SFL Corporation Ltd (SFL) 2014 Q3 法說會逐字稿

Welcome to the Ship Finance International third-quarter 2014 earnings call. Today's conference is being recorded.

At this time I would like to turn the call over to your host for today, Mr. Ole B. Hjertaker. Please go ahead, sir.

Thank you very much and welcome, everyone, to Ship Finance International and our third-quarter conference call. With me here today I also have our CFO, Harald Gurvin.

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 has declared a $0.41 dividend, in line with the previous quarter. The dividend represents $1.64 per share on an annualized basis, or 9.8% dividend yield, based on closing price yesterday, and the Company has now paid in aggregate more than $18 per share since 2004.

Net income for the quarter was $35 million, or $0.37 per share, and aggregate charter revenues recorded in the quarter, including 100%-owned subsidiaries accounted for as investment in associate, was $168 million excluding cash paid, profits paid, and income on financial investments.

The tanker market improved during the third quarter and there was a positive cash contribution of $7.9 million on the Frontline vessels. Year-to-date, the accumulated cash sweep amounts to $21.4 million on these vessels, and with a firm charter market also in the fourth quarter, there are expectations for additional cash sweep for the year.

We also have exposure to the crude oil tanker market through our two modern Suezmax tankers operated in the pool with sister vessels owned by Frontline 2012. The average time charter equivalent for the third quarter was approximately $20,900 per day, which is up from the level seen in the second quarter.

With a strengthening tanker market in the fourth quarter, the average charter rate is expected to improve from the third-quarter levels, even when adjusted for amounts off-hired on Glorycrown, in connection with scheduled special survey, and a major upgrade to improve fuel economics and thereby increase earnings potential going forward. This is including modifications to the engine, propeller, and hull elements, and preliminary test results are promising. This vessel is now back in service.

The EBITDA equivalent cash flow in the third quarter was approximately $146 million and last 12 months the EBITDA equivalent has been approximately $519 million. In the third quarter, and including all the 100% owned assets, just over 50% of our charter revenues came from the offshore segment, around 30% from tankers, and the remaining 20% or so split between our drybulk and container assets. This includes cash sweep and profit split contribution.

We had full contribution from (inaudible) in the third quarter and we expect the liner segment's share to continue to increase after delivery of the two new 8,700 TEU vessels in September and November and expect the next two vessels to be delivered in January next year. And we still have significant capital available for new accretive investments.

We have also recently acquired two 82,000 deadweight tonne Kamsarmax bulk carriers in combination with long-term charters to a state-owned charter in China. The vessels were built in China in 2012 and the charter is for a period of approximately eight years. We took delivery of the vessels in the third quarter and we will have full cash flow effect from the fourth quarter this year.

So far we have funded the vessels from our cash position, but we expect to draw down on financing in the fourth quarter. The annual EBITDA contribution is estimated to approximately $7 million on average during the eight-year charter period.

Two of our four 8,700 TEU container vessels under construction in Korea were delivered to the Company at the end of September and in early November. The vessels have been delivered well ahead of the original schedule and immediately commenced their long-term time charters through the Hamburg-Sued container line. The remaining two vessels are scheduled to be delivered in January 2015.

There will be some off-hire relating to one of the vessels in the fourth quarter due to repairs following an incident during docking at a port in Asia. This is covered by insurance and the vessel is expected to be back in service in early December. The economic impact is limited to an estimated $600,000 to $1 million and offset by the earlier-than-scheduled delivery of the two first vessels.

The EBITDA contribution for the vessels is estimated at approximately $46 million per year on average during the charter period, giving us a very good return on invested capital.

We have also recently disposed of three 15-year-old VLCCs which were due for third special survey in the coming months. The vessels were delivered to the new owner in November and we have received cash proceeds of $77.5 million in aggregate, including a cash compensation from Frontline. In addition, we will also receive $48 million of amortizing notes from Frontline and following this sale we will have 12 VLCCs and 5 Suezmaxes remaining on charter to Frontline.

The backbone of our business remains our significant portfolio of long-term charters. Most of our vessels are chartered out on a long-term basis and we still have more than nine years weighted average charter coverage. Full details on a vessel-by-vessel basis is available by contacting us on email at ir@shipfinance.no.

We have $4.6 billion of fixed rate order backlog and the estimated EBITDA equivalent backlog is approximately $4 billion, or $43 dollars per share. These numbers include only the reduced base rates from the Frontline vessels and do not include the cash flows from the two Suezmax vessels operated in the spot market, nor do they include revenues from our other vessels after the end of their current charters.

We now have a total of 17 customers across our four market segments and, with the exception of the jack-up West Linus, we have not in any long-term charter deals with related companies for more than six years. As there have been a lot of focus on the drilling sector recently, in light of the reduction in oil price and the softening charter market for drilling rigs, I think it is worthwhile to take a quick look at our drilling assets and counterparties.

In 2008 we acquired three ultra-deepwater drilling assets from Seadrill at a cost price of more than $2.5 billion, of which $2.1 billion was financed in the bank market. These deals were all on the back of strong sub charters for the rigs and we structured it with front-heavy charter payments. We have now amortized more than 50% of the loans and Seadrill is currently enjoying significantly lower charter rates on the rigs compared to where we started.

When West Taurus comes off its initial six-year charter to Petrobras in February next year, the average bareboat charter rate is approximately $170,000 per day and two of the rigs still have sub charters of $500,000 to $650,000 per day for a long period. The charters that we have at Seadrill still continues for another nine years from today with purchase options at certain intervals. They have had some purchase options already which have not been exercised and the next option is for West Taurus in February 2015. Details of the purchase options are in the detailed charter backlog I mentioned previously and that can be obtained by us by contacting us on email.

Seadrill is listed both in New York and Oslo and has a market capitalization of more than $10 billion.

In February this year we took delivery of the harsh environment jack-up drilling rig West Linus to North Atlantic Drilling Limited and in May it commenced its five-year sub charter to ConocoPhillips at a rate of $377,000 per day. There is no termination rights for ConocoPhillips in that charter as long as North Atlantic drilling performs on the charter.

And as for the Seadrill charters, our charter rate is accelerated the first five years, enabling us to amortize the debt from $475 million to $237.5 million, or 50% over that five-year period. Thereafter, we will still have 10 years remaining charter to North Atlantic Drilling, but then at a significantly lower rate, giving North Atlantic Drilling a comfortable low breakeven rate including operating expenses.

North Atlantic Drilling has purchase options at certain intervals, first time in 2019, and they are also listed in New York with our market capitalization of $800 million. We also have a jack-up drilling rig on charter to the Indonesia-based drilling company, Apexindo. This is a standard 375-foot jack-up drilling rig built in 2007 in Singapore.

Our chartering counterparty is a Dutch subsidiary of Apexindo, but fully guaranteed by the parent, and the rig is operating in Indonesia where it has been working on sub charters to Total since it was new. We have more than three years remaining on that charter and the cash flow is very strong, with only limited financing attached.

Apexindo has a purchase option in February 2018 at $70 million, where we also are entitled to a 25% profit split if the market value is higher at the time. As an illustration, the market value for the rig was nearly $190 million at the end of the third quarter, so depending on the market development in the segment, there could be significant value in the profit split arrangement. And Apexindo is listed in Jakarta with a market cap of approximately $800 million.

Frontline continues to perform on its charter obligations, and as we have mentioned before, we have the interesting combination of very low financial leverage, well below current scrap levels, and significant leverage to the market through the cash sweep arrangement. We have amortized down the debt on these vessels very quickly and have reduced the loan amounts by more than 80% since 2008.

Even compared to reported scrap value levels, the financing leverage is very comfortable as illustrated by the red line in the graph. With this low leverage there's no net loan amortization required, and even with the scratch base rates for Frontline, there is a significant free cash flow from these vessels.

On top of that, if the average rate for the VLCCs in the fourth quarter should hit $25,000 per day, the aggregate cash sweep could be around $32 million for the year, increasing to approximately $38 million in a $30,000 VLCC market. This is assuming a 40% higher charter rate for the VLCCs than the Suezmaxes, but of course, the actual profit split from will depend on specific earnings for these vessels and we cannot give you a clear picture on that until we have seen the performance for the full fourth quarter.

The threshold for the cash sweep kicks in already at $17,675 per day for most of the VLCCs and $13,200 per day for the Suezmaxes and is capped at $6,500 per day per vessel.

We cannot comment on Frontline's financial position or their plans for refinancing the convertible loan due in April next year, but note that they report more than $100 million of free cash at the end of the third quarter and have raised equity and converted part of their convertible loan recently. They have also stated to the market that their target is to rebuild Frontline into being a leading tanker company, which is encouraging. But to put our exposure to Frontline in perspective, the aggregate EBITDA backlog from all the Frontline vessels combined is approximately the same as the EBITDA backlog from the single drilling rig West Linus.

If we then switch to our performance the last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associates, the EBITDA, which is defined as charter hire plus profit share less operating expenses and G&A, was nearly $520 million in the period. Net interest was $180 million, or approximately $1.26 per share, and our normalized ordinary debt installments relating to the Company's projects was around $215 million. This is excluding prepayments relating to sale of older assets and without net amortization of Frontline vessels, given the low leverage on those vessels, after significant prepayments of debt earlier.

Going forward, we expect a positive contribution from our recent acquisitions. And with that I will leave the word over to Mr. Harald Gurvin, our Chief Financial Officer, who will take us through the numbers for the third quarter.

Thank you, Ole. On this slide we are shown our pro forma illustration of cash flows for the third quarter compared to the second quarter. Please note that this is only a guideline to assess the Company's performance and is not in accordance with US GAAP.

For the third quarter, total charter revenues before profit split and cash sweep were $168 million, or $1.80 per share, up from $155 million in the previous quarter. Revenues from VLCCs were in line with the previous quarter, while revenues from Suezmaxes were up in the quarter due to improved earnings on the two Suezmax tankers trading in the spot market.

Revenues from drybulk were also up in the quarter, mainly due to delivery of the two Kamsarmax drybulk carriers on long-term charters to a state-owned Chinese operator in July and August, respectively. The increase in offshore revenues is due to West Linus earning full-day rates from May following commencement of the sub charter to ConocoPhillips, which had a full effect in the third quarter.

Vessel operating expenses in G&A were $32.4 million compared to $30.7 million in the previous quarter, mainly due to the addition of the two drybulk carriers. We recorded a cash sweep of $7.9 million from Frontline in the third quarter, up from $1.8 million in the second quarter, and also a profit share of approximately $100,000 relating to the four Handysize drybulk carriers, down from approximately $300,000 in the previous quarter. So overall this summarizes to an EBITDA of $146 million for the quarter, or $1.56 per share, compared to $179 million in the previous quarter.

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 booked 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 will also this quarter publish a separate webcast which explains the finance lease 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 $83.2 million, which includes $7.9 million in cash sweep from Frontline in the quarter. We recorded a gain of $5 million in the third quarter following settlement of a claim relating to four Handysize drybulk carriers redelivered to us before expiry of the charters. The total settlement is $30 million, of which $15 million was received in the first quarter, $5 million in the second quarter, $5 million in the third quarter, and remaining balance of $5 million is due in the fourth quarter 2014.

Total operating expenses were $49.6 million, giving us the operating income of $38.5 million. Results in associates for the quarter was $9 million, up from $8 million in the previous quarter, mainly due to West Linus earning full day rate for the third quarter. So overall and according to US GAAP, the Company reported net income of $34.6 million, or $0.37 per share, for the quarter.

Moving on to the balance sheet, we showed $32.6 million of consolidated cash at the end of the quarter. In addition, we had approximately $120 million freely available for drawdown on our revolving facilities. Available for sale securities of $62.3 million includes $39.4 million invested in short-term tradable securities as a short-term liquidity placement.

In addition, the second-year notes in (inaudible) lines are recorded are recorded under available-for-sale securities at only $22.9 million, or 40% of par value, including accrued interest. The $79 million amortized in Frontline notes are included in amount due from related parties on the current and long-term assets.

The remaining balance as for September 30 was $72 million, but the notes are conservatively recorded in our balance sheet at 72% of par value. The number does not include the $48 million in amortizing Frontline notes relating to the three vessels sold during the fourth quarter.

On the debt side, we had approximately $1.8 billion of consolidated interest-bearing debt outstanding at quarter end. In addition, our 100%-owned subsidiaries accounted for investment in associates had $1.4 billion in bank loans at quarter end, which is not included in the consolidated account.

Consolidated bank loans were $1.1 billion and, in addition, we had approximately $700 million of consolidated senior unsecured notes outstanding at quarter end. The figure includes the NOK900 million bonds maturing in 2019, of which $139 million was net outstanding, and the NOK600 million bonds maturing in 2017, of which $89 million was net outstanding. The figure also includes the $350 million convertible notes maturing in 2019 and $125 million convertible notes maturing in 2016.

Both our outstanding convertible notes can be repaid in shares at the Company's option at maturity.

Stockholders' equity was approximately $1.3 billion, including $103 million of deferred equity. The book equity ratio, including deferred equity, was 40.5% at the end of the quarter.

Then looking at our liquidity and remaining CapEx, as mentioned, the Company had total available liquidity of approximately $153 million at the end of the quarter, which includes $33 million in cash and approximately $120 million freely available on the revolving credit facility. We also had $62 million in available-for-sale security at quarter end, as previously described.

On the CapEx side, three of the four state-of-the-art 8,700 TEU container vessels were still under construction at quarter end. One of these vessels was delivered in November and immediately commenced its seven-year charter to Hamburg-Sued. The remaining two vessels are scheduled to be delivered in January and we have secured post-delivery financing for all vessels matching the seven-year charters and with a limited guarantee from Ship Finance.

The financing amount is higher than the remaining installments payable to the yard and the total net positive cash effect to Ship Finance upon delivery of these vessels will be around $38 million. We have also arranged a $39 million financing for the two Kamsarmax vessels acquired in the third quarter, which were funded from our cash position. The facility is expected to be drawn in the fourth quarter and matches the eight-year term of the charters and with a limited guarantee from Ship Finance.

We are comfortably in compliance with all financial covenants under our loan agreements a quarter end and we have very limited refinancing requirements over the next years. It is worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 43 quarters since the Company was established.

Given the financial turmoil and depressed shipping markets over the last years, this gives us a very strong standing in the banking market and we have recently secured new financings with both existing banks and new banks. We continue achieving excellent financing terms and have seen a significant reduction in loan margins over the last year, improving the cash flow from our projects.

Then to summarize, net income for the quarter was $34.6 million, or $0.37 per share, including $8 million in cash sweep and profit share. The aggregate EBITDA was $146 million, or $1.56 per share. The Board has declared a quarterly cash dividend of $0.41 per share for the quarter. This represents a dividend yield of 9.8% based on the closing share price as of November 30.

We have taken delivery of 14 vessels and rigs so far in 2014, all employed under long-term charters and supporting our long-term distribution capacity. We see investment opportunities in multiple segments and have the capital available for new investments.

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

(Operator Instructions) Marcelo Brisac, Armory Investments.

Good afternoon. Thank you very much for the call. I have just two questions.

The first one would be related to the dividend. It's been a couple of quarters that you've been paying dividends higher than your net profit. I know there's no cash problems with that because you do have some non-cash expenses. But is there any limit, like any statutory limit to how much do you think can pay, or you can continue doing that for a long time?

There are no statutory regulations on the dividends. Over the years -- and if you look at this in a 10-year perspective -- our dividend payout has been in the region of between 70% and 75%.

When the Board sets the dividend, the view -- the basis for the dividend is based on a long-term assessment of development of the Company and not necessarily linked to a specific percentage of the current quarter net income. Therefore, we have seen in the past quarters where we have earned a lot more than the dividend payout and, consequently, in quarters like this when the net earnings have been somewhat lower.

Of course, we are now in the process of taking delivery of some new big container ships which are generating significant contribution. So hopefully over time this will -- what can we say? We will be able to continue that -- the average that we have paid in the past. But as I said, there are no specific regulations on the percentage from quarter to quarter.

Okay, thank you. And the second one is really related to your customers. You give -- present very well the case here on who is renting the drilling rig from you and everything else, but could you just provide like what are your three largest clients and how much each one of them represents from your revenues?

My colleague Harald Gurvin can give you specific percentage of the revenue, but I would say the three largest clients we have is, number one, Seadrill; number two -- let me see here. We have Seadrill, we have Frontline as a big customer, and then we also have Globus, where we have five bulk vessels and two car carriers.

Seadrill is, of course, the biggest simply because we have the three ultra-deepwater rigs to them, but otherwise -- and also North Atlantic drilling, with the one jack-up drilling rig, is important for us because of the significant cash flow. But we have 17 clients in total and we have been focused on building our business by what you say expanding our customer base. If we go back to 2006, when I joined the Company, we basically had one client and we were exposed to one single segment.

So we think that over time the Company has demonstrated its ability to diversify both the asset base but also the charter counterparts.

Okay, thank you.

Fotis Giannakoulis, Morgan Stanley.

Hello and thank you. Ole, can you please give me your view of where are the opportunities in terms of acquisitions? And what I would ask more specifically is about opportunities in the crude tanker space, given the strengths that this market has been experiencing the last couple of months. You've been making quite good profit from the profit sharing, but at the same time your crude tanker exposure is shrinking and I can say for a good reason. Are there opportunities to start building up this part of your business?

Absolutely. We are looking at the investment opportunities across the board and, apologies, but of course we are being a bit generic. But it's difficult for us to comment on specific deal opportunities before we decide to go ahead and actually do a deal. But I could say right now we are looking at the deals, both in the tanker, bulker, container, and offshore space.

If you look at segments where you see, call it, more long-term charter deals, I would say that there is more -- we could see more of that in the container and car carrier business. And also I would say that in the offshore space we're also seeing more longer-term chartering opportunities where you see strong counterparts at the end where you have good visibility on cash flows.

With the change we have seen also in the market now where the bond market seems to have stopped up and typically sort of project bond market that was very active, particularly in Europe over the last two years, we think that there will be more opportunities coming in that segment. That was a segment that was mainly geared towards the offshore space, but also to a certain degree on sort of tankers and bulkers.

But I would say that generally there are several opportunities out there. We try to be relatively conservative with the deals we do. We focus -- we have a lot of focus on residual values.

We are careful with buying, what can we say, older type equipment and with older I would say anything built -- which is not, call it, ordered after 2011. Simply because you have seen a change in technology, typically engine technology, hull technology has changed somewhat, and therefore that, we think, will have an impact on residual values at the end of the charter periods. But apart from that we focus on the counterparts and if the deal makes good sense, hopefully, we can demonstrate our ability to go ahead and do that.

If I would ask you to rank the sectors in terms of deal flow, would it be correct to say that on the top it ranks container ships and car carriers followed by offshore and at the bottom drybulk and tankers?

I would say the same. And also of -- between drybulk and tankers, we see -- I would say generally we see maybe more chartering opportunities on the tanker side than the drybulk side. There is a lot of chartering on the dry side, but you have to be very careful with your chartering counterparties.

As we have seen, in downturns there are -- generally I would say there are more chartering defaults in the drybulk sector than there is in the other sectors, so that of course has an impact on how we view the different segments. And, of course, we have to be careful -- in all segments you have to be very careful with who our counterparty is.

But if you look at both the liner business and the offshore business, call it chartering out vessels to players here, then you are basically integrated in the logistics chain more so than on assets that go in what we say, so to speak, in the spot market. So you have a different, call it, market structure in those segments.

And without asking you to get into the Frontline restructurings and some potential repayments, can you remind us what is the profit-sharing agreement? If I am not mistaken, it runs for another year. Is there any discussion of potentially extending this profit-sharing agreement beyond 2015? And if you can remind us the terms of this agreement.

The profit-sharing agreement was basically put in place three years ago now, at the end of 2011. The basis for that deal was that we reduced the base rates at the time by $6,500 per day for all the vessels, all the VLCCs and Suezmaxes, with the agreement that if the market rate was actually higher than these new reduced levels, we will get the full benefit up to the old base rates. So this is the concept of the cash sweep.

And that agreement has run in 2012, 2013, and now in 2014 and there is one more year to go. In 2012 we got full contribution from the cash sweep. In 2013 we got basically zero because the market was very poor. But this year we have good prospects of getting a cash sweep, a good cash sweep contribution as we had accumulated more than $20 million already by the end of the third quarter and with a very firm market currently we hope that there will be more there.

There are no specific discussions on extending that specifically, but unfortunately, as I mentioned also, when I comment on Frontline, we cannot really comment on that relationship specifically other than saying that they are performing on their charter obligations. They have never missed a charter payment to us. And if we go back to the restructuring we took part in in 2011, they did that in a very proactive fashion where we effectively agreed on the restructuring well ahead of Frontline coming to what we call an anticipated default situation.

We note that Frontline has ambitions to rebuild themselves into a leading tanker operator and, of course, we look forward to that.

Maybe, if I'm not mistaken, there is also a profit share beyond the levels. So are you earning -- given the strength of the crude tanker market, are you earning above the level of all the fixed time charter right now?

No, there's no earnings beyond, call it, the fixed -- call it the old charter levels. The profit split -- and we have a 25% profit split over and above the original rates for those vessels as they were setback in 2004 and 2005, respectively. So there is a 25% split above that level, but Frontline prepaid $50 million of this in 2011 when we restructured them, so you would have to accumulate profit splits in excess of $50 million before there will be cash payments to us.

Therefore, in our communication to the market we have not indicated any expectations for getting any profit split over and above those levels. Of course, if that happened we would be thrilled. But I think realistically -- also because these vessels are not brand-new anymore -- I don't think we should give any indications that we have expectations for that to happen.

Thank you very much, Ole. That's very helpful. One last question about Seadrill.

I understand that there are some discussions about extending one of the contracts at the Seadrill level for West Polaris. Are there any thoughts of potentially exercising their purchase option? Even if you are not aware about any thoughts, in an event that something like that happened, what are you going to do with all the cash from the proceeds, assuming that Seadrill decides to exercise their option to buy back the assets?

So far on the deepwater drilling rigs, they've had multiple options to buy them. There have been two purchase options already on the West Polaris and two purchase options on West Hercules that have not been exercised. The next option is on West Taurus in February of 2015, and of course, as this is Seadrill's option, it is also their prerogative to exercise or not exercise it.

We have 15-year bareboat charters on these rigs, so if it's not exercised, the deal just continues as it should. And what happens if they are exercised? Well, it could be a phenomenal Christmas party in the Company or we would preferably reinvest the capital in new assets. Hopefully, accretive assets.

So I am not so concerned. Then it's really more a question of can we redeploy that capital in an effective manner.

Thank you, Ole. I might have to change my Christmas plans if that's exercised. Thank you.

(Operator Instructions) Ceki Medina, Southpaw Asset Management.

Good morning and afternoon, gentlemen. I was wondering if you could update us on Horizon Lines. There has been a transaction there. Can you please let us know, if the transaction closes, how much you would expect to get and any P&L impact, etc.?

Yes, you are correct. We hold some second lien notes in Horizon Lines. We received those notes in connection with the restructuring in Horizon Lines back in early 2012 and the face value of those notes were $40 million at that time. In addition, we also hold some warrants in Horizon Lines.

There has recently been announced a transaction or an agreement for a transaction where Matson and Pasha jointly will acquire Horizon Lines, or more precisely, Pasha will acquire the Hawaii assets and Matson will acquire the rest. Also, in combination with Horizon Lines, they are discontinuing the Costa Rica service. This potential transaction is depending on anti-trust approvals in the US, because, both for Pasha and Matson, they are all in these trade lanes already. So we do not anticipate or expect any resolution to that for quite some time, potentially later in 2015.

The notes we have have been accumulated on a payment-in-kind basis, so we have -- they have accumulated upwards. And I think at the quarter end the nominal value of those notes stood at $57 million. We have had -- we have conservatively recorded those notes in our books at 40% of face value and, therefore, at quarter end they stood at $22.8 million or $22.9 million, if I'm not mistaken, in our accounts.

Again, depending on the outcome of that deal, we could potentially record a book profit relating to that deal. But in any case, that would be a fourth-quarter 2014 or a later event.

And your warrants are exchangeable into 10% of the Company, is that not right?

Well, yes, we have -- it's 9.25 million warrants.

Got it, okay. Can you also update us, or let me know, with respect to the time with which -- at which Seadrill (technical difficulty) would update you if they wanted to buy those back, what is the lead time they would need to give to you for you to make preparations for better use of the cash?

You know -- this is Harald here. They have to exercise the options 60 days before the option date, so the next one is in 60 days.

Got it, thank you.

Henry Voskoboynik, Fore Research & Management.

Good morning. Thanks for taking my question. Just to follow up on the West Taurus. If Seadrill does not get a contract, or if the contract is not extended, can you walk me through the variable charter agreement and what happens to your day rate? Kind of just walk us through the scenario, please?

Absolutely. The West Taurus is coming off charter with Petrobras in February 2015 and at that time our charter rate, our bareboat charter rate will be $165,000 per day. But again, with the interest adjustments, the actual -- given the low interest rate levels currently, the actual charter payments will be lower than that. But let us just use the base rate, which was based on a 4.25% LIBOR as a basis. On average, the three rigs will then have $170,000 per day on average.

Both the Polaris and Hercules still are on very firm sub charters, and just to illustrate that, Hercules is on to Statoil until January 17 at $503,000 per day based on the latest update from Seadrill on their webpage. And the West Polaris, the drill ship, is on to Exxon Mobil until March 2018 at $655,000 per day. There is significant cash flow generated from those assets.

And you can even say, if you looked at these three assets isolated, you could see that, even if West Taurus was lying idle with full operating expenses, these three vessels would be probably cash-positive with a good margin isolated. But I think it is really too narrow to look at it just like that, because we have Seadrill Limited as our chartering counterparty and, therefore, Seadrill Limited is behind us with their full balance sheet.

So they are obliged to pay us this bareboat charter rate irrespective of their ability to keep that rig working or not in the market. What we have seen is that Seadrill has been very good at securing long-term charters for further drilling rigs. There is significant cash flows, forward cash flows for Seadrill so we are quite confident with their ability to perform on their charter obligations to us.

Got it. A follow-up question. We've seen Statoil cancel or try to get out of some of the contracts early recently and obviously paying penalties for it. Is there anything in your contract today, again with Seadrill or with the final counterparty, if Statoil were to get out of their contracts early, even paying penalties to Seadrill? Is there any clauses in your contract with Seadrill that might get impacted in terms of day rates and with the day rate going to base rate earlier if the final user of the rig were to end the contract early?

This is Harald. There's no requirement for any sub charterers in those contracts, which are held in high -- well, they're bareboat charterers so there will not be any impact for us so we still have continued paying the same rates.

Got it. Lastly, you mentioned the loan balance is less than 50% of the original financing amount to this stage on this three ultra-deepwater. Can you give us a little more data as to what exactly is the loan balance on these three vessels now?

Yes, I think we can go through that. On the West Polaris the outstanding, as per quarter end, was $360 million; on the West Taurus it was at quarter end $323 million; and on the west Hercules it was $291 million.

That, of course, after quarter end puts this amortizing down each month, so we are down from that level as we speak.

Got it, great. Thanks very much.

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

Okay. So then I would like to say -- to thank everyone for participating in our third-quarter conference call. And if you have any follow-up questions, there are contact details in the press release.

With that I would want to wish everybody a nice day and enjoy Thanksgiving on Thursday.

Thank you, sir. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.