SFL Corporation Ltd (SFL) 2016 Q3 法說會逐字稿

Good day and welcome to the Q3 2016 Ship Finance International, Limited earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ole Hjertake. Please go ahead.

Thank you and welcome all to Ship Finance International and our third quarter conference call. With me here today I have our CFO, Harald Gurvin, and our Senior Vice President, Andre Reppen.

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 quarterly dividend of $0.45 per share. This dividend represents $1.80 per share on an annualized basis or nearly 13% dividend yield based on closing price of $13.90 yesterday. This is the 51st consecutive dividend and we have now paid dearly 22 dividends per share over time, or $1.8 billion in aggregate since 2004.

Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries, accounted for as investment in associate, was $149 million, and the EBITDA equivalent cash flow in the third quarter was approximately $115 million. Last 12 months, the EBITDA equivalent has been $524 million, and the reported net income for the quarter was $32 million or $0.35 per share.

In September 2016, we announced the issuance of a $225 million senior unsecured convertible note due 2021 in the US market. Most of the proceeds were used to repurchase a significant portion of the 2018 convertible note. But there was also incremental cash proceeds of approximately $40 million adding to our investment capacity. We are, of course, happy to see that the capital markets are open to us, and the transaction builds on our long-term strategy of diversifying not only assets and customers, but also our funding sources.

If you look at distribution of charter revenues per segment, this is changing with a continuing rebalancing from offshore to container and dry bulk vessels. In the third quarter, 34% of revenues was from the offshore segment, down from 37% one year ago and more than 50% a year before that. The container segment, on the other hand, now represent 25% of charter revenues, up from only 8% two years ago. And with the delivery of the two very large container vessels soon, we expect the relative share from this segment to continue increasing going forward.

We have now taken delivery of all three container vessels to Maersk line, with full cash flow in effect in the third quarter. The charter period is five years fixed, plus two optional years. And we estimate average EBITDA from these vessels to more than $32 million per year after all vessels now have been delivered.

We have also two large 19,200 TEU container vessels in the pipeline, with scheduled delivery at the very end of 2016 and in early 2017. This is in combination with long-term bareboat charters to Mediterranean Shipping Company, or MSC, the world's second largest container line.

We estimate average EBITDA from these vessels to $31 million per year after delivery, and the financing is by way of a finance lease matching the term of the charter. This financing is without recourse to Ship Finance, and the remaining net CapEx is approximately $30 million or $50 million per vessel payable on delivery.

In addition, we have two 114,000 deadweight ton product tankers, also called LR2 type, under construction, with delivery scheduled for second half 2017. The vessels have been chartered out on time charter basis to Phillips 66 with a minimum period of seven years plus five optional years. The minimum period represents a backlog of approximately $113 million, and the aggregate annual EBITDA contribution from the vessels is estimated to approximately $11 million, on average. Remaining yard payments are approximately $41 million per vessel and financing will be arranged in due course.

Divesting of older vessels is a part of the Company's ongoing strategy to renew and diversify the fleet, and we have recently sold the 18-year-old VLCC Front Century, with delivery in the first quarter next year. Net proceeds from the sale will be approximately $24 million including compensation due from Frontline.

I would like to note that all the tankers we have sold the last few quarters have gone out of conventional trading in the spot market, which then effectively reduces capacity in the market and is benefiting the remaining vessels.

After the sale of Front Century, we will have 10 VLCCs and two Suezmaxes remaining on charter to a subsidiary of Frontline, down from nearly 50 vessels at the peak in 2004. The profit-sharing arrangement on these vessels give us an interesting leverage to the tanker market and kicks in already from $20,000 per day for the VLCCs.

Last year, we also changed the profits bid calculation basis from annual to quarterly basis, adding optionality value for us. And, as we can see on the right side of the slide, the actual charter revenues were significantly higher than the backlog going into the quarter, illustrating the upside potential from profit-sharing arrangements and spot trading vessels.

The forward market, as illustrated by the TD3 forward rates, is currently quoted at $31,300 per day for the first quarter next year, which is well above the level three months ago. At this level, the net contribution per share from the crude oil tankers is estimated to nearly $0.20 per share in the first quarter.

And in addition, we also have the dividend potential from our $11 million Frontline shares, with a dividend payout of $1.1 million due in December based on the $0.10 dividend announced today. In total, we will then have received more than $14 million in cash dividends from Frontline since 2015.

In addition to the Frontline vessels, we also have exposure to the crude oil tanker market through two modern Suezmax tankers, which are traded in a pool with sister vessels owned by Frontline. For these vessels, the average charter rate in the third quarter was approximately $24,300 per trading day, compared to a breakeven level of approximately $17,000 per day after interest and amortization for the vessels.

Over the next year, we have covered nearly three-quarters of the vessel days with a combination of charters, with a floor rate and profits bid, which will create a buffer if markets stay soft, and still with some upside if and when markets strengthen.

We now have 22 dry bulk vessels in the fleet, with the 15 larger vessels chartered out on long-term basis and 7 handy-size vessels traded in the spot market. One of our long-term objectives is to combine stability and predictability in cash flows with optionality, as we have seen over time that market volatility can generate super returns from time to time.

So, while we negotiated a deal with Golden Ocean last year, we included a 33% profits bid on top of the base rate. At the time, not much value was attributed to the profits bid due to the soft chartering market then, but we see now charter fixtures at levels above our base rate of $17,600 per day.

Going back in time, as illustrated by the graph on the slide, and even if we exclude the Chinese super cycle for bulkers from 2004 to 2008, we have seen charter rates levels well in excess of our base rate from time to time. And while we did not expect it to happen so soon, we are not surprised to see market rates move upwards. The profits bid will be based on actual performance by these specific vessel so we cannot guide you on if and when a profit share will materialize on these Capesize bulkers, but that the profit share is calculated and payable on a quarterly basis we believe there is good probability for profit shares over the remaining eight- to nine-year charter period.

For the 7 handy-size dry bulk barriers we currently trade in the spot market, the rates achieved in this quarter were marginally above operating expense level. There are, however, indications that market sentiment may be gradually improving from this segment, as well, and we intend to continue trading these vessels in the spot market until long-term rates improve.

In light of the weak charter markets for rigs, we have the last few quarters discussed our drilling exposure on an asset-by-asset basis. In 2008, we acquired West Taurus and West Hercules at a cost price of more than $850 million per rig, and we financed them with $700 million 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 and also with limited corporate guarantees relating to the financing structures.

Now we have amortized more than 60% of the loans and the average net charter bareboat charter rate for the two deepwater units is below $150,000 per day on average, which is only 40% of the initial charter rate.

One of the rigs is the harsh environment rig, West Hercules, which was upgraded for a very substantial amount in connection with full winterization for arctic operations a few years ago. The rig has been operating for Statoil in Canada until recently but is now idle in Norway and being marketed for new contracts. While the other semi-submersible rig, the West Taurus, is in layup in Spain.

The harsh environment jackup drilling rig, West Linus, has a sub-charter to Conoco Phillips at a rate of $326,000 per day until 2019, and there is no termination right for Conoco Phillips in that charter as long as the rig performs on the charter. And during this charter, the debt will be reduced from $475 million initially to $237.5 million after only five years. Thereafter, we will still have 10 years remaining charter to Seadrill, but at a significantly lower rate, giving Seadrill a comfortably lower breakeven rate.

As Seadrill stated during their most recent earnings release, they are in advanced stages with their banks to extend their secured credit facility out to the 2020 and 2023 timeframe, reduce fixed amortization and cash debt service cost, and amend their financial covenants. They've also initialed dialogues with several of their large bondholders and also with potential providers of new capital.

We have likewise commenced discussions regarding our charter arrangements with Seadrill. While these discussions are preliminary and subject to confidentiality, we're hopeful that a solution will be reached that both supports the value of our charter arrangements, as well as helps to ensure that Seadrill remains a stable counterparty.

We cannot comment on anything relating to this process, but Seadrill has never missed a charter hired payment and is continuing to pay us the full agreed charter rate. And we continue our steep schedule repayment profile on the loans.

We also own the 2007-built jackup drilling rig Soehanah. This is a modern 375-foot jackup drilling rig built in Singapore, and the rig is currently idle in Indonesia and is being marketed for new work in the Southeast Asia and Middle East regions. Apexindo, who has chartered the rig since 2011, is covering all expenses relating to the rig for the time being, including a full special survey of the rig, which is estimated to be finalized by the end of the year. This rig is debt free.

The illustration on the page demonstrates the rapid deleveraging of our drilling assets, and, not least, illustrates the limited recourse to our balance sheet. Aggregate loan balance for all the rigs is now below $900 million, which is less than 50% of the initial loan amounts. Of this, only a quarter is guaranteed by Ship Finance and the rest is nonrecourse to our balance sheet. We have also depreciated the assets significantly over the charter period and have book values below charter-free valuation quoted by rig brokers despite a significant drop in rig values.

We have $3.9 billion fixed-rate order backlog after our recent acquisitions in sales. And with a rebalancing of the portfolio, the container segment now stands at more than $1 billion. The estimated EBITDA equivalent backlog is more than $3.2 billion or around $34 per share.

Most of our vessels are chartered out on long-term basis and we have nearly nine years weighted average charter coverage, with a relative similar charter coverage in all our segments. The charter backlog does not include any contribution from the various profit-share arrangements, nor does it include cash flows from the two Suezmax vessels operated in the pool arrangement with Frontline.

It also excludes the nine container vessels and bulkers in the spot market and the jackup rig Soehanah. As this backlog is based on fixed-rate charters only we have not included revenues from any vessels after the end of the current charter period. We not only have a diversified fleet, but also a diversified customer base with 16 chartering counterparties in total.

Full vessel details on a vessel by vessel basis and including finance lease breakdown is available by contacting us via our webpage under the contact heading. On our webpage we also have a fleet map function where you can see where our various vessels and rigs are at any given time, updated daily.

If we then switch to our performance last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associate, the EBITDA, which we define as charter hire plus profit share less operating expenses and general administrative expenses, was $524 million in the period. Net interest was $96 million or approximately $1 per share. And our normalized ordinary debt installments relating to the Company's projects was $187 million or nearly $2 per share in the 12-month period. This is excluding prepayments relating to sale of older assets.

Net contributions after this is $241 million, or $2.60 per share over the last 12 months. For the same period, we have declared dividends of $1.80 per share or $168 million in aggregate, which is below our historic average payout ratio of approximately 70% to 75% since 2004.

Of the distributable cash flow, the Seadrill rigs contributed $61 million in aggregate or 25% of the total in the 12-month period. Even if we subtract this from the distributable cash flow, in the chart, we would still have a positive margin compared to the dividends declared.

With that, I will give the word over to our CFO, Harald Gurvin, who will take us through the numbers for the third quarter.

Thank you, Ole. On this slide, we have 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 share were $141.3 million or $1.51 per share, slightly down from $143.4 million in the previous quarter. VLCC and Suezmax revenues were slightly down in the quarter due to the sale of an older VLCC in early July and lower revenues from the two Suezmaxes trading in the pool, where one is traded in the spot market.

Liner revenues were up in the quarter following delivery of the last of the three container vessels to Maersk line in May, which has pool earnings effects in the third quarter. The reduction in dry bulk revenues was due to the dry docking of one of the vessels during the third quarter while the slight reduction in offshore revenues was due to the temporary reduction in the rates for the five offshore supply vessels on charter to Deep Sea Supply.

We recorded a profit share $5.4 million under the 50% profit share agreement with Frontline, down from $14 million in the previous quarter. The tanker market softened in the third quarter compared to the very strong second quarter but has strengthened again in November. We also recorded a profit share of approximately $160,000 relating to some of our annualized dry bulk carriers.

Revenues from financial investments were down in the quarter mainly due to lower dividends received on our shareholding in Frontline. Overall, this summarizes to an EBITDA of $114.5 million for the quarter, or $1.22 per share, down from $128 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 the 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 US GAAP operating revenues and instead booked as revenues classified as repayment for investment and finance leases, resulting 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 accounting and investments in associates in more detail. This webcast can be viewed on our website at shipfinance.bm under investor relations and webcast.

Overall for the quarter, we reported total operating revenues according to US GAAP of $93.5 million, which includes profit share from Frontline. Total operating expenses were $61 million, resulting in operating income of $33 million.

We recorded a positive non-cash mark-to-market of derivatives of $4.9 million during the quarter and $2.7 million of negative non-cash amortization of deferred charges. Overall, and according to US GAAP, the Company reported net income of $32 million or $0.35 per share.

Moving on to the balance sheet, we showed $63 million of consolidated cash at the end of the quarter, excluding amounts freely available for drawdown under revolving facilities. Available-for-sale securities of $116 million includes investment in senior secured bonds with a fair value of $37 million at quarter end and also our 11 million shares in Frontline.

The three rigs on charter to Seadrill are included in the balance sheet under investment in associates and amount due from related parties long term. Our investment in the subsidiaries owning the units is in the form of both equity and shareholder loans from the parent company.

The total equity investment in the rigs is just a combination of the two, and the split between equity and shareholder loans from quarter to quarter will depend on the inter-Company accounting. Stockholders' equity was approximately $1.1 billion, giving a book equity ratio of 40% at the end of the quarter.

Then looking at our liquidity and capital expenditure, the Company had total available liquidity of approximately $238 million at the end of the quarter, which includes approximately $175 million freely available under revolving credit facilities. Available-for-sale securities includes our 11 million shares in Frontline with a market value of approximately $82 million based on the closing share price yesterday.

Moving on to the CapEx, we had four new buildings under construction at quarter end, all with long-term charters to strong counterparties. The two large container vessels to MSC have expected delivery in late 2016 and early 2017. The vessels will be financed through a 15-year lease agreement matching the charter with MSC. The financing is nonrecourse through Ship Finance, and the net remaining CapEx is limited to $15 million per vessel payable upon delivery.

We also have the two new-build product tankers under construction, with scheduled delivery during the second half of 2017. The remaining CapEx before financing is approximately $41 million on average per vessel.

We have not yet arranged financing, but given the strength of our charter and our strong standing in the debt financing market, we expect to secure a competitive financing well before delivery, and have already received interest from several financing institutions.

In October 2016, we issued $225 million in senior unsecured convertible notes. The five-year notes have a coupon of 5.75% per annum and an initial conversion price of approximately $17.77 per share. The higher coupon on the new notes compared to the existing $350 million convertible note is due to limited dividend protection and a higher conversion price.

The strike price on the new note is only adjusted for dividends in excess of point $0.225 per share per quarter. And based on the current dividend, the new notes are potentially significantly less dilutive than the existing notes.

The majority of the proceeds from the new notes were used to repurchase the existing notes maturing in February 2018. The average repurchase price was approximately 180% of par value due to the adjusted strike price on the existing note, and the net outstanding has been reduced from $350 million to approximately $184 million, which is also reflected in the graph on this slide.

The new notes were issued in October and the transaction will be reflected in the accounts for the fourth quarter. The repurchase of the existing notes has reduced the potential for equity dilution, but based on the repurchase price and rights of related deferred charges, the net book effect in the fourth quarter is expected to be a cost of approximately $17 million in [profit notes]. The net cash proceeds from the issuance of the new notes was approximately $40 million.

On the debt side we had approximately $1.6 billion of consolidated interest-bearing debt outstanding at quarter end, which includes approximately $1.1 billion in bank loans and approximately $500 million in senior unsecured notes. In addition, our 100% owned subsidiaries accounted for as investments in associates at approximately $900 million in bank loans at quarter and. The debt in these subsidiaries is not included in the consolidated accounts but are included in the graph on this slide.

The Company has no bank or bond maturities until the fourth quarter 2017, while we continue our scheduled debt amortization of close to $45 million per quarter. We are in compliance with all financial covenants under our loan agreement at quarter end. It is worth noting that not only has Ship Finance been profitable and paid dividends each of the 51 quarters since the Company was established, we have also been in full compliance with all financial covenants on our loan agreement, which gives us a strong standing in the bank market.

To summarize, the Board has declared a quarterly cash dividend of $0.45 per share for the quarter. This represents a dividend yield of 12.9% based on yesterday's closing price. Net income for the quarter was $32 million or $0.35 per share. We successfully placed $225 million of convertible notes in October and used the proceeds to repurchase a substantial portion of the convertible notes due 2019.

We had full cash flow effect from the three vessels at Maersk in the third quarter and continue our divestment of all the vessels through the sale of two older VLCCs. We have a strong liquidity position and limited remaining CapEx.

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

(Operator Instructions)

Fotis Giannakoulis, Morgan Stanley.

Ole, I want to ask you about opportunities to deploy capital, because you have scrapped a number of vessels, tanker vessels with Frontline, and I was wondering, where can you put the new capital to work right now, given the weakness in the containership market and the other sectors in the shipping space?

Thank you for this. We decided, at the beginning of the year we took what was, call it, internally, decided to step back a little bit and sit on the fence, if you can call it that, because we saw that there was significant (inaudible) maritime stocks into other segments. The effect of that, as we all know, was, of course, a significant drop in share prices in many of these sectors. But it also, of course, means that there is than less capital available for investments in that segment, which means, again, that there will be less price pressure.

So far, we're very happy with that decision because we've looked at new projects -- I would say we screen new projects basically on a daily basis. But any deal we've looked at so far this year would probably have been even better if we did it today. So, from that perspective, terms have only improved, I would say, in our favor.

But, you're absolutely correct. What we have seen is a significant drop also in asset prices, which makes it more interesting to invest. We are looking, as we speak, at opportunities. I would say, we're looking at opportunities in the tanker market right now, we're looking at some dry bulk things.

We also look at the container market. Of course, we cannot comment and we will not be specific on the exact segment or the exact dollar amount that we expect to invest over the next, call it, few months, but the deal opportunities and deal economics, I think, has certainly improved over the year.

But for us, it's important to do the right deals instead of running out and just do a lot of deals just because we have promised to invest a certain amount of capital. That said, with available liquidity we have, has probably never been better, so we have a very strong balance sheet, I would say, and good capacity to grow if and when we see new opportunities. We will continue to screen for projects and hopefully we will find something that is truly accretive, also, in the long run.

And I agree with you, we have sold older assets. We have sold some older tanker vessels. But we've also taken delivery of new vessels during the last few quarters. So, it has not been a one-way road. We are also looking at larger transactions that could or could not be very beneficial for the Company.

Can I insist a little bit about the type of transactions? Because, a few years ago, a typical transaction was a sale and lease back that you could lever up a return with around 60% or 70% debt financing.

Are we still talking about the sale and leaseback back transactions? Or, given the fact that asset values have declined so much, you might be tempted to try to take some market exposure, some greater market exposure, by naked assets or assets with short-term or medium-term period contracts in order to benefit from the back end and anticipate the appreciation in the asset values?

I would say that we look at both. We have invested from time to time, in, as you say, naked assets, assets without a specific charter attached to it. It's typically for assets in segments where we believe we will be able to find a good charter and where we see that there are interesting dynamics -- for instance, on the new building price side, et cetera.

We did that for container ships. We have one chartered to Hamburg-Sued, which we ordered then on speculation and then fixed the charter a few months later.

I think with our association to the wider, you call it, Fredriksen group, or main shareholder, Mr. John Fredriksen, who owns 36% of the shares in the Company, we have a very strong position with the different shipyards. I don't think anyone have ordered more new buildings than Mr. Fredriksen or companies associated with him at the various yards, in modern history.

So, from that perspective, I think we do see, from time to time, some interesting opportunities, also, on that side. But I will not be specific on that because, again, it all boils down to doing the right deals, and we do not want to be tied to the mast, if you can call it that, in terms of what kind of deals we will do.

But we can certainly, and we've done in the past, we could build, own, operate, is our preference, then we control the vessels technically. But, of course, we could also do more regular, say, leasebacks, which have more, call it, cost of capital arbitrage type nature.

Of course, I appreciate that. I would like to ask you about your existing contracts. I know that you monitor very closely all your charterers. I want to focus on the offshore assets with Seadrill and also with Golden Ocean in the dry bulk sector.

And if you can also comment about some of the container deals, given the fact that we have some of the bankruptcy of Hanjin. I know that you do not have any exposure to Hanjin. How do you view the credit quality of your charterers?

And I'm not talking about overall, I'm talking about how this has changed from the previous quarter. Do you feel more confident, less confident? Is there anything that you would like to point out about the difference in the credit risk of [shifting amounts] during the last three months?

You're absolutely correct. We monitor very closely our various counterparties. And when we structure deals we also build in a very steep repayment profile on the loans to take down, call it, exposure also on the financing side.

But, I would say all our customers are performing 100%. And if you look at our exposure on the container side, as you pointed out there, the vessels are chartered to the largest container line, Maersk Line. We have a number of vessels on charter to the second-largest, MSC. We also have some vessels on charter to Hamburg-Sued, who is a relatively smaller player, seventh or eighth place, but with a very strong balance sheet.

Our preference is, of course, to charter our assets to market leaders with strong balance sheets. And what we focus a lot on is also trying to invest in the right assets. For instance, where we have committed capital on the container side, is generally to the big new type of assets. We have very limited exposure to the old Canamex class of vessels where we have seen markets have been really poor and where we have seen, even now we have seen a seven-year-old vessel being scrapped, which is something we haven't seen since the 1980s in the shipping market. I think one of the things we focus on is being on top of what's happening, what kind of assets our customers will demand over time, and positioning ourselves accordingly.

There's not much other than that to comment on our various customers. You mentioned Golden Ocean. We now see that the charter rates, spot fixtures, at least, in excess of the base rate levels. And when we did a deal back in 2005, we structured it with a profit split at the time. I don't think the profits bid was priced much into the deal, if you can call it that, because the market wasn't that strong at the time.

But as we have seen over the years with the tankers, who have had profits bids, volatility in these markets, if you have the option, that's our friend. What we prefer, of course, is to get options and not give options.

Thank you very much, Ole. That's very helpful.

Magnus Fyhr from Seaport Global.

Most of my questions are related to deployment of capital. But just one question on the payout ratio. Can you talk a little bit about you're thinking there? A lot of the cushion there has been contributed by the high profit sharing from the tankers. That's likely to drop here as we go into 2017. Talk a little bit about what kind of levels you guys are comfortable with.

The dividend levels are set by the Board on a quarter by quarter basis. And typically, the focus, if I can comment on that, from the Board has been on what they believe is the long-term sustainable level. So, it's not directly linked to any profit split in any individual quarter.

That's also why you will see from time to time, that we make a lot more money than we pay out in dividends. If you go back over the years, if you go back from the very start in 2004, you will see that we have, compared to net income, we have paid out around between 75% and 80% of net income in dividends over the years, but from time to time with earnings significantly more than the payout. And if you look at distributable cash flow, the ratio is lower, typically.

I cannot give any specific guiding on that. Of course, we monitor the tanker market. We have also reduced the number of tanker vessels on charter to Frontline, as they have grown old and we have sold them. So, that is, of course, taken into consideration when the Board looks at the dividend.

I think we should not forget, also, that the liquidity position we have, and, hopefully, good investment capacity we have, where we could potentially add new assets to the portfolio, that could also build on the distribution capacity.

All right. Thank you.

Herman Hildan, Clarksons Platou.

If we go a year back, you've just been raising your dividends multiple times, been through quite an aggressive investment period. Since Q3 you've kept your dividends unchanged and you sold on your investments and deleveraged some of your offshore assets, while also made repairs, have continued to invest and grow the dividends, and so on.

I fully appreciate that any deal you did yesterday or any deal you did today is better than 2007-2008. But how should we read this situation on you becoming more careful, because, by your strategy, you're supposed to be investing throughout the cycle. Is it mainly finding counterparties that you believe are sustainable throughout the cycle? What's the key reason for the somewhat more conservative approach over the last year?

Thanks for that. I wouldn't say we've been more conservative. If you look at our investment profile over time, you will see that it's almost been one year with lots of investment, the next year with lower investment, and then again significant investments. As I said, for us, it's more important to do the right deals than necessarily do a programmed amount per quarter or per year.

And what we've also seen, and this I hope is one of the benefits of having a diversified segment approach, we can also benchmark deals between segments. Unfortunately, what we have seen in the market, generally, is that both the capital markets and also the financing banks are very cyclical. Typically, towards the peak of the market, that's when you see the capital markets being very aggressively, call it, putting equity into companies, and also when the banks are willing to finance the most and leverage the highest.

Of course, it's a classic recipe for disaster because what we always try to do is not invest on the peak, but instead try to invest when we are at the lower end of the cycle in the segment. So, the fact that we haven't invested so much so far this year, you shouldn't really read anything specific into that. It's just been that we haven't felt that we found the right opportunities for the right deals with the right structure. That may change, of course, on short notice.

I cannot give you any specific guidance because, as I mentioned earlier, if we gave you guiding on how much money we would invest next quarter or next two quarters, et cetera, it could create a situation where we feel that we have to invest where we shouldn't have invested. So, what we do hope over time is that we will steward the Company in a way that we build a portfolio with truly accretive deals instead of doing deals that looks good in the short term but could end up being dilutive deals for shareholders.

From the outside, obviously, you are unique in the way that you have still very good access to bank financing. And when you look at the asset prices, they are in certain segments at all-time low levels. And I fully appreciate you can't give guidance on what segments or when will you invest, what amount of capital. But at least the asset prices being very low, that's a good starting point to be able to do deals.

So, what is the key hurdle to find -- what makes you pass on these deals that you're seeing in the market today? Is it the counterparty? Is it the residual risk? What's the key hurdle to pass in order to do a deal?

It differs from deal to deal, really. But we have seen some deals where there are expectations with very high residual values that we have not been comfortable with. But it's difficult to be specific because, again, it's all deal-related, more from a combined perspective. That's why we haven't ended up doing the deals.

Of course, we also do have expectations for returns over time. That said, last year, we invested $1 billion, so we haven't been sitting all still. It's just that the last few quarters we haven't announced any new transactions.

But is it fair to say that it's harder to structure a deal with a base return in an environment where few segments are actually generating any returns?

It all depends on the counterparty. But, of course, in a market where a potential charterer is losing money day out and day in, that's of course not a good starting point. So, it's always better for a counterparty to actually make money.

What we offer -- and this is more for traditional sale leaseback type structures, what we offer is, of course, a very long-term stable provider. And what we can also offer as a preference is to operate vessels on a time charter basis. I think we have a very efficient operating platform. We don't have any hidden fees or, call it fee leakage, in some other structures, so I think we can deliver very good value for money.

And with our access to the capital markets, as we illustrated by the convert placement, as you pointed out, we believe we still have very good access to the bank market. At least that's what the banks are pitching on us when they have come and proposed things for us. I think we are in an interesting position where we can grow the portfolio -- with the right deals, of course.

And just, finally, a very short question -- how should we think about Frontline position? You mentioned liquidity. Is it one way of keeping capital when better opportunities arise, or is it a long-term investment? What's the thinking around that position?

We have full flexibility relating to those shares, so from that perspective it's a financial investment. We've also generated very good returns on it with more than $14 million in dividends since 2015. From our side, it's an opportunistic ownership position. So far, it's been quite good for us.

Okay. Thank you very much.

[Oiven Hagen], Nordea.

I understand you cannot provide any details on the associations that you stated that you have entered into with Seadrill. But could you give any indication on what you are prioritizing in those negotiations? We have seen new revised charter agreements with older counterparties in Fredriksen system in the past and they've all come out slightly different. What will you be looking to protect and what will you be more willing to give up when you start these discussions with Seadrill?

As I said, we cannot really comment anything relating to those discussions, other than there has been a contact now with Seadrill and us. So, I hope you appreciate that this is something that we expect will take some time. I think Seadrill has indicated that they expect to have a solution some time in the first half of next year.

What you've see, looked at other situations we've been into, all situations are different, our position is different, the level of guarantees are different. There are many factors here building in. But what our objective is, is to make sure that we get the best possible deal out of it for us and our shareholders. That's our paramount objective.

Over time, and in other situations, I think we have come out with a reasonably good deal such as the Frontline restructuring back in 2012, where we now sit and generate a lot of profit split relating to those assets. But as I said, no comments on any specifics there. We just have to wait and see what the solution will end up like.

Okay. Thank you. Could you comment if you have involved the banks on your side in the discussions?

I cannot really comment on the discussions or the process. When there is an announcement made, we will, of course, make all the appropriate disclosures.

Okay. Thank you very much.

(Operator Instructions)

John Reardon from Western International.

It seems like the Company is trucking right along and you are in a position to really take advantage of some opportunities, as they present themselves. Now, in your comments, you talked about tankers and bulkers and containers. Maybe because of your discussions with Seadrill, you didn't mention anything about offshore drilling. Recently, Schlumberger on their call said that they felt that the offshore drilling market had actually bottomed and was showing some signs of life. Would you agree with that, or would you just rather not comment about that at all?

Thank you. I think I would leave the market commentary on the drilling side to the market specialists. I think there are many very good analysts out there who I'm sure can guide you there.

What we do observe is, of course, that there are a number of idle rigs out there. And when we see the charter rates for the vessels that are being fixed now at levels, like I said, plus/minus operating expenses. So, from that perspective, the market is certainly not very strong.

But we do see some fixtures every now and then. But, at least what we hear when we speak to analysts, is that they expect that this is also based on the various oil companies budgeting. The expectation is that 2017 may continue to be soft simply because there's not so much work to be done. And then the analysts hope that 2018 will be better if we have some stability in oil price and the oil companies start spending again.

The flip side for our Company is, yes, they may save a lot of money not do any drilling, but of course it also means that their depletion rate will accelerate, and that, of course, is not a good thing in the long run. I can certainly not call the market, I cannot give you any guiding that the market has turned in any way. I think it will be, from a financial investment perspective, still painful in that sector. But at the same time, we do hope that market will pick up again as the oil companies start spending and start building their reserves.

Okay. As a follow-up, if I may, we recently had an election here in the US and Mr. Trump got in. He supposedly has been buddies with Mr. Putin. I was wondering if you have a perspective on some developments in the event that, say, the sanctions against the Russians for their adventures in the Crimea and the Ukraine fade from the focus on a foreign policy basis -- IE, are there opportunities in Russia that have been denied to Ship Finance because of the sanctions?

I wouldn't say that there are many opportunities that we haven't been in a position to do. I think most of the drilling assets in the Russian markets are more specialized than the standard deepwater and standard jackup drilling rigs that we primarily look at. So, from that perspective, I don't anticipate any change.

We do, of course, we try to be very careful with sanctions and not be infringed with sanction exposure. But, so far, I don't think we've seen many deals relating to those assets in that area. That would be interesting for us, even without sanctions issues, and I really don't expect a lot of other opportunities, either.

Okay. Thank you very much, Ole.

As there are no further questions in the queue, I would like to hand the call back over to your hosts for any additional or closing remarks.

Thank you. I would like to thank everyone for participating in our third-quarter conference call. And if you do have any follow-up questions, there are contact details in the press release, or you can get in touch with us through the content pages on our website, www.shipfinance.bm. Thank you.

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