SFL Corporation Ltd (SFL) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to today's Fourth Quarter 2018 Ship Finance International Limited Earnings Conference Call.

(Operator Instructions) I must advise you that this conference is being recorded today on the 26th of February, 2019.

I would now like to hand the conference over to the speaker today, Ole Hjertaker.

Please go ahead, sir.

Thank you, and welcome all to Ship Finance International and our fourth quarter conference call, which also marks our 15-year anniversary of dividend payments.

In connection with this, we've also changed our logo as some of you may have noticed.

Our ticker on the New York Stock Exchange is SFL, and going forward, we will most likely use the letters SFL more actively in our marketing to customers as what we offer to them is a lot more than just ship financing as we will discuss more about later.

With me here today, I have our CFO, Aksel Olesen; and Senior Vice President, André 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 U.S. 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 $0.35 per share.

This is our 15-year anniversary of profits and dividends, and the dividend represents $1.40 per share on an annualized basis or 11% dividend yield based on closing price of $12.49 yesterday.

Over the years, we have paid more than $25 per share in dividends or more than $2.1 billion in aggregate, and we have a fixed rate charter backlog of $3.8 billion, which should support continued dividend capacity going forward.

The reported net income for the quarter was approximately $3.5 million or $0.03 per share.

This is after an impairment charge of nearly $36 million relating to 5 offshore support vessels, mitigated by gains relating to the sale of other offshore assets.

Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was approximately $160 million, and the EBITDA equivalent cash flow in the quarter was approximately $126 million.

Last 12 months, the EBITDA equivalent has been approximately $454 million.

2018 has been an active year with multiple transactions.

We have grown our backlog by more than $1.3 billion and seen a major change in the fleet mix.

At the same time, we have divested several older uneconomic assets, including several VLCCs from the company's initial fleet in 2004.

In August, we were pleased to announce the acquisition of 3 modern eco-design container ships built 2015 and with a capacity of 10,600 TEU in combination with 6-year time charters to Maersk Line.

The first 2 vessels were delivered to us in the third quarter and the last vessel in early October, so we have received nearly full cash flow from the vessels in the fourth quarter.

The EBITDA contribution from these vessels is estimated to approximately $35.5 million per year.

At the end of the quarter, we acquired 2 19,400 TEU container vessels with long-term bareboat charters to MSC, the world's second largest container line.

The transaction added nearly $470 million to our backlog, and we arranged a non-recourse back-to-back long-term lease financing in connection with the transaction, which limited our equity investment to approximately $30 million.

With our large and diverse fleet, we continued to -- our fleet renewal processes and sold another 2 older VLCCs in the fourth quarter.

We received $51 million in proceeds from the sales, including a $3.75 million loan note from Frontline as compensation for early lease termination.

There was some minor loss of approximately $1.8 million recorded in the quarter after this sale.

In December, we sold the 2007 built jack-up Soehanah for approximately $84 million.

The rig was debt free, and we recorded a book gain of nearly $8 million in connection with the transaction.

We also sold some financial investments in Golden Close Maritime Corp Limited whose only asset was the drill ship, DeepSea Metro 1. The rig was sold for $262.5 million in 2018, and we received approximately $45 million from the redemption of bonds and cash dividends on shares we own.

A gain of approximately $13 million was recorded in the quarter, and Golden Close still have some minor assets, which will be wound down in due course.

Ship Finance owns 5 offshore support vessels on long-term charters to a nonrecourse subsidiary of Solstad Offshore ASA.

The market for offshore support vessels remained challenging, and the vessels are currently in lay-up.

In December 2018, Solstad announced standstill agreements with multiple lenders and other stakeholders and commenced discussions to restructure its balance sheet.

While the outcome of this discussion is still pending, we have recorded impairments totaling $35.7 million, which brings the book value in line with charter-free broker estimates at year-end.

We have also removed these charters from our charter backlog in order to present a more conservative forecast for our backlog.

As of the end of 2018, the company had a limited corporate guarantee of $30 million under related bank financing of the affected vessels.

The offshore support vessels used to only represent approximately 2% of our charter backlog, and our financial commitments is limited to a corporate guarantee of $30 million under related bank financing of the vessels.

So in all, a -- this is a relatively marginal exposure compared to our overall balance sheet.

And also perhaps worth mentioning is that over the years, and we have owned these assets now since 2007 and 2008, we have received approximately $270 million in charter revenues from the vessels on charter to Solstad.

Subsequent to quarter end, we have agreed to extend the charters for 6 container vessels.

Two 5,800 TEU vessels have been extended 5 years at approximately $6,500 per day on bareboat basis, and we have added a purchase obligation at the end, while four 4,100 TEU vessels have been extended by 2 years at $4,000 per day.

This has added more than $35 million to our charter backlog, and these charters are reflective in the charter backlog that is available for analysts and investors, who would like to see them after contacting the company.

Following the recent acquisitions, our charter backlog now stands at approximately $3.8 billion.

The bulk of transactions last year was related to container vessels.

So the liner segment now represents more than 50% of our backlog, up from around 25% at year-end 2017.

The offshore segment has come down from more than 40% 1 year ago to 27% at the end of 2018, while the tanker segment has come down from around 20% to 7%.

Our focus in the liner segment has primarily been on new design container vessels between 9,000 and 19,000 TEU as we see this segment being more attractive for liner companies to take on long-term charters.

We do still see container opportunities in this segment as illustrated by the recent acquisitions, but we have -- do not have any specific guiding or relative allocation between the segments.

All deals we do are on a deal-by-deal basis from time to time.

In the offshore space, we were very happy to finalize the financial restructuring of Seadrill in early July last year.

SFL received full charter hire on the rigs during the restructuring of Seadrill which enabled us to significantly reduce our financial exposure to the rigs in that period.

We have agreed to temporarily reduce charter hire by 30% from 2018 to 2022, with a catch-up thereafter.

In the meantime, we will continue to generate strong net cash flows from these assets due to significantly reduced leverage and corresponding lower debt service costs.

Seadrill has sub-chartered the harsh environment jack-up rig, West Linus, to ConocoPhillips until the end of 2028.

The harsh environment semisubmersible rig, West Hercules, has recently been awarded multiple consecutive sub-charters in the North Sea and is now working for Equinor until mid-next year.

Including the West Linus, we have reduced the debt from $1.9 billion initially on these rigs to around $650 million currently.

And of this aggregate outstanding loan balance, only $266 million is currently guaranteed by Ship Finance.

On the dry bulk side, we have 22 dry bulk vessels in the fleet with 14 larger vessels contracted out on long-term basis and 7 Handysize vessels and a Supramax bulker that's traded in the spot market.

One of our long-term objectives is to combine stability and predicability in cash flows with optionality, as we have seen over time that market volatility can generate super returns from time to time.

We have a 33% profit split on top of the base rate of $17,600 per day plus interest adjustment for the vessels on charter to Golden Ocean.

There was a profit share in the third quarter, but not this quarter.

But given market volatility, there could be many opportunities for profit share going forward, and in the meantime, we do receive our base rate every single day.

The market strengthened during the first part of the fourth quarter, but has softened lately and it is uncertain if a profit share will accumulate this quarter.

The Kamsarmaxes and most of the Supramaxes in our fleet are all on long-term fixed rate time charters, while the 7 Handysize dry bulk carriers continue to trade in the spot market.

The rate achieved this quarter for the Handysize vessels were approximately $8,500 per trading day, which was up from approximately $8,000 per day in the previous quarter.

On the tankers side, in the fourth quarter, the spot market for crude oil tankers saw an increase in rates across all sectors.

In particular, the VLCC market produced its strongest quarter in the past 2 years.

The market began to soften towards the end of December and rates reported this far in the first quarter of 2019 are somewhat lower than in the previous quarter.

The remaining VLCCs are in charter to Frontline Shipping Limited, a nonrecourse subsidiary of Frontline Ltd., and earned approximately $28,600 on average per day, which is well above the base charter rate of $20,000 per day.

So a profit split of $1.5 million was accumulated in the quarter.

The remaining 3 vessels are built between 2002 and 2004 and were debt free at year-end.

Only one of these assets were part of the initial fleet acquired from Frontline in 2004 after selling more than 40 older vessels profitably over the years.

In addition to the VLCCs, we also have exposure to the crude oil tanker market through 2 modern Suezmax tankers, which are traded in a pool arrangement with sister vessels owned by Frontline.

For these vessels, the average charter rate in the quarter was approximately $17,500 per day, which was up from the $12,500 per day the previous quarter.

The reported earnings -- the earnings on these vessels were, however, low compared to reported rates in the market due to a new accounting principle, where voyage expenses has changed in 2018 from discharge-to-discharge to a load-to-discharge principle for voyage contracts.

In a rising market, there will be a lag before revenues are booked and these vessels have both balance days at the end of the quarter.

This is a timing issue only, so we expect to see a relatively high contribution in the first quarter as a consequence of the trading pattern of the vessels.

But of course, the fourth quarter was softer than we did anticipate.

All the other assets in the segment are on long-term fixed rate charters.

Across all segments in the fourth quarter, 65% of revenues derived from time charter vessels, while only 35% derived from bareboat chartered vessels and rigs, which may be a surprise to many.

We believe we can offer superior service and flexibility to our customers giving us access to more deal flow than if we focused on one operating mode only and certainly, only if we focus also on long-term time charters and not only financial bareboat charter arrangements.

As this is our 15-year anniversary, we would like to take a step back and look at what has happened during these 15 years.

It started with 47 vessels and OBOs trading at the crude oil market back in 2004.

1/3 of the fleet at the time was single hull tankers and all vessels were chartered to Frontline Limited.

We were effectively a 100% owned captive financing arm of Frontline and -- but over the years, the shares of Ship Finance were distributed by Frontline as dividend.

And currently, we have a diversified shareholder base with more than 70,000 shareholders according to the latest information.

In 2006, after 2 years, a separate management team was hired in the company, and the company commenced a strategy of diversification.

This strategy encompassed asset diversification, counterparty diversification, charter structure diversification and financing risk diversification.

So we have gone from 1 single asset class to 4 asset types where the tanker space now is the smallest with representing 7% of the backlog.

We have multiple counterparties and currently have 16 counterparties that we charter our vessels to.

And more importantly, we have encompassed a chartering structure diversification, where we can offer both vessels on time charter and vessels on bareboat.

For vessels on time charter, we benefit from the association with a wider Fredriksen Group, where we believe we can offer among the best-in-class cost efficient management vessels, while at the same time, we can offer bareboat structures for those clients who prefer that kind of arrangements.

In addition, we have focused on financing diversification.

When the company was initiated in 2004, it had a $580 million bond loan, a $1.1 billion bank loan and the rest was equity.

Now we have a much more diversified structure, where we have around $1.5 billion in the bank market, but this represents only 33% of our capital structure.

We have roughly the same amount in bond loans as we had back in 2004, but this is split in multiple bond loans, 3 Norwegian krone-denominated bond loans and 2 convertible notes in the U.S.

At the same time, we have diversified and have significant funding from the lease market.

And that represents 25% of our capital structure or around $1.1 billion that we have raised in the lease market, primarily in Asia.

We have focused on this diversification because what we have seen over time is that not only our shipping market is volatile, but also financing markets are volatile.

By having a wide outreach and focusing on diversification and funding means that there is less risk for us to be trapped in case one bank or a certain market should change in character or there should be issues not relating to us, but relating to other sites of their business where they would have to reduce their activity level.

We, therefore, believe that we are well positioned to continue growing our balance sheet, and over the years, we have sold most of the older vessels, and we have really renewed the vessels.

So of the initial fleet, only 1 vessel remains, while we have acquired all the other 85 vessels in the fleet subsequent to our start back in 2004.

And with that, I would like to give the word over to our CFO, Aksel Olesen, who will take us through the numbers for the quarter.

Thank you, Ole.

On this slide, we have shown a pro forma illustration of cash flows for the fourth quarter compared with third quarter.

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

Total charter hire for the fourth quarter was $154 million, up from $150 million in the previous quarter.

The main reason for this increase is the delivery of the third container vessel on charter to Maersk in October and a full quarter with revenues from the first 2 vessels.

The 2 19,400 TEU container vessels acquired at the end of December will have full earnings effect in the first quarter.

Revenues from our tankers was down due to the sale of 2 VLCCs, partly offset by the profit share from the Frontline -- from Frontline for the 3 remaining VLCCs in the order of $1.5 million and better earnings on the 2 Suezmax vessels trading in the pool.

The marginal reduction in dry bulk was due to lower revenues on the 7 smaller Handysize vessels trading in the spot market.

There was no profit share accumulated on the Capesize bulkers in this quarter.

This summarizes to an adjusted EBITDA of $126 million for the quarter or $1.17 per share, up from $120.5 million in the previous quarter.

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

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

As our strategy -- 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 U.S. GAAP 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.

So overall, for the quarter, we report total operating revenues according to U.S. GAAP of $118.6 million, up from $111 million in the previous quarter.

This number is lower than the charter hire received for the above-mentioned reasons.

We recorded a gain of $7.6 million in connection with the sale of the jack-up rig, Soehanah, at the end of the year, mitigated by a loss of $2.6 million in connection with the sale of the VLCCs, Front Ariake and Front Falcon, giving us a net gain on sale of assets of $5.8 million.

Following an impairment test of accounting of the 5 offshore supply vessels on charter to Solstad where the assets were written down to charter-free broker valuations, the company recorded an impairment of $35.7 million in the fourth quarter.

In December 2018, Solstad announced standstill agreement with multiple lenders and other stakeholders and commenced discussions to restructure balance sheet.

While the outcome of these discussions is pending, we believe it's prudent to take this adjustment now.

As a result, the total operating expenses were $102.4 million, which includes impairment on the Solstad vessels, resulting in an operating income of $22 million.

Furthermore, a gain of approximately $13 million was recorded in connection with the sale of financial investments in Golden Close Maritime Corp, which owned the drillship DeepSea Metro.

This was classified as an investment in financial securities and the gain is included in other financial items.

From 2018, we have had to mark-to-market our 11 million shares in Frontline every quarter.

And in the fourth quarter, we recorded EBIT loss of approximately $3 million.

The share price of Frontline is currently higher than at year-end, and if the share price remains above $5.53, we can expect EBIT gain in the first quarter.

So overall, and according to U.S. GAAP, the company reported net income of $3.5 million or $0.03 per share.

However, excluding the impairments, gains and other nonrecurring items, we would have had a net income of $28.2 million or $0.26 per share.

Moving on to the balance sheet.

We showed $212 million of consolidated cash at the end of the quarter, including freely available cash in our subsidiaries accounted for as investments in associates.

The change in investment in marketable securities is related to the sale of securities related to Golden Close Maritime mentioned earlier.

As for change in amounts due to related parties, we prepared $30 million of debt related to the Seadrill rigs, reducing debt service in 2019.

The reduction in other current assets is related to the sale of the shares of the asset-owning company of the jack-up Soehanah with the balance being charter hired classified as finance lease.

Then moving on to the long-term assets.

The change under vessel and equipment is due to refinancing in the form of capital leases of our 3 10,600 TEU container vessels and 3 14,000 TEU container vessels, whereby the vessels were reclassified to vessel and equipment under capital leases on the balance sheet.

The corresponding lease liability is included under other current liabilities and other long-term liabilities.

Increase in investments in finance lease is mainly related to the 2 19,400 TEU vessels acquired at the end of the quarter.

We continue with short term and current portion of long-term interest bearing debt.

The reduction is mainly due to the refinancing of the bridge financing used to acquire the 10,600 TEU and 14,000 TEU container vessels.

The current portion includes scheduled loan amortization and also the NOK 900 million floating rate bonds due in March, which is expected to be repaid with cash from balance sheet.

The company currently holds NOK 228 million of the bonds.

Looking at the other current liabilities, approximately $68 million of the $136 million is the current portion of obligations under capital leases, with the balance of the capital leases being $1.1 billion in other long-term liabilities.

In conjunction with sale of assets, maturity of the credit facility, we repaid $85 million of standing under Frontline VLCC facility and expect to draw down on a new facility of $50 million in the first quarter.

Stockholders' equity was approximately $1.2 billion, giving a book equity ratio of approximately 30% at the end of the quarter.

Then looking at our liquidity and financings status.

As mentioned, we have total available liquidity of $212 million at the end of the quarter, including cash in our subsidiaries accounted for as investment in associates.

In addition, we had available-for-sale securities of $87 million, which includes investment in senior secured bonds and other securities, with a fair value of approximately $26 million at quarter end in addition to our 11 million shares in Frontline with a current market value of approximately $64 million based on the closing share price yesterday.

We had a total of 10 debt-free vessels at quarter end, including 3 VLCCs, 2 car carriers, 2 chemical tankers and 3 1,700 TEU container vessels.

The combined charter free value of these assets is approximately $200 million based on average broker appraisals.

We may potentially enter into financings on some of these assets in the future, including the 3 VLCCs where we expect to draw down on the new facility of $50 million in the first quarter.

In the fourth quarter, we concluded refinancing in form of lease financing for 6 large container vessels with cash proceeds of $570 million and a net liquidity effect of $130 million at very attractive terms.

We have also repurchased approximately $28 million of our convertible notes in the open market, which we from time to time do, with a gain of $1.5 million recorded in the fourth quarter.

Then to summarize.

The board has declared a cash dividend of $0.35 per share for the quarter, representing the 60th consecutive quarter of dividends, with more than $2.1 billion distributed to shareholders since 2004.

In 2018, we demonstrated our ability to further grow and renew our business.

We currently only have one of the original vessels left in the fleet, and last year, we acquired 24 vessels by investing $1.2 billion, adding more than $1.3 billion to the charter backlog.

Furthermore, we have demonstrated our ability to secure attractive financing, and we have a very strong liquidity position giving us a substantial investment capacity to act on growth opportunities in very favorable market environments.

And with that, I give the word back to the operator.

We'll open the line for any questions.

(Operator Instructions) The first question comes from the line of Chris Wetherbee.

James on for Chris.

Wanted to touch on the offshore.

Wanted to get a sense of your plans on those 5 vessels, like how are you thinking about possibly divesting them, redeploying them, restructuring them?

Just wanted to get a sense for how the standstill might have impacted how you think about those vessels moving forward?

Yes.

On those vessels, we did agree mid last year for a reduction in charter rate with a catch-up later.

So we are receiving charter rates on 2 of those vessels.

I think it's important to note that this -- we are taking this impairment now as a precautionary measure on the basis of communication by Solstad to the market that they are commencing a restructuring of their balance sheet in light of the weak market.

We have, therefore, taken this -- we have, therefore, taken that impairment now, written them down to -- for charter-free broker values and also removed the charters from our charter backlog.

That said, those vessels are still on charter to the subsidiary of Solstad Offshore.

So we have not, call it, either taken the vessels back or taking -- taken any other action like that.

So it's a precautionary measure for us, and it's not on the backlog specific, call it, action that's happened with those vessels recently.

I would like to add that those 5 vessels represent less than 2% of our -- before we took them out of the backlog, they represented less than 2% and also our financial exposure is really now limited to the $30 million financing guarantees we have on the related financings.

So compared to our overall balance sheet of $4.5 billion, we think this is a relatively marginal situation.

But of course, a situation we will focus on and, what can we say, manage as best as we can and to get -- to extract as much value out of this for us and our stakeholders.

So -- but no, we don't have any specific plans or we don't have any specific plans to take actions where we will terminate those charters, which is what we would have to do to be able to take the vessels and possibly recharter them to someone else.

Do you have the option to terminate the charters?

Does that actually fit with Solstad?

Well, there is not an option to terminate.

As an owner, you always have -- you've got -- as an owner, if your counterparty is not paying the charter hire, there are mechanics in a charter agreement that you can then take the vessel back and terminate the charter.

This is in all our agreements.

So nothing special relating to these vessels.

For the time being, as I said, they are on charter to Solstad, and we are receiving charter hire as we agreed 6 months ago.

Got it.

And then also wanted to touch on end market concentration.

You had -- you hadn't really -- you had said that you aren't going to provide guidance essentially on how that might look.

But on the lower end, how small would you be willing to let a particular segment become?

Is there a minimum value that you think makes sense?

Or would you let potential end market fall away entirely?

Well, when we make transactions -- when we look at transactions, we don't focus specifically on allocation for segments as such.

It's all deal by deal, and we have -- we used to have 100% in the tanker space, now we are 7% there.

The offshore space used to be almost 60% at some stage a few years back, now it's down to 27%.

So this is, I will call it, a moving mix.

It's all down to which transactions we do from time to time.

I think one of our benefits of having a multiple segment approach is that we can benchmark deals between the segments.

What we have seen over the years is that if you focus on one segment only, you are almost programmed to invest at the peak of a cycle because it's when the market is peaking, that's when the equity market typically are wide open for specific -- in a segment.

And also that's when banks usually are willing to lend the most, both absolute and relative.

So we think having a multiple segment approach, it gives us a better balance on the market.

It gives us a way to benchmark between the segments.

And if we think that things are going too fast in a segment, we can pull back in and focus on another segment.

Of course, we have relatively few tankers left.

I mean, we wouldn't mind owning more tanker vessels if we had the right structure and if we had the right counterparty with the right type of assets.

And there are also segments that we are not in like LNG, for instance, which would be a very natural fit for us.

But it's all about finding the transaction with the right assets and we prefer modern assets.

We don't -- we would be hesitant to take on older type assets to the right counterparty with a right structure of the deal, where we can also generate a running cash flow that can support our dividend capacity.

So we are monitoring deal flow across the board consistently here, and of course, we have ambitions to continue building the charter backlog across the board across the segments.

Got it.

And then one more follow-up on that.

Looking at dry bulk, the 8 vessels that you have off charter, do you see any indications in the market that those actually might be put on longer-term charters in 2019?

And if you can't put them on longer-term charters in 2019, are those assets that you might consider divesting or monetizing in some way?

Well, as we say, everything -- here, everything is for sale.

You can even -- at the right price, you can even get my dogs.

No, but joking.

Yes, we always monitor the market and there are -- we have looked at -- there have been charter opportunities also for those vessels.

That said, we -- given our size of our fleet and given that we can actually run and operate vessels in the market, means that we don't have to fix them up long term to keep them employed.

So these vessels were on long-term charters and they were redelivered from the charters, and we have traded them in the market and our ambition is to continue doing that until we think the market has the right balance and we would fix them out.

So us not having fixed them, I guess, would be an indication that we haven't -- we don't think the market has been strong enough for a long enough period to the right counterparty.

But as I said, initially jokingly, I mean, everything in our portfolio is for sale at the right price.

And what would I say, if you offer me a good price, you can get that one and I'm sure you can get other assets too.

But our ambition is to build our portfolio of assets, which hopefully can also support increasing the charter backlog and support the dividend.

Our next question comes from the line of Randy Giveans.

All right.

So a few quick questions for me.

Ship Finance, you have roughly $212 million in liquidity plus you expect pretty significant free cash in both 2019 and 2020.

So where are some of those expected uses of this cash?

Any thoughts on share repurchases at this point?

Well, I mean, we did repurchase some convertible notes just before year-end.

So -- but it was on a relatively small scale, it was less than $30 million nominal.

We wanted to roll out the process.

We look at deal opportunities, I would say, on a -- new deal opportunities almost on a daily basis.

And we are capital agnostic.

So for us, it's all about doing transactions that we think will be accretive to our distribution capacity in the long run.

It could be everything from buying a vessel to potentially buying back a share.

So this is something we focus on all the time.

But we don't have any sort of specific target.

As Aksel mentioned, we believe we have relatively strong cash position.

We have more cash now than we had when we bought the 3 deepwater drilling rigs 10 years ago.

So we believe that we could do significant transaction if the right transaction materializes.

That's fair.

Okay.

And then kind of looking at the dividend or distribution, your coverage ratio should remain above at least 1.5x in both 2019 and 2020.

Like you've mentioned a few times, current yield of 11%.

I know you don't give specific dividend guidance per se.

But if you can just handicap, is the dividend more likely to go up or down in the next year or 2?

Well, I think from a management perspective, our ambition is, of course, to build the dividend and increase it over time.

But the board has always been very cautious and the board has never promised future dividends.

But if we look at the history, the dividend has normally been stable or increasing.

So -- and when the board looks at, I would say, distribution capacity, they don't look at it on a quarter-by-quarter basis, they take a more long-term view when they set the dividend.

So ambition is to grow it, but no promises.

Okay.

Sure, that's fair.

And then one quick question for me.

Any of the long-term charters interested in scrubbers?

I know there was some talk for scrubbers on the Capesizes chartered to Golden Ocean, but maybe any update for those or other vessels, maybe container ships?

Well, yes, we are going to install scrubbers on a number of the vessels that we have in our fleet.

We are going to install some scrubbers for our own account relating to tankers.

As you mentioned, Golden Ocean is in the process or has committed to purchase scrubbers on most of the vessels they have in our fleet.

We are discussing with them whether they should pay for it or whether we should, call it, finance it effectively for them.

And we are also in the process of installing scrubbers on a number of the large containerships.

When we look at scrubbers you collect from our side and when we do it for our own account, it's typically for vessels that are sort of in the spot market or short-term market because that's when you can get the benefit of potential duplication and potential for spread expansion, particularly in the early phases of the IMO 2020 phase-in.

But when we have assets on long-term charters, it's always our charter who pays for the fuel.

So whether we put a scrubber on a charter vessel is really down to what kind of deal is it for us?

Does it makes sense from a cost of capital perspective?

Do we get the returns we need?

And then we are pretty agnostic on that.

Sure.

Okay.

And then I guess, with that, any CapEx or off-hire day guidance for this year, assuming the scrubbers come from Feen Marine?

Well, we have -- Feen Marine is one provider.

I think there will be many scrubbers from other providers.

So we are -- we have, I'd like to say, we have -- we're not locked into one single provider of that.

In terms of CapEx, as I said, for our own account, we're looking at CapEx of around -- I would say, around $10 million in aggregate.

And then potentially depending on agreements with our charters, it could be more if we get the right return on the capital invested.

But from an overall perspective, in terms of our own cash outlay, it's relatively marginal and if we do more, it's typically because we get a very nice return on the capital we put in.

And that would all be in 2019?

Most of it will be 2019 and some into 2020.

The next question comes from the line of Gregory Lewis.

Could you talk a little bit about the opportunity set you are seeing in 2019.

I mean, clearly, 2018 was a strong year for you guys in deploying capital pretty much throughout the year.

But as you look at 2019, could you talk a little bit about the deals you are seeing?

Are they similar in nature?

Have yields moved at all?

Or is it kind of '19 shaping up just a lot like '18?

Yes, I think every deal is different.

So it's difficult to be specific and tell that the general market is changing.

I would say that the deals are certainly not becoming worse from a risk-reward perspective in our minds.

And also in light of the continued effective reduction in bank portfolios, we also see more, call it, opportunities, what we're saying, on bareboat or, call it, structured finance related where many players out there and, I would say, sort of Tier 2 players where Tier 1 are the listed large entities who will -- who continue to have very good access to bank markets like we do, but there are many on the notch below that who don't have that access and who cannot necessarily go up and raise a bond in the market, et cetera.

So there could be opportunities around that.

But also for companies who look at their own cost of capital because what we -- I think, we can offer, we can offer a wide range of products either from a bareboat structure, which -- with a purchase obligation in the end, which is really a structured financing or cost of capital arbitrage, where we can benefit from our superior access to capital than many others.

We can also go to the other end, where we can have a vessel on time charter, where we, through our affiliation with the Fredriksen Group, can source -- can manage those vessels more cost-efficient than most, we can build vessels, and we have relationships with the shipyards that are much stronger than almost any other shipping company out there, and therefore, can potentially source deals and manage deals very efficiently combining with efficient capital.

So we're looking at a wide range of products where we are now at -- ranging from either end of the scale.

But in the end, it's all down to what's the risk-adjusted return for us, do we think it will be beneficial and support our dividend capacity going forward.

Okay.

And then just on your liquidity.

I mean, you have the bond due coming, like, later this quarter.

After you take away that, I mean, you have the Frontline shares.

I don't imagine you'd want to sell those at this point.

You have the, I guess, $200 million of unencumbered vessels.

Could you sort of talk a little bit about how you're thinking about overall dry powder at this point in terms of what type of growth or projects we could see without the addition of new debt at this point?

I think we -- as you see, we have very -- different sources of capital available.

I think we refinanced our NOK from the last fall.

So part of that was due to take out in the upcoming March month.

We might still go-to-market as the market develops, but we'll just have to monitor basically how that market develops.

I think -- for the time being, I think we are in a good position and it will really depend on the specific project or acquisition on how we finance that.

We have very good access to, call it, bank, bank capital at attractive cost.

So really on a case-to-case basis, it's a bit difficult to kind of give a general comment on exactly how that's going to look at the end of the day.

But we think we are in overall good position to basically look at market opportunities and there are a few coming our way.

Okay.

And then just one last one for me.

As I look at those unencumbered vessels, I mean, you mentioned the 2 VLCCs.

The other vessels that are on it, should we be thinking about those more in terms of going the bank debt route market?

Or do we think maybe they'll be better -- more suited to be in the lease market?

I think, if -- I mean, we are going to draw down on the new facility for the VLCCs now in this quarter.

That's correct.

But I think to the extent they are going to leverage off those vessels, that would just be with paying (inaudible) senior financing, if we do that at all.

It's also good to just have some free assets providing just cash flow to support the dividend.

So I think that's how we'd like to have it for the time being.

The next question comes from the line of Magnus Fyhr.

Just a few questions here.

First, I mean, you've done a good job in diversifying the company into having a fleet of assets in various segments.

Is it -- at any point, the liner segment, is it risk that it's becoming too big, given that most of the deals have been in that segment?

Or is there any target level that you feel like you would need to look at other segments from a diversification standpoint?

Well, over time, we have been -- as I mentioned, we started with 100% tankers, now it's smaller.

We had a very big proportion of offshore at some time.

It's smaller.

And now it's containerships that's relatively larger.

So this goes in waves.

Also when we look at the containership exposure, there are really to 3 of the top liner companies.

So it's not all concentrated on one counterparty.

It's multiple counterparty.

And it's also different in structure.

Some of them are bareboat and more, call it, structured financing sort of tuned, while others we have time charters where we have more, call it, residual exposure and opportunity towards that.

That said, of course, our ambition is to have a diversified portfolio.

So we are looking also at transactions in other segments.

But again, it's all down to what's the deal -- what does the deal look like, risk-reward, individual deals, and we're not so focused on specific percentage in any segment.

So if we think that a deal is right, we could do more on the container side, while of course, our preference, everything equal, would be to weight up in some of the other segments, again, to have a balanced portfolio over time.

Yes, I like the Slide 7. Has that made -- I noticed you dropped one slide on the payout ratio and distributed cash flow.

Was there any reason for that?

Not really.

It was sort of -- it was really a slide we didn't use that much.

I mean, we give out all the numbers.

And the only -- the thing we really focus on there has always been sort of the debt reduction.

So it's been very sort of stable from quarter to quarter.

Also we didn't have a sort of separate slide on each segment because we basically provide full breakdown on our fleet and the backlog through our website.

So instead, we focused on Slide 6 where we sort of combined that in that one slide.

So I think, it's really a more of a refresh of the slide deck than anything.

And one last question.

There has been a lot of focus on, I mean, the excess liquidity on the balance sheet with, I guess, 2018 somewhat of a transition year.

With expected cash flow to increase in 2019, how much cash do you really need on the balance sheet?

I mean, you have excess of $200 million now of liquidity.

And it doesn't seem like a lot of the recent investments have required much equity capital.

Well, if you look at our portfolio with predominant long-term chartered assets, we -- you are very correct.

I mean, you really don't need that much cash on the balance sheet because you really need to have a buffer cash because, call it, the timing of when money comes in may be different for when you pay, let's say, debt installments, et cetera, or operating expenses on the vessels.

In addition to the $200 million, as Aksel pointed out, we have $200 million of unencumbered assets and also a lot of, call it, financial investments.

So our capacity if you really, call it, squeeze it, is more without raising outside capital in our portfolio.

So I would say you can easily run a portfolio like this with, say, plus/minus $50 million of debt without any problems and without really testing any limits.

We have been running with relatively high cash proportion, I think, all the way since we were in the, call it, in the process with Seadrill.

And we have done a few transactions where we have freed up a lot of cash selling a couple of offshore assets.

So I think this is more a matter of timing for when capital is being invested, more so than necessarily a desire to sit with a very big pool of cash.

All right.

And just one last.

The -- I mean, the yield has come down a little bit here, which is good to see.

But you are checking a lot of boxes here.

You diversified your cash flow and you diversified your capital structure.

You got good solid long-term contracts and a strong backlog.

What else can you do to make investors more comfortable with the Ship Finance model?

Yes, like we said, over time, hopefully, we can demonstrate that we are performing through the cycles.

We have -- in the presentation, I have tried also to highlight how the different products that we can offer to our counterparties.

If you look at our charter backlog, we did take that impairment on the offshore assets.

They were relatively marginal from an overall portfolio perspective.

But all the other customers are performing very well and no other issues in the portfolio, as we speak, which, of course, make -- is where -- makes us very happy.

So over time, hopefully, because the model proves itself and if we can continue paying sustainable and hopefully dividends, maybe we can -- maybe more people will believe in us, who knows.

I mean, we tried -- we have to do our best, we have to continue focusing on finding opportunities, minimizing costs and delivering value to shareholders and over time, hopefully, it will reward itself.

Right.

I definitely think the dividend increase will speed up the process.

(Operator Instructions) Dear speaker, there are no further questions.

Okay.

Then I would like to thank everyone for participating in our fourth quarter conference call.

And I hope that many of you have enjoyed all the dividends we have distributed over the past 15 years.

We are committed to continue building the company and we believe there will be good investment opportunities for us going forward with attractive risk-reward profile.

If you have any follow-up questions, there are contact details in the press release or you can get in touch with us through the contact pages on our web page www.shipfinance.bm.

Thank you.

That does conclude our conference for today.

Thank you for participating.

You may all disconnect.

Have a nice day.