SFL Corporation Ltd (SFL) 2012 Q2 法說會逐字稿

Good day and welcome to the presentation of Q2 2012 results conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Ole Hjertaker.

Please go ahead, sir.

Thank you and welcome, everyone, to Ship Finance International and our second-quarter conference call.

With me here today I also have the CFO, Harald Gurvin, and Senior Vice President, Magnus Valeberg.

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.

The Board of Directors has declared a cash dividend of $0.39 per share.

This represents $1.56 per share on an annualized basis, or nearly 10% dividend yield based on closing price yesterday.

We have now declared dividends for 34 consecutive quarters and paid out $13.75 per share, or nearly $1.1 billion in aggregate dividends, since 2004.

Net income for the quarter was $61 million or $0.77 per share.

Included in the results was a $21.2 million net book gain relating to the Horizon Lines' restructuring, so net of this book gain adjusted earnings were $40 million or $0.50 per share.

Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was $185 million.

This includes the $16.3 million of cash sweep from Frontline.

The EBITDA equivalent cash flow in the quarter was $151 million or $1.91 per share.

There was a full cash sweep the effect of 23 out of 28 Frontline vessels and nearly full cash sweep affect on five vessels.

The aggregate contribution was therefore $0.21 per share.

In addition, there was also an accumulation of profit share in the quarter.

The amount represented $600,000, or $0.01 per share approximately, but due to the $50 million prepayment of future profit share that Frontline made in December 2011, we will not recognize profit share revenues in the profit and loss statement until accumulated profit share is in excess of that amount.

With the profit share accumulated in this quarter the threshold is now reduced to $48 million.

As an illustration, the average profit split per quarter since 2004 has been more than $15 million per quarter or $0.19 per share.

We have recently sold the two older combination carriers.

One vessel, Front Rider, was announced sold in June and delivered to the new owners in July this year while another vessel, Front Climber, was announced sold last week and with delivery to new owners in September.

Aggregate sales price for the two vessels was approximately $19 million, including approximately $1 million compensation from Frontline.

Over the last five quarters the number of OBOs have been reduced from eight to three remaining, of which two are employed on long-term subcharters.

The book gain from the two transactions is estimated to $2.6 million in aggregate and will be recorded in the third quarter.

We have previously announced the sale of the two remaining non-double hull vessels in the fleet.

The delivery will now be earlier than previously announced with expected delivery in the fourth quarter for the first vessel and in the first quarter of 2013 for the last vessel.

Net cash effect from these sales is estimated at approximately $30 million in aggregate.

In April, we announced restructuring of the Horizon Lines chartering deal.

The vessels were built in Korea in 2006 and 2007 and had been on charter to Horizon Lines for five years, but the US flag service they were used in was discontinued.

As a US domestic [drawn] second container line they could not redeploy the vessels in the international markets without significant losses and the vessels had, therefore, been in layup for four to five months.

We received a termination compensation of $40 million of nominal value in second lien bonds plus warrants to subscribe for 9.25 million shares in the Company, or nearly 10% of the share capital.

The bonds have been recorded in our accounts at a conservative 40% of nominal value and the warrants have been recorded at approximately $0.13 per share, which is significantly below where the share is trading today.

Due to the limited liquidity in both the bonds and the shares in Horizon Lines, we believe this is a prudent approach and, hopefully, there is good upside to these figures.

Before layup the vessels had been dry docked at the stipulated expense of $800,000 to $1 million per vessel, and as part of the deal we took over fuel inventories, which had a value of approximately $4 million.

The breakeven level on the vessels after financing and operating expenses is approximately $10,500 per day the first 18 months and $14,500 per day the next 5.5 years.

The financing remains nonrecourse to Ship Finance and there is only a limited guarantee obligation relating to the charter rate level.

While the charter market currently is soft, this was also reflected in the compensation package from horizon lines.

We believe the market balance in the segment could create some interesting opportunities due to the age profile of our vessels on the water and very limited order book.

In July we announced the termination of four chartering agreements on Handysize dry bulk vessels chartered to the Chinese company, Hong Xiang Shipping.

Hong Xiang is part of a large privately owned Chinese conglomerate, Beijing Jianlong Group.

The group is active in many segments, including iron and steel production, shipbuilding, and electromechanical manufacturing.

We have a charter performance guarantee from the parent company in the group.

At the time of redelivery Hong Xiang had failed to pay charter hire for approximately three months, but as Hong Xiang had subchartered the vessels in the market, we managed to collect significant amounts in hire from these subcharters during that period.

At the end of the second quarter approximately $4 million was recorded in trade receivables relating to these vessels, but a part of this has subsequently been recovered from the subcharters.

The original charter rate was $14,000 net to us, while the spot market is reported currently to be in the $7,000 to $8,000 range.

We do not want to be specific on the amounts claimed for overdue payments and future losses in order to not compromise the legal proceedings.

It is difficult to assess how long time the legal process will take and we don't expect to have it finalized until next year at the earliest.

The companies who had the vessels on subcharter from Hong Xiang have been very cooperative in this whole process and the vessels were immediately rechartered without idle time between the charters.

The Company's intention is to continue employing the for Handysize vessels in the short-term market until market rates recover.

We finalized the restructuring of the agreement with Frontline in 2011 and this is the second quarter we see the economic effect of this in our profit and loss statement.

Frontline paid a cash compensation of $106 million to us in December 2011, which was equivalent to nearly two years reduction in base rates.

We used these proceeds to prepay on bank financing and have, therefore, reduced breakeven rates for these vessels to the new reduced base rate.

While he had a net contribution per share of approximately $0.10 per share from these vessels before the restructuring, the cash rate, therefore, now represents the net contribution.

Based on historic charter rates provided by Clarksons, there have been very few quarters last 15 years where we wouldn't accumulate basically a full cash sweep.

If Frontline generates market revenues in line with the previous base rates, like in the second quarter, the cash sweep alone would give us a positive net effect in excess of $0.20 per share per quarter or double the previous net profit contribution from Frontline.

The spot market in the third quarter has been reported by brokers to be lower than the second quarter, but we will not make any predictions for the remainder of the year.

Frontline reports their numbers tomorrow and may be more specific on the guiding for the tanker market.

The cash sweep is based on two separate calculations, one for 23 vessels and another for five vessels.

The threshold levels for the five vessels is higher than for the 23 vessels and depending on the market, there may be a full cash sweep effect and profit split on top for 23 of the vessels but no contribution on the five vessels like we had in the first quarter.

It is worth noting that the cash sweep and the profit share is based on actual performance by the vessels in the period.

We still have a significant portfolio of long-term charters, which is the backbone of our business.

Most of our vessels are chartered out on a long-term basis and we still have close to 10 years' weighted average chartered coverage.

Full details on a vessels-by-vessel basis is available by contacting us on e-mail at IR@shipfinance.no.

We have $5.5 billion of fixed rate order backlog which is equivalent to approximately $69 per share.

The EBITDA backlog was approximately $4.4 billion, or $55 per share.

These numbers are after we excluded the Hong Xiang charters and include only the reduced base rate from the Frontline vessels.

Expectations for cash sweep, profit share, and rechartering after end of current charters are, therefore, not included.

Looking at the segments where this cash flow will be generated, we see that offshore is still the largest with 46%, or approximately $2.5 billion, while tankers where the Company started now represents approximately 34% of the backlog or nearly $1.9 billion.

It is worth noting that this is not only Frontline but also includes tankers chartered to other customers.

Hong Xiang represented approximately 2% of our charter backlog, so after the termination of those charters bulkers have now been reduced to 6% of the portfolio while containers stands at 14%.

We have a total of the 15 customers and more than 40% of the portfolio is with companies with a market cap in excess of $5 billion.

If we include all listed companies the percentage is 83%.

In addition, a majority of the backlog in the private segment is with companies with a public rating.

Of course, if we look at counter-party risk, it is worth noting that we own the assets and they all have an alternative market.

So the effective counter-party risk in theory should be limited to the excess charter hire, if any, above current market for the corresponding charter period.

The rest is effectively covered then by the steel.

If we look at the average weighted charter tender, as indicated on the right side, with more than 17% of the portfolio in excess of 10 years we only have 2% of our charter portfolio with less than five-year charters.

We invested significant amounts in the first half of 2011, but have been very cautious the last 12 months.

The main reason for this is that we have seen a downward pressure on asset prices driven by several factors, partly by the general uncertainty in the world economy which increased after December last year, but also we have seen dynamics, particularly linked to the asset financing in the shipping industry, where European banks have been very careful with their volumes to the industry, linked to a general downturn in the European markets.

At the same time, we have also seen significant deliveries of the newbuildings coming into the market in many segments driven by previous ordering of vessels.

And we have seen shipyards who have had significant order books in the past, having reduced the backlog on newbuildings, they have decided they have had to focus more on attractive new orders.

What we have seen is that over the last 10 years, because of what we could call a super cycle from 2002 to 2008 where we saw a significant buildup in shipbuilding capacity, these shipyards could basically build these vessels on their standard design and did not have to do much product development over this period.

So when we now see that there will be an increased focus on efficient vessel design this is, as we see it, more like a pent-up demand or sort of a pent-up technological development that should have taken place over the last 15 years but has really been concentrated now over the last few years.

So what we see is that the new contracts and the vessels you now can order at the shipyards have much more fuel efficient engines and, therefore, more economical to use.

This is general across the board in the industry.

But we have seen a significant impact, particularly on the container market, where the container vessels traditionally have been designed for high speed and focus on transit time and where the focus now has been more on reduced speed and more optimal use of the vessels also in a slow steam scenario.

When we ordered four container ship newbuildings in 2011 these were based on a newer design where we, at 30% of historical peak order price just the two years before we ordered the vessels, ordered these vessels at 30% lower price than previously done.

At the same time, these vessels are maybe up to 30% more fuel efficient for transportation capacity and can carry maybe 10% more cargo than the comparable vessels in the past.

Of course, this has a significant impact also on the asset value for secondhand values.

And while we expect that to normalize, we believe that there will be a continued value gap between the two vessel types, newbuildings and secondhand values, and we have been waiting for that to crystallized also in asset pricing.

At present we see that yards are effectively quoting prices which is essentially marginal production cost for these assets and also reflecting the current low steel price.

At the same time, we know that China and Korea are the marginal producers of shipping assets and there is inflation pressure, particularly on labor costs in China, that we believe will create the floor for the level they are willing to build vessels at.

At the same time here, we also see that banks who have been very careful in lending money they have been focusing their attention and their capacity to the bigger well-known names and the bigger well-known systems.

The same thing goes with who has got access to capital from export credit agencies who also focus on the bigger entities.

So the banks they really want to do business these days with companies who have a public profile and who have access to different pockets of money.

We believe, therefore, that we now see a very interesting time where the bigger companies, like Ship Finance, will have access to capital while others will not have the ability to do significant new projects.

So while we have been very careful over the last 12 months, we now see that the market begins to look more interesting from an asset price perspective.

Of course, what we focus on when we do new projects we focus on the combination of assets and charter coverage.

In this scenario and in this market environment we believe it could also be attractive to take on some more asset exposure, like we have done from time to time in the past, in order to position ourselves for a potential rebound in values and charter rates.

And, thereby, create even more value for shareholders than just looking in the charter rate together with the asset acquisition at the same time.

We will not make specific guiding on what we intend to invest and exactly when, because we need that flexibility, but what we can say is that we have been very careful over the last 12 months for a reason.

We believe asset values, particularly asset values on the newbuilding side, have corrected down to interesting levels.

Then it is more a question of timing and structuring the right deals for us before we start to deploy capital for new projects again.

If we then switch to our performance the last 12 months, the normalized contribution from our projects, including vessels accounted for as investments in associates, the EBITDA was $638 million last 12 months.

This is equivalent to approximately $8 per share.

Net interest was $138 million, or approximately $1.74 per share, but more importantly were normalized ordinary debt installments relating to the Company's projects was $364 million, or more than $4.50 per share.

This is excluding the significant pre-payments relating to the Frontline vessels in 2011.

We had approximately $3.1 billion of net interest-bearing debt at the quarter end and we continue our schedules [steep] loan amortization.

The amortization represents around 8.5 years profile to zero and is compared to a weighted average age of the vessels of approximately five years.

The net contribution from our projects last 12 months after this aggressive debt repayment profile was $166 million, or $2.10 per share, which again compares to the $1.46 in dividends declared for the corresponding period.

Over the last eight years aggregate net income has been nearly $21 per share while aggregate dividends declared have been $13.75 per share, illustrating the relative conservative profile of the Company.

With that I will I will leave the word over to Mr. Harald Gurvin, our Chief Financial Officer, who will take us through the numbers for the second quarter.

Thank you, Ole.

On this slide we are shown a pro forma illustration of cash flows for second quarter compared to the first quarter of 2012.

Please note that this is only a guideline to assess the Company's performance and is not in accordance with US GAAP.

For the second quarter of 2012 total charter revenues were $168.9 million, or $2.13 per share, compared to $172.8 million, or $2.18 per share, in the first quarter of 2012.

On the VLCCs, Suezmaxes, and chemical tankers revenues were in line with the previous quarter.

The container vessels achieved revenues of $17 million in the second quarter compared to $21.3 million in the previous quarter.

The reduction is due to the termination of the Horizon Lines charters in April 2010.

However, it should be noted that we, on average, receive charter hire until mid-May 2012 as Horizon Lines paid charter hire up front on a quarterly basis.

The dry bulk vessels achieved revenues of $17.6 million in the second quarter compared to $16.9 million in the previous quarter.

Revenues for the second quarter includes charter hire from the four Hong Xiang vessels.

Following the cancellation of these charters in July 2012, we expect revenues from dry bulk vessels to decrease slightly going forward.

Also due to the recent sales of two additional OBOs.

On the offshore side charter hire came in at $92.3 million, in line with the previous quarter.

We also generated a cash sweep from Frontline of $16.3 million in the second quarter, up from $13.6 million in the first quarter, which reflects the full cash sweep on most of the vessels.

A profit share of $0.6 million also accumulated in the second quarter, but as this is netted against the $50 million of profit share prepaid by Frontline the number is not included in the table above.

The vessel operating expenses showed a slight increase compared to the first quarter.

This is due to the five Horizon vessels coming off bareboat charters and thus incurring OpEx and also a full quarter of operations for the four dry bulk vessels delivered during the first quarter.

So, overall, this summarizes to an EBITDA of $151.3 million for the quarter, or $1.91 per share.

We then move on to the profit and loss statement as reported under US GAAP.

As we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional shipping company.

As our business strategy focuses on long-term charter contracts a large part of our activities are classified as capital leasing.

As a result, a significant portion of our charter revenues are excluded from our book operating revenues and instead booked as revenues classified as repayment of investment in finance leases, results in associates and long-term investments, and interest income from associates.

If you wish to gain more understanding of our accounts, we also this quarter published a separate webcast which explains the financees accounting and investment in associates in more detail.

This webcast can be viewed on our website, ShipFinance.org.

Overall for the quarter we reported total operating revenues according to US GAAP of $84 million.

Charter revenues from operating leases were down approximately $3 million compared to the previous quarter, mainly due to the cancellation of the Horizon Line charters.

Charter revenues from finance leases was slightly down, mainly due to the scheduled reduction in charter rate for two of the OBOs as they reached their 20-year anniversary date early in the quarter.

As mentioned, the profit share of $0.6 million accumulated in the second quarter, which has been set off against the $50 million profit share prepaid by Frontline giving us zero net effect in the income statement.

Including the $1.4 million profit share agreement in the first quarter, another $48 million of profit share will have to accumulate before profit share revenues are recognized in our accounts.

The cash sweep income from Frontline was $16.3 million, up from $13.6 million in the first quarter, giving an aggregate cash sweep as per 30 June of $29.9 million.

We also booked a book gain of $21.7 million relating to the termination of the Horizon Line charters in the second quarter.

As compensation for the termination of the charters, we received second lien notes in the Horizon Alliance LLC with a face value of $40 million, which we conservatively had recorded at $16 million, or $0.40 to the $1.

We also received 9.25 million warrants exercisable into 10% of the common stock in the parent company, Horizon Alliance Inc., which we recorded at $1.7 million at the time they were issued.

It should be noted that to be conservative we are taking an impairment of $0.5 million at quarter end relating to these warrants bringing them down to 1.2 million in our books.

The remaining gain of $4 million relates to fuel and inventory on board the vessels at the time of delivery.

So overall and according to US GAAP, the Company reported net income of $61 million, or $0.77 per share, for the quarter.

Moving on o the balance sheet we show $101 million of cash at the end of the quarter.

In addition, we have invested $23 million in short-term tradable securities as the short-term liquidity replacement.

The second lien notes in Horizon Lines are also recorded under available for sale securities at $16.5 million, which includes accrued interest during the quarter.

The amount due from related parties includes the $29.9 million cash sweep accumulated during the first and second quarter.

The final cash sweep is calculated on an annual basis and payable in March the following year.

Other long-term assets include the Horizon Line warrants at $1.2 million following the $0.5 million impairment at the end of the quarter and the $50 million investment in the two CMA CGM container vessels since this transaction is structured as a loan and we are mortgage securing our investment.

Stockholders' equity stands at over $1 billion, including the $159.2 million of deferred equity.

The book equity ratio, including the deferred equity, was 34.4% at the end of the quarter.

Then looking at our liquidity and financing data.

As mentioned, the Company had cash of $101 million at the end of the quarter which excludes the $39.7 million in available for sale securities.

On the debt side we had approximately $3.2 billion of total long-term debt outstanding at the end of the quarter, for which $1.9 billion is consolidated long-term debt and approximately $1.3 billion is long-term debt in our subsidiaries accounted for as investment in associates.

This figure includes the unsecured note bonds maturing in 2014 of which $73 million is net outstanding, the $125 million of convertible bonds maturing in 2016, and the $274 million net outstanding of senior notes maturing in December 2013.

The convertible bonds can be repaid in shares in the Company's option at maturity.

We have arranged for long-term financing for all vessels under construction with the remaining total commitments of up to $198 million.

The leverage is in excess of 75% of the contract price for each vessel with maturities between 10 and 12 years from delivery.

We have limited refinancing needs the next four quarters.

On upcoming debt maturities the financing relating to the three ultra-deepwater units acquired from Seadrill in 2008 matured during the second half of 2013.

The financings were for an original total amount of $2.1 billion, but was structured with a very front-loaded repayment structure and we have already repaid over $800 million on these facilities alone.

And we continue to pay down significant amounts before maturity with an average balloon payment per rig of approximately $370 million.

It should also be noted that the rigs will have 10 years left on the charters at Seadrill at the time of maturity and are structured with put options and purchase obligation at the expiry of the charters taking away the residual risk.

While we have repaid the substantial amount of the debt, charter (inaudible) evaluations have increased over the last quarters based on the strong outlook for the offshore market.

The current financings are very attractive and we will address the refinancing in due course.

We have a proven track record in the banking market and are confident that the rigs can be refinanced on attractive terms.

The 8.5% senior notes mature in December 2013.

The original amount of the senior note was $580 million, but the current net outstanding is only 274, or less than half the original amount.

Our total unsecured debt now only stands at around 50% of total debt.

The senior notes can be called at par at any time and there is still more than a year left until maturity.

We will address this when the timing is right and, given the relatively small amount to be refinanced, we are confident that those senior notes can be refinanced at attractive terms.

The next slide provides more detail on our newbuilding program and the remaining payments to the yard.

Following the delivery of four dry bulk vessels in the first quarter of 2012 we have two remaining dry bulk vessels under construction with expected delivery in the fourth quarter of 2012 and first quarter of 2013, plus four container vessels scheduled for delivery in 2013.

The graph shows the committed financing in the blue bars compared to the remaining shipyard installments in the yellow bars.

We have already paid significant amounts in cash to the yards, while we chose not to utilize all available predelivery financing in order to reduce the interest expenses during the construction period.

This means we may have a positive cash to affect relating to the newbuilding program in the quarter when we fully utilize the available financings.

For the third and fourth quarters of 2012 we have total scheduled yard installments of $45 million while we may grow up to $42 million on committed financing, giving a net cash investment of approximately $3 million.

For 2013 the scheduled yard payment totaled $179 million where we can draw up to $156 million on related financing, resulting in a net cash investment of approximately $303 million in that year.

If you look at the period overall from now until the end of 2013, the overall net cash investment compared to the available financing is only $26 million.

We are in compliance with all financial covenants on our loan agreement.

Free cash was $101 million compared to the minimum requirement of $25 million.

Working capital was $219 million compared to the requirement of being positive and the book equity ratio was 34% compared to the minimum requirement of 20%.

And on the loan agreements, where we have minimum value covenants, we were fully in compliance at the end of the quarter.

It is worth noting that Ship Finance has been in compliance with all financial covenants for each of the 34 quarters since the Company was established.

Given the financial turmoil and depressed shipping markets over the last year, this gives us a very strong standing in the banking market.

Then to summarize for the second quarter of 2012 the Board has declared a quarterly cash dividend of $0.39 per share.

This represents a dividend yield of 9.9% based on yesterday's closing share price.

Net income for the quarter was $61 million, or $0.77 per share, and aggregate EBITDA was $151 million or $1.91 per share.

Our fleet renewal continues and six older vessels have been sold and seven newbuildings have been delivered over the last year.

The weighted average age of our fleet is only five years.

We are well positioned from continued selective growth with a strong balance sheet, diversified asset portfolio, and premium access to deal flow and capital.

With that I give the word back to the operator who will open the line for any questions.

(Operator Instructions) Justine Fisher, Goldman Sachs.

Good afternoon.

So the first question I have is on the charts that you had showing the valuation gap between the newbuilds and the secondhand vessels.

It is an interesting -- they are interesting charts to look at because you can definitely see the divergence in the market.

But the first question about those is the valuation gap could probably also be characterized as a pricing gap, and so why would you not buy the lower-priced secondhand vessels and instead buy the newbuilds?

I guess the reason maybe fuel saving, but I was wondering if there was any other reason.

Well, you have a combination of fuel savings, which of course contributes part to the value gap but also access to financing.

What we see is that typically in softer markets, basically in all industries, you have export, the credit agency type support on financing, which gives you, in many ways, better access to financing than for, say, a one-off dry bulk carrier that is five, six, seven, years old.

The banks who may look at financing that will probably give you a lower advance rate and it may even also be more expensive from a cost of capital perspective.

So I think it is a combination of two things.

It is both improved efficiency, which commands a difference in price, but also cost of capital is different and, therefore, you should see a bigger prize gap between newbuildings and secondhand vessels.

From our side, we look at relative value.

So we look at modern assets only, but we would be happy to buy secondhand vessels if the pricing is right and if the relative pricing is right also compared to booking a new building with delivery, say, two years from now.

Are you able to get, or do you think that you would if you had -- for vessels coming online would you be able to get better market time charter rates for a newbuild as opposed to, let's say, a three- to four-year-old vessel?

Obviously for a 10-year-old vessel there probably is going to be a difference.

But is the charter rate diverging for new versus, let's say, five-year-old vessels as the values are diverging?

Well, you have to adjust for the fuel efficiency.

So, say, if a VLCC can burn, can offer 10 tons less per day in fuel for a newbuilding that will, of course, be reflected in the charter rate you are able to command.

But apart from that as long as the vessel is modern and is otherwise in good shape, you can find charters also for secondhand vessels.

But from our side, of course, what we look at is a combination of the price we pay for it, the charter rate we think we can get over the life of the vessel, and also the residual value at the end of the charter.

Right now in some segments, if you look at for big dry bulk vessels, where market rates are currently are below operating expense level, at least according to some brokers, you can say that there is actually a negative carry in owning the vessels for the near term.

And, therefore, a delivery two years from now can actually be a benefit if you believe that you will have very low revenues on the vessel.

(multiple speakers) an impact on the value.

So that is another reason that you would buy a newbuild as opposed to a secondhand vessel, because it is actually a good thing if you don't have it now.

But if you can buy it at a cheap price and started operating two years from now then you don't have the negative carry in the interim.

Correct, unless the secondhand value price was attractive enough so we think still it is a good investment.

Okay.

Another question I had was just on Seadrill options.

Can you refresh our memory as to whether and then when Seadrill has put options, or I guess call options to purchase some of the offshore vessels that you operate for them?

Or that you lease to them.

The next options Seadrill has to purchase a deepwater drilling rig is in October 2014 for the West Polaris.

They had opportunity to pull that or purchase that rig, but they had to call that two weeks ago and they haven't done that.

So next call option is in October 2014.

Then we have one rig, West Hercules, which they have a call option in November 2014, and then West Taurus in February 2015.

Then they have purchase options, say, with on average two-year intervals from those purchase option dates.

We are happy to send the exact schedule to you.

It was also disclosed -- actually in the 2009 20-F on page 84 and 85 there is a detailed breakdown on a rig by rig basis with both combination of the charter rates in the different periods and also the purchase option dates and the purchase option prices.

Okay, I will definitely go and look at that.

So is it, and maybe it is too early to say, but have you guys have any discussions with them about what they might do in 2014?

I mean if rig values are up they could purchase the rigs and then resell them if they wanted to.

I don't know if that is something that they would even want to do.

But have you guys had any discussions with them as to what they might choose to do with those options?

No, we have not discussed that specifically.

I mean, as it is their option, we wouldn't expect them to communicate that to us until it is time; until they decided to call.

But it is two years from now so many things may change [until then] and we cannot make any projections or estimates of what they may or may not do.

Okay.

These rigs have been on very high charter rates, but now as we have amortized down so much of the debt the charter rates also comes down based on the schedule.

So from Seadrill's perspective I am sure they also look at the very attractive net cash flow that is coming out from these rigs.

So they pay the bareboat charter hire to us.

Then, of course, you had to add on operating expenses but they have recently concluded charters on these rigs at levels way over that.

So there is also a nice cash flow contribution for that.

Okay.

Then the last question I have is on the bond maturity next year.

Can you talk about the various options that you guys are thinking of as far as replacing this bond?

You don't have to say, obviously, exactly what you are going to do, but are you considering secured financing to replace this bond, the Norwegian bond market, the US unsecured market?

And how do you view those various options for refinancing?

We have access to different, call it, sources of capital.

We have around $3.1 billion in the secured bank debt market.

We are presently in the European convertible bond market.

We have a Scandinavian bond outstanding and, of course, we also have the US market.

So I believe we have various access to financing.

We have a call option.

We can call the bond on 30 days notice at par, so we have a lot of flexibility.

We still have 15 to 16 months until the maturity of that bond.

And given the relative size, it is less than $300 million, I believe the size of our company and not least the strong support we have from our big shareholder, Mr. John Fredriksen, who owns 40% of the Company and his standing in the capital markets, I think we are quite comfortable with our ability to refinance that before or at maturity at an attractive rate.

But I cannot give you any guiding as to exactly when or how we will do that.

That we will do on what we will call an opportunistic basis, where we will look at our various options and choose the one we believe is the most attractive for the Company.

Wonderful.

Thanks for the time, I appreciate it.

Martin Korsvold, Pareto Securities.

Good afternoon.

I am just wondering if you could give us an update on the container spinoff you were talking about potentially in the last quarter report.

I don't see it mentioned in this quarter's report.

Yes, we mentioned the container segment in the last quarterly report as we saw that as a potentially interesting segment.

What we have done after that is that we have structured it so that we have the ability to spin it off if and when we believe timing is right and we believe it will benefit our shareholders in the long term.

Part of the reason for setting that up and making that -- setting up the structure is that we believe it could be interesting from a consolidation perspective.

We see several entities and structures in the container market, both the listed companies but also on the private side, and portfolios controlled by the banks where there could be potential for asset consolidation.

And having that ability to do that not only in, call it, Ship Finance as a parent company, but also on a segment specific set up for the containers we believe is a benefit.

So it is something we have.

We have it, you could say, structurally ready.

We can do it if and when we believe timing is right, but we want to do that in connection with a transaction or with a structure where we can illustrate and show the market that it will be accretive to Ship Finance's shareholders.

So we will get back to that when timing is right and we wish to do something specific.

Okay, thanks.

Second question on the covenants; good to see that you are in compliance with minimum value clauses.

I am wondering, given that, especially in dry bulk but I guess also in tankers, we have a situation where ship broker values are quite a bit above what the actual transaction value seems to be.

Could you give us an idea of how this might affect liquidity going forward if values on tankers and dry bulk were to come down to more sort of real levels?

Yes.

Of course it is difficult to guess what the market maybe in the future.

I think it is a good thing we don't have any value covenants relating to dry bulk vessels, so we don't have any issues there irrespective of where the market may go.

On the tanker side, we had already -- as of June 30 we have paid down the loans to a scrap value for the vessels.

So if we had to scrap all the vessels the scrap value we are in the ranging of $580 per lightweight ton.

As we are continuing to pay down the debt fairly quickly on those vessels, we are paying down more than $80 million per year just relating to the assets on charter to Frontline.

At year-end we will be down to low $500s in scrap exposure on the assets.

So what we can say is that if you look at the graph and the presentations on tanker values we saw an extreme peak of course in 2007, 2008 on asset values.

At that time we did not lever up the vessels so we had the relatively conservative financing at the time.

After that, of course, first values crash down 50% almost overnight in 2009.

We did not have any issues with minimum value clauses then.

And then we have seen also a significant drop in value over the last 12 months and we still haven't had any issues on the minimum value side.

So we are, of course, prudently following this closely and believe we have structures in place.

Not least the fact that we paid down so much on our financing means that even if values should slip downwards we can still maintain a nice buffer.

Okay, good.

Lastly from me, on the dividends you are paying $0.39 this quarter whereas your cash sweep from the tankers is $0.21.

The way the market looks now it doesn't look like there is going to be much cash sweep, at least in the second half of this year.

Do you feel confident that you will be able to maintain the $0.39 dividend going forward even without any cash sweep from (inaudible) in the second half?

Well, I think as a general observation the Board does not communicate future dividends, so the Board decides the dividends on a quarter-by-quarter basis.

Also, the Board when they set the dividend they do not look at immediate, necessarily the earnings in that specific quarter.

I think the Board has a more long-term approach when they look at the dividend levels, and there is no link in the report from the Board between the cash sweep from Frontline and the exact dividend payout.

So we cannot comment on future dividends and you could also say that we can -- nor can we predict what the tanker market will be over the next few quarters.

There is another prominent ship owner whose market observation is that the market may go up, go down, or remain stable.

And while that is amusing, I think it is equally important to -- it is more the uncertainty here that is interesting to observe.

Also that volatility in many ways is a friend because the cash sweep is based on the revenues for these vessels over the year.

What we have seen, both in the first quarter and the second quarter, is a buildup not only of cash sweep but also on the profits paid on top.

And that will effectively serve as a buffer if the market should be lower later in the year.

So we believe that there will be a cash sweep accumulating from a lower level than if you adjust for subcharters and the buffer that is built up than the actual cash sweep levels nominal on a vessel-by-vessel basis.

Okay, thank you.

Rasta Behrang, Jefferies.

Good afternoon, gentlemen.

If I am not mistaken, Seadrill guarantees a significant portion of debt related to your ultra-deepwater rigs.

Given that you are nearing refinancing of these term loans, I just wanted to make sure that the guarantees would be rolled over to new credit facilities?

By guarantees you mean Seadrill's guarantee on the charter?

I assume, if I am not mistaken, they also guarantee the debt related to these rigs, right?

No, no.

The structure there is that we have the vessels on bareboat charters to subsidiaries of Seadrill and then Seadrill is guaranteeing the performance of the bareboat charters until the end of the charter period.

So Seadrill does not guarantee specifically the bank financing, and they never have.

But what the banks, of course, look at when they see this, first of all, they look at the loan exposure that is due to be refinanced.

At maturity the loan exposure is around $360 million per rig or half of what the loan use was back in 2008.

At the same time, we see that market values charter fair market values for these rigs, if the banks were to have to take them as collateral, is basically almost the same as they were back in 2008.

So there is a huge difference between loan amount and charter fair values so leverage is relatively low.

Then you have 100% guarantee from Seadrill for the performance of the charters and the charters have 10 years maturity after the end of the financing period.

Then on top of that the banks also look at the guarantee that Ship Finance has contributed, which is around $80 million, I believe, for one rig.

Sorry, it is already reduced to $70 million for one of the rigs and it is $100 million per rig for the two others, so $270 million.

So the combination of this, we believe, makes a very interesting structure for the banks to look at.

And I believe, given what has happened over the last few years in this, call it, financial turmoils we have seen over the last four years, I believe we have demonstrated to the banks and to the market that we are able to manage our portfolio in a very prudent way.

We have no issues with the banks and we believe, at least that is what we hear from many of the banks, that we are a favored client.

Of course, we will have to wait and see until we actually finance these what the terms will be, but we are confident that the terms will be very attractive in the market.

And do you expect to refinance these current facilities in the third quarter or in the fourth quarter of this year?

We will not give a specific guiding on that.

The maturity is in the second half of 2013, so obviously we will do that ahead of that.

There is no call premium relating to the refinancing, so we can do that refinancing at par when we wish to.

At the same time we also have very attractive terms on the existing financing, so it is also attractive for us to keep that as long as possible.

But, of course, we will be prudent and conservative in terms of the timing for when we do this, as I think we have also demonstrated in the past when we have refinanced assets, and we believe that will be completed well before maturity of these loans.

Okay, great.

That is helpful.

That is all for me, thank you.

(Operator Instructions) Herman Hildan, RS Platou Markets.

Good afternoon, guys.

Just had a quick question, you discussed a lot about the Seadrill rigs, etc.

I believe you have about just short of $0.5 billion of equity or of cash tied up in those assets.

My question is if Seadrill were to, for example, call those options maybe a bit earlier and drop it down to an MLP would you get, call it, equal return figures on, for example, eco-designed newbuildings or other deals that you see in the market?

Just to get an idea of, I guess, where deals in the market are at the moment.

Well, all deals are different and the rigs we have at Seadrill have already been paid down.

We have paid down significant amounts of debt, so the exposure is very comfortable to the asset itself.

Of course, Seadrill is a very strong company and we are, of course, very happy to have that in our portfolio.

We also have been very happy to have the differentiation in our portfolio in a volatile, call it, traditional market for traditional shipping assets.

The offshore market has held up very firmly.

The purchase options they have are on specific dates and the next purchase option for the West Polaris, which is the first, is on October 11, 2014, so they do not have call options on a running basis.

So it would be very hypothetical to discuss what they want to do and not want to do.

I am sure they also have a lot of other assets that they could potentially look at, including in the MLP set up that they are discussing with the market.

But this is not something we are a party to.

We expect to have the cash flow from these assets at least for the next two years.

In the meantime, both we and Seadrill also is enjoying very significant cash flows from these assets.

So we assume that they believe that the current set up is attractive also for Seadrill.

Okay.

So let me kind of rephrase my question, Ole, slightly then.

If you look at, for example, eco-design container ships, you seen of the largest sizes you have bunker consumption, maybe 50, 60 tons lower than the old design.

At current bunker price that is $36,000, $40,000 a day, which is what the current time charter rate is.

Now, as you briefly also mentioned earlier, you see the funding market drying up.

And for those, call it, more private players without the access to financing the question is how much of this eco-efficiency do you believe that Ship Finance would be able to, call it, take advantage of and what kind that returns are you aiming at for our eco newbuilds if you were to do a back-to-back newbuilding with a charter?

Yes, Herman, apologies for not replying properly to your second part of your question.

We think that there are definitely very interesting investment opportunities for newbuildings also.

This is also something to do with when you time which transaction.

So, for instance, when we did the container ship transaction last year which we negotiated affectively back to back.

At the same time as we negotiated with the shipyard we negotiated the charter with Hamburg Sud.

Of course, at that time the container operator they also, of course, have a feeling for what asset prices are and what newbuilding prices are.

Therefore, that will, in a way, have an impact also on the charter rate they are willing to pay.

From time to time, like we did with two Suezmax tankers we ordered in 2006, we may also order vessels on our own account if we believe timing and pricing and terms are right.

And by doing that we may be able to capture more of the upside if we believe that there could be affirming -- that newbuilding prices could increase due to underlying factors, such as raw material, labor, or other factors.

By ordering such assets ourselves we may be able to capture more of the upside if at the time of chartering out the vessels there would either be a longer lead time or a higher price for the container line themselves.

So, generally, I would say that in terms of return on equity percentage wise you will definitely see a higher return for a newbuilding or for a new type asset set.

But when you look at returns you also have to look at the asset adjusted returns or risk-adjusted returns.

So from a risk-adjusted return we believe, of course, that the Seadrill rigs are very, very attractive now and sort of new projects, particularly if we look at more, call it, speculative positions, should command a significantly higher return.

We have done deals last year where we have seen equity returns well north of 20%.

Of course, what we try to do when we structure a transaction is to try to get as much as possible of the return for ourselves.

Also just as a last question, I mean obviously you have a pretty interesting position in the shipping markets with the banks drawing out or going out of the industry, or at least stop lending out, then you obviously have big CapEx programs ahead.

Do you see more interest from banks in terms of cooperating or coming in between as a buffer capital between shipping companies and the banks, given your experience in the industry?

That could be the case.

That is what we did effectively when we structured the two 13,800 TEU vessels to CMA CGM last year, which was affectively structured -- our capital we invested was structured as a security junior loan.

So it is something we definitely can do if the terms are right.

What we see on the banking side, I mean we work with around 30 banks and we have seen that over the years, over the cycles some banks succumb, some banks leave the market.

But we have a good core of a number of banks who have been there over the long run and who have seen down cycles before and managed well also through down cycles.

We also see some new banks who have not significant exposure to the market who are attracted to a segment where you have seen significant reduction in asset prices and where they now can effectively lend money to strong entities, to assets at almost historical low values, at least in recent history, at good margins.

So you can see also from the banks' perspective for those who are active or are willing to deploy capital this is also a phenomenal time to do much better risk-adjusted business than they did back in 2006, 2007, and into 2008.

So we also see some interest on that side.

But, generally, I would say what we see from the banks is that if you go back four or five years anyone with a shipping project could go to banks and get funding.

Now the banks are much more selective.

They focus on their core clients and, of course, they also focus on clients who have access to other pockets of money, be it equity, be it the bond market, be it the convertible market, or other pockets of money.

Because no bank wants to be called out as the lender of last resort as they say, the one who has to carry the burden if the client cannot pay off.

Okay, thank you very much.

Thank you.

(Operator Instructions) As there are currently no further questions in the queue I would like to turn the call back over to our speakers for any additional or closing remarks.

Thank you, everyone.

I would like to thank you for participating in our second-quarter conference call and wish everyone a nice day.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.