SFL Corporation Ltd.
Q4 2015 Earnings Call Transcript

Published: 29 Feb 2016

[Operator:]

Good day and welcome to the Q4 2015 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 Hjertaker, CEO. Please go ahead, sir.

[Ole Hjertaker:]

Thank you and welcome to Ship Finance International and our fourth quarter conference call. With me here today, I have our CFO, Harald Gurvin 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 again declared a quarterly dividend of $0.45 per share. This dividend represents $1.80 per share on an annualized basis or 14% dividend yield based on closing price of $12.56 on Friday. This is 48 consecutive dividend and we have now paid more than $1.6 billion in dividends since 2004 or more than $20.50 per share. We have increased revenues, EBITDA and net income this quarter compared to last quarter. Aggregate charter revenues recorded in the quarter including 100% owned subsidiaries accounted for as investments in associate was $170 million and the EBITDA equivalent cash flow in the fourth quarter was approximately $142 million. Last 12 months the EBITDA equivalent has been $530 million. The reported net income for the quarter was $54 million or $0.58 per share this is after gains on the sale of Frontline notes and sale of two older Suezmax tankers in the quarter balanced by impairments relating to older offshore supply vessels and some marketable senior notes owned by the company. Profit share contribution in the quarter was nearly $21 million mainly from the Frontline vessels, but also linked to some profits arrangement relating to six Handysize bulkers. And the distribution of charter revenues per segment is changing with a continuing rebalancing from offshore to container and drybulk vessels. In the fourth quarter 34% of revenues was from the offshore segment down from 52% one year ago and with the delivery of the new container vessels we expect the relative share from this segment to increase going forward. In June we announced the acquisition of three new building container vessels between 9,300 and 9,500 TEU capacity. Two of the vessels have been delivered already and the last vessel is due for delivery in May. The vessels have been chartered out to Maersk Line for a period of five years plus two year options, and the transaction added more than $200 million to our fixed rate backlog. We estimate average EBITDA from these vessels to more than $32 million per share after delivery, and net of financing, the remaining CapEx is limited to $24 million at quarter end. We’ve also recently agreed to acquire two large 18,000 to 20,000 TEU class container vessels with scheduled delivery in late 2016 and early 2017. This is in combination with long-term payable charters to a leading container line adding $460 million to our charter backlog. We estimate average EBITDA from these vessels to around $31 million per year after delivery and the financing is the way of a finance lease matching the term of the charter. This financing is without recourse to Ship Finance and our remaining net CapEx was $30 million at quarter end or $15 million per vessel payable on delivery. In December, we announced the acquisition of two large 114,000 deadweight product tankers also called LR2 type, with delivery scheduled for second half 2017. The vessels are under construction at the shipyard in Korea and have been chartered out on time charter basis for a period of seven to nine years to a U.S. based investment grade energy manufacturing and logistics company adding $113 million to our charter backlog. The aggregate annual EBITDA contribution from these vessels is estimated to approximately $11 billion on average. The aggregate yard contract prices is approximately $109 million and we will arrange financing in due course. Given the strength of our charterer and experience from other recent financing so we believe this deal will be easy to finance and we have already received interest from several financing institutions. We plan to arrange long-term financing in due course and well before delivery. At the end of fourth quarter we had full cash flow effect from the eight Capesize bulkers to Golden Ocean. The deal includes a 33% profit share and while there was no profit share from these vessels in the fourth quarter there are 38 quarters remaining on these charters with profit split optionality in each of them. The drybulk market has been under severe pressure the last few months and spot charter rates for large bulkers are currently below operating expenses. Most analysts predict the period of soft market rates due to oversupply of tonnage in the segment. We currently see significant scraping of all the vessels and virtually no ordering on new buildings, which hopefully will lead to a swifter market recovery when demand side also improves. But this could take time and we’re happy to see that Golden Ocean recently strengthened their balance sheet with $200 million in new equity and amended loan terms with the banks significantly reducing cash outflows and building on liquidity buffer. Following the merger between Frontline and Frontline 2012 in the fourth quarter, Frontline redeemed the outstanding $113 million senior unsecured notes owned by us. These notes were originally issued to us in 2013 and 2014 in connection with the sale of older vessels. The notes were originally recorded below par value and we booked a gain of nearly $30 million in connection with the redemption. We still owned 11 million shares or 7% of the company and we look forward to the potential for dividend from Frontline on the back of a strong tanker market in the fourth quarter. In the fourth quarter we received nearly $3 million in dividends and Frontline today declared $0.35 per share dividend, which will be nearly $4 million for us to be paid in mid-March. And divesting of all the vessel is part of the company’s strategy to renew and diversify the fleet. And we have recently sold three older vessels. In October we sold a 20 year old Suezmax tanker Front Splendour and in December we sold the 17 year old Mindanao and booked gains of $4.1 billion relating to these sales. Subsequent to quarter end we sold and delivered the 1999 build offshore support vessel Sea Bear to an unrelated third party. As part of the compensation for terminating the charter, we received $14.6 million amortizing senior unsecured notes from Deep Sea Supply essentially similar in structure to the type of notes we previously had from Frontline. We booked an impairment of $8.1 million relating to this sale in the fourth quarter as the net proceeds are known at the time of this reporting. Simultaneously, we also recorded an impairment of $5.2 million relating to a sister vessel Sea Leopard based on revised assumptions for residual value after hand of charter following the sale of the Sea Bear. We now have 12 VLCCs and 2 Suezmaxes remaining on charter to a subsidiary of Frontline down from nearly 50 vessels in 2004. The profit share arrangement gives us interesting leverage to tanker market and kicks in at relatively low levels compared to the previous structure. And the profits split is now calculated and paid on a quarterly basis. And as we can see on the right side of the slide, the actual charter revenues were double the backlog for the charter including the upside potential from profit split arrangement and spot trading vessels. The forward market as illustrated by the TD3 forward rates currently quoted at approximately $40,000 per day for the period between the second quarter to the fourth quarter 2016 is below first quarter levels, but still at level that would generate significant profit split for us. At this that level the net contribution per share from the Frontline vessels would be above $0.25 per share per quarter after profit split. But there is upside potential here and if the guiding from Frontline for first quarter VLCC earnings at $73,000 per day for 88% a vessel day should materialize, it would be outside the graph. And in addition, we also have dividend potential for more $11 million Frontline shares. In addition to the Frontline vessels we also have exposure to the crude oil tanker market through two modern Suezmax tankers, which have traded in a pool with sister vessels owned by Frontline. For these vessels the average charter rate in the fourth quarter was approximately $35,300 per trading day compared to our breakeven level of approximately $17,000 per day after interest and amortization for the vessels. Over the next two years, we have covered nearly three quarters of the vessel days with the combination of fixed rate charters and profit split, which will create a buffer even if market softens and we will still participate in the upside if market strengthens. In light of the continued low oil price and a softening chartering market for rates, we think that it’s worthwhile to take a look at our drilling assets in counterparties. In 2008, we acquired the ultra-deepwater drilling rig West Taurus and West Hercules at a cost price of more than $850 million per rig and we financed down 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. Now we have amortized more than 50% of the loans and Sea Drill is currently and drilling significantly lower charter rates on the rigs compared to where we started. The average bearable charter rate for the two deepwater units is approximately $140,000 per day and one of the rigs still have a sub-charter of around $450,000 per day until 2017. The harsh environment jackup drilling rig West Linus has a sub-charter to ConocoPhillips at the rate of nearly $330,000 per day until 2019 and there is no termination rights for ConocoPhillips 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 a 10 years remaining charter to Sea Drill, but then at a significantly lower rate giving Sea Drill a comfortably low breakeven rate. We also have a jackup drilling rig on charter to Indonesia based Apexindo. This is a 375 foot jackup drilling rig built 2007 in Singapore. In the fourth quarter we receive reduced charter payments on this drilling rig and the charter hire received in the quarter was approximately $4.6 million compared to $6.9 million in the previous quarter. The reduced rate is due to a soft drilling market in the region and we are in a dialogue with this customer to find a longer term solution. But in the meantime the rig is active and currently on a short-term sub-charter to an oil company. The broker value was more than $140 million in December. So significant buffer to current asset leverage and also to our book value, which today is below $100 million. The graph on the page illustrates the initial leverage when we acquired these rigs and demonstrates the rapid delevering we have always built into our drilling rig financings. Loan balance is now down to below $900 million net of undrawn committed amounts of $152 million. We today have $4.4 billion of fixed rate order backlog after our recent acquisitions and the increase in particularly linked to the container segment, which is now stands at more than $1.1 billion. The estimated EBITDA equivalent backlog is more than $3.6 billion or around $35 per share. Most of our vessels are chartered out on a long-term basis and we have more than nine years weighted average chartered coverage with a relatively similar charter coverage in all our segments. Full details on a vessel-by-vessel basis and including the new containership charters is available by contacting us via our webpage under the contact heading. These numbers do not include any contribution from the various profit split arrangement nor do they include cash flows from the two Suezmax vessels operated in the pool arrangement with Frontline and the nine container vessels and bulkers in this spot market. And as the backlog is based on fixed rate charters only. We have not included revenues from any vessels after the end of the current charter period. And we keep expanding our customer base and have now 17 chartering counter parties in total. 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 defined as charter hire per profit share less OpEx and G&A was $530 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 around $190 million or approximately $2 per share. This is excluding prepayments relating to sale of older assets. Net contribution after this was $244 million or $2.60 per share in the last 12 months. For the same period we have declared dividends of $1.74 per share or $165 million in aggregate, which is well below our historic average payout ratio of approximately 75% since 2004. And with that I will give the word over to our CFO, Harald Gurvin, who will take us through the numbers for the fourth quarter.

[Harald Gurvin:]

Thank you, Ole. On this slide, we have shown our pro forma illustration cash flows for the fourth quarter compared to the 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. For the fourth quarter total charter revenues before profit share were $146.4 million or $1.57 per share. Slightly up from $145.5 million in the previous quarter. Revenues from Suezmaxes were down in the quarter following the sale of sale older Suezmaxes in the third and fourth quarter and lower revenues from the two Suezmaxes trading in the spot market in the fourth quarter. Revenues for liners and drybulk were up in the quarter following the delivery of the first of the three container vessels to Maersk during the fourth quarter and a full quarter of earnings on the eight Capesize driver carriers to Golden Ocean delivered during the third quarter. Earnings from offshore were slightly down due to reduced charter hire received under the jackup drilling rigs Soehanah during the quarter. We recorded a profit share of $20.6 million under the 50% profit share agreement with Frontline, up from $16.6 million in the previous quarter. We also recorded a profit share of approximately $400,000 relating to six of the handysize drybulk carriers. Financial investments includes the dividend of $2.75 million received on our shareholding in Frontline in the fourth quarter and interest received on senior secured notes we own in other companies and the Frontline notes redeemed in December. So overall this summarizes to an EBITDA of $142 million for the quarter or $1.82 per share, up from $136 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 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 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 the interest income from associates. If you wish to gain more understanding of our accounts, we would also this quarter, publish a separate webcast, which explains the finance of this accounting, and investment in associates in more detail. This webcast can be viewed on our website, shipfinance.bm under our Investor Relations and Webcast. Overall for the quarter, we reported total operating revenues according to U.S. GAAP of $114 million, which includes the profit share from Frontline. We also recorded a gain of $4.1 million on the sale of two older Suezmax tankers. Total operating expenses were $69.5 million resulting in an operating income of $48.5 million. This is after an impairment charge of $13.2 billion relating to the two older offshore support vessels one of which was sold in the first quarter of 2016. Other financial items includes the gain of $28.9 million on the redemption of the Frontline notes, which were fully redeemed at par in December and an impairment of $20.6 million on investment in senior secured bonds held as available for sale securities. So overall and according to U.S. GAAP the company reported net income of $54.3 million or $0.58 per share. Moving on to the balance sheet, we showed $70 million of consolidated cash at the end of the quarter, excluding amount freely available for drawdown under revolving facilities. Available for sale securities of $200 million include investments in senior secured bonds with a fair value of $35 million at quarter end and also our 11 million shares in Frontline. Following the merger between Frontline and Frontline 2012 in November our ownership was reduced from approximately 28% to 7% and the shares were exemplified from investment in associates to available for sale securities and are now recorded at their fair value at quarter end. Stockholders’ equity was approximately $1.2 billion giving a book equity ratio of 40.5% at the end of the quarter. Then, looking at our liquidity and financing status. The company had total available liquidity of approximately $398 million at the end of the quarter, which includes $70 million in cash and approximately $328 million available under revolving credit lines. We also have $35 million in tradable senior secured bonds at quarter end and 11 million shares in Frontline with a market value of approximately $100 million based on the closing share prices on February 26, 2016. On the debt side we had approximately $1.7 billion of consolidated interest bearing debt outstanding at quarter end, which includes approximately $1.1 billion in bank loans and $630 million in senior unsecured notes. In addition our 100% loan subsidiaries accounted for as investment in associates at approximately $830 million in bank loans outstanding at quarter end. The debt in these subsidiaries is not included in the consolidated accounts, but included on the graph on the slide. Following the redemption of the $125 million convertible notes in February 2016 the company has no other bank or bond maturities until the fourth quarter 2017, while we continue our scheduled debt amortization of close to $50 million per quarter. The $125 million convertible notes were issued in 2011 and the outstanding under the notes was repaid from our available liquidity. We had a share settlement option under the agreement, but it was being more accretive to our shareholders to settling cash given the current share price. We’re comfortably in compliance with all financial covenant under our loan agreement at quarter end. It is worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 48 quarters since the company was established, which gives us the very strong standing in the banking market. Moving on to the CapEx we added six new building on a construction at quarter end. The first of the three 9,000 TEU new building container vessels was delivered in the fourth quarter. We have arranged the bank financing of $70 million per vessel at very attractive terms to part finance the acquisition as the net remaining CapEx is limited to $12 million per vessel payable on delivery of the relevant vessels from the shipyards. We took delivery of the second vessel in the first quarter while the third vessel is scheduled for delivery in the second quarter of 2016. We have also entered into agreement with two large container vessels with expected delivery in late 2016 and early 2017. The vessels will be financed through a 15 year financial lease agreement, which is non-recourse to Ship Finance and a net remaining CapEx is $50 million per vessel. In December, we announced contracts with two new billing product tankers at a shipyard in Korea. The combined contract price is approximately $109 million and delivery is scheduled during the second half of 2017. As mentioned we have not yet arranged financing, but given the strength of our charterer and our strong standing in the bank market, we expect to secure a competitive financing well before delivery and are already receiving interest on several financing institutions. Then to summarize, the Board has declared a quarterly cash dividend of $0.45 per share for the quarter. This represents a dividend yield of 14% based on a closing share price as of February 26. We reported increased revenues, increased EBITDA and increased net income for the quarter. We had continuous strong profit share contribution from the tankers and charters of Frontline and also received a dividend of $2.75 million on our shareholding in Frontline in December plus we received an $84 million in dividends in March. We have acquired several container vessels and two product tankers all with long-term charters to strong counterparts. At the same time, the fleet renewal continues with the sale of three older vessels. And with that I give the word back to the operator. Who will open the line for any questions.

[Operator:]

Thank you. [Operator Instructions] We have a question from Anthony [indiscernible] Corporation. Please go ahead.

[Unidentified Analyst:]

I have a very simple question and that is our company and I have several hundred thousand shares of it does not do enough. I hate to use the term PERFORMANCE, but it does not give its figures on a regular basis. And I just compare it to NAT in Nordic and Nordic has a PE of the 10.7 we have a PE of 8. Is there any possibility that we’re going to be a little more investor friendly? That’s the question.

[Ole Hjertaker:]

Thank you. I’m not sure if I understood the question correctly. If you’re referring to the price earnings ratio, I think I would like to comment that we have a fundamentally different business model than Nordic American Tankers or NAT as you refer to. Their business model is employing all vessels in the spot market and therefore following the spot market up and following it down when as it asset goes. Our business model is to have a long-term charter coverage, which creates a much longer call it much more stability in revenues and then also in earnings overtime we believe. And therefore you cannot compare quarter-by-quarter call it price earnings.

[Unidentified Analyst:]

I understand that sir. I understand that, but we don’t seem to be getting paid for it for instance I think that we have a decent report and not the best in the world, but decent for what we have. And the stock is down. I think that’s I just think that if we were a little more investor relations friendly that wouldn’t be having. And I’m not saying that we have to get naked in front of the world, I’m just saying instead of one release or letting the releases come out on our reports to the SEC maybe something additional to that, that’s all I’m saying.

[Ole Hjertaker:]

Thank you. And we note that and we’ll discuss that internally.

[Unidentified Analyst:]

All right, thank you.

[Operator:]

[Operator Instructions]. There are no questions at this time.

[Ole Hjertaker:]

Then I would like to thank everyone for participating in our fourth quarter conference call. 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 webpage, which is shipfinance.bm. Thank you.

[Operator:]

This will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.