the overall remaining capital expenditures for the Company remain fairly marginal compared to the Company size.

And I guess you can't really comment too much on your bank debt financing.

You indicated you're expecting to get $42 million per vessel of bank debt.

Maybe in a general way, you could comment on your Company's ability to access this type of bank debt.

It looks like, based on current charter free values on the ship, that would become about a 70% loan-to-value ratio, and I am wondering what types of things you might expect in terms of term and spread over a LIBOR or a LIBOR floor.

And maybe it is difficult, because I know you are probably in the middle of negotiations, but also expected timing -- you have already taken delivery of the ship, but it sounds like you have not yet secured the debt financing.

So anything you can give us for color on that would be very helpful.

Yes, yes.

First of all, we have not committed to financing for any of these vessels yet.

So, therefore, we cannot give you any specific terms.

What I can say on a general note is that we see that the banking market has become quite more active now than what we have seen previously.

I would say that in the first half of the year, the bank market was I'm sure quite challenging for many companies because the banks were almost preoccupied with their own issues and didn't really focus so much on new business.

My sense is that has changed a lot after the summer, and I am sure also linked to many of the banks' own capital-raising efforts, where they have created a more solid foundation and therefore makes it easier for them to be out in the market and do their business, which is lending money.

We have also seen that the average funding costs for the banks have come down dramatically if we compare to what we saw in February and March, when the funding costs for the banks were really high.

We are approached, I would say, very regularly from banks who wish to look at new business opportunities.

And I think what we believe will happen in the market now going forward is that there will, of course, continue to be banks that do business, but we believe that the banks will be more selective with their business counterparts.

And in a fairly small market, which I would characterize the shipping financing market compared to the overall financing market, it helps to be a relatively big player with a good balance sheet and also access to the capital markets.

We have a 13 years' charter coverage, which of course is very, very important for the banks when they look for the companies who they think will be there in the long term and who has backing for the assets through the cash flows.

So we are quite confident that we can easily secure financing for these assets.

We have not done so partly because we have a very good cash position, so it hasn't been a necessity for us to necessarily secure financing for those.

And I will not give a specific guiding, but I would expect to see something more maybe in the first quarter.

Okay, thank you.

That's helpful.

Now, can you explain in a very general sense, when you have a single-hull -- and I recognize that your single-hull exposure is going down all the time.

But the few remaining single-hulls you have, when it steps down on its 2010 anniversary date to a lower charter rate, as disclosed, at what point do you have -- is a decision made to scrap it?

Is that your decision, is that Frontline's decision, or is it a mutual decision that you would both make?

And what type of splitting of the scrapping proceeds would there be with Frontline in a scenario where you decide to scrap a ship or perhaps sell it?

The relationship with Frontline is very straightforward.

Frontline, they have a charter arrangement for those vessels where they charter in those vessels.

And as many -- as you know and I'm sure many of the others who are listening, too, know, we have a charter structure where we have still a fairly high average base rate for the suez -- for the single-hulls until the vessels' anniversary date in 2010.

And then from that date on, the base rate drops to $7500 per day, but then we pay $6500 per day in operating expenses.

So effectively, on a net basis, it drops to only $1000 per day, which is a very low level.

At the same time, from that specific date, for the respective vessels, Frontline also then have an option to terminate that charter early.

These charters run until basically 2014 and 2015 for the single-hulls, but they have an option to terminate early.

If they should terminate an option early, of course, they will hand the vessel back to us, and then it is all our decision what we want to do with it, whether we scrap it or whether we can trade it, or whether it can be converted for other use.

And of course, that will be all for our own benefit.

We don't have to share anything.

The only reason why we in the past have agreed with Frontline to pay them a compensation is that Frontline, because they have the long-term charter and if there is a value in that long-term charter over and above the base rate we have, there is a value in that charter arrangement.

And therefore, we have agreed to pay that -- to pay a part to Frontline when we have terminated charters.

With respect to the Front Duchess, that number was smaller partly because, of course, the sales price was lower than some of the single-hulls we sold two or three years ago, where we sold them for very, very high numbers.

So what I would -- and typically, when we make those calculations and when we make up our minds for when does it make sense to sell and when does it make sense to pay anything to Frontline, of course, we look at our alternative costs, which is of course that the charter with Frontline continues and that we in the end would trade the vessels or scrap the vessel at that time.

What we do know is that Frontline has subchartered two of the remaining single-hulls well into 2011, so at least two of those vessels will be on that charter for another year and a half or so.

But we have no indications for Frontline as to whether or not they will exercise their option to redeliver early.

I guess at the end of the day, if the ships are worth more to them than $1000 a day, they would maintain the charters and maintain some control over the ships.

And any repurposing of the vessel would be a negotiation with them.

And I guess if they are worth less than $1000 a day to Frontline, then they will terminate the charters.

I guess it remains to be seen what happens to the market for these ships.

Is that a fair way to look at it?

Yes, exactly.

It remains to be seen.

Of course, when you look at the equation from Frontline's side, they pay -- you can call it they pay the equivalent of $1000 per day on bareboat basis, but they have to pay the operating expenses and they have to maintain the vessel, because the charter arrangement we have the Frontline is that we charter them out as trading tanker vessels.

So they have to keep the vetting for them and keep them tradable.

So if they do continue to trade them well beyond 2010, that would indicate to us that there may be a market for those vessels also beyond the fixed charter term for Frontline.

But we also see that there is a very robust scrap market for these assets, and we have written them -- we have a fairly low book value base for the remaining single-hull tankers.

So for us also on an overall scale, they represent a very small proportion of our overall fleet.

In total, these vessels -- and this includes -- if we then also include one vessel which is sold on bareboat higher purchase terms where there is a purchase obligation in the end, and a vessel with double sides, the total book value of those are in the region of $100 million.

And that is, of course, compared to our total balance if we combine both the consolidated assets and the nonconsolidated assets, which is, of course, way, way over that.

Now, finally, I just want to ask you about the climate for new deals getting done right now.

I would imagine that a lot of your potential clients are looking for alternative means of financing, but on your end, perhaps your cost of capital will go up.

So it is difficult to offer as attractive terms to your clients as you could in the past.

And I'm wondering if you can in a general sense talk about what your pipeline is looking like compared to what it was looking like six months ago and what types of deals you can see getting done in this environment, where it makes economic sense for both you and your clients.

Well, you know, as a general observation, I think that as long as we have access to the financing market, and with a fairly substantial asset base and portfolio, we think that we have very good access to capital at very attractive rates.

That means that for most of our -- for the potential business counterparts [even] have access to at least as attractive price and structured financing as they would.

If you then combine that with investors' total return expectation for the equity, on a cost of capital, we should then normally always be competitive.

Of course, any deal we do now will be reflective of the financing environment.

And that is both the leverage -- call it the leverage opportunities in terms of how much leverage you can put on an asset, but also the financing costs relating to that leverage.

We do look, and we have been looking continuously at project opportunities, but we have not announced anything to the market yet, and we have in many ways been sitting a bit on the fence.

We believe there will be a lot of deal opportunities coming.

Those deal opportunities could stem -- it could stem from the bank market.

It could stem from shipyards, but also from good clients who maybe have capital commitments themselves and they need to look at how they can rearrange their balance sheets and where players like us could play a good role in -- call it providing that kind of structures.

So I think it is a good business environment.

We see the banks becoming more active, and these indications we get is that they are willing to do new deals in a bigger way now than earlier this year.

So we will continue to -- we monitor the market, and we -- but of course, we will not announce anything or comment anything until we do any new transactions.

Okay.

Well, thank you very much for your help.

(Operator Instructions).

Anders Rosenlund, ABG SC.

I apologize if you mentioned this, but could you repeat if you mentioned it or tell us why the contribution from offshore dropped by $10 million from Q2 to Q3, on slide number 8?

The main reason for that was that in the second quarter, the West Ceres was on full charter for the full period.

The West Ceres had a charter rate of $112,500 per day for the first three years of the lease period.

So around $10 million represents the charter hire for that vessel.

The vessel, if it had continued in our portfolio, the charter rate would have been reduced to $51,500 per day.

But it was agreed sold very early in the quarter, so that contributes to most of that difference.

Of course, the flipside of that is that we received $40 million of cash out of that transaction.

Okay.

And I have a second question.

And that is, if Ship Finance -- I'm sorry -- Frontline wants to cancel a single-hull vessel, how far ahead will they have to give you notification?

30 days' notice.

Okay, brilliant.

Thank you very much.

(Operator Instructions).

It appears we have no further questions at this time, sir.

Then I just want to thank everyone for listening in to the Ship Finance's third-quarter earnings release.

And we look forward to keep the contact with you in the future.

Thank you.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.