SFL Corporation Ltd. (SFL) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Q4 2012 Ship Finance International Ltd. Earnings Conference Call. Just to advise, today's conference is being recorded. And at this time, I would like to hand the conference over to Mr. Ole Hjertaker. Please go ahead, sir.

Thank you, and welcome, everyone, to Ship Finance International's fourth quarter conference call. My name is Ole Hjertaker, and I am the CEO in Ship Finance Management. And with me here today, I also have the CFO, Harald Gurvin; and our Senior Vice President, Magnus Valeberg. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the 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. Net income for the quarter was $51 million or $0.60 per share. This number included a gain on sale of assets of approximately $21.5 million or $0.27 per share. Aggregate charter revenues recorded in the quarter, including 100% owned subsidiaries accounted for as investment in associate, was $168 million. The EBITDA equivalent cash flow in the quarter was $134 million and last 12 months, the EBITDA equivalent was $585 million. There was a full cash sweep effect on 22 out of 27 Frontline vessels worth $12.1 million in the quarter. Including the accumulated amount in the 3 previous quarters, the cash sweep for the year ended up at $52.2 million or approximately $0.65 per share for 2012. The Board of Directors declared a cash dividend of $0.39 per share for the fourth quarter already in…

Thank you, Ole. On this slide, we have shown our pro forma illustration of cash flows for the fourth quarter compared to the third quarter of 2012. 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 of 2012, total charter revenues were $155.9 million or $1.84 per share, compared to $166.2 million or $2.10 per share in the third quarter of 2012. The fair share data for the fourth quarter reflect the issuance of 6 million new shares in October 2012. On the VLCCs, Suezmaxes and chemical tankers, revenues were in line with the previous quarter. Our liners, which include container vessels and car carriers, achieved revenues of $80 million in the fourth quarter, up from $14.6 million in the previous quarter. The increase is mainly due to the delivery of the 2 car carriers in end October and mid-November, respectively. The drybulk vessels achieved revenues of $40 million in the third quarter compared to $15.6 million in the previous quarter. The reduction is mainly due to the sale of 3 OBOs during the fourth quarter, partly offset by the delivery of 1 Handysize drybulk carrier in mid-November 2012. On the offshore side, charter hire came in at $81.9 million, down from $93.9 million in the previous quarter. The reduction is due to a scheduled step-down in the charter rate for the ultra-deepwater drillship West Polaris, which is on a long-term bareboat charter to Seadrill. It is important to note that the rate reduction is balanced by reduced interest and debt repayments on our related financing. We also generated a cash sweep from Frontline of $12.1 million in the quarter, which represents a full cash sweep on 22 out of the 27 vessels trading…

[Operator Instructions] We will now take our first question from Fotis Giannakoulis from Morgan Stanley.

I want to ask about the containership sector, and what is the situation right now with the 4 smaller containership vessels? As we know that there is a lot of stress in this particular category, what are your thoughts about employment of these ships or if there are also thoughts of potentially disposing these vessels?

Yes, we have now 6 smaller container vessels and -- sorry, 7 smaller container vessels, and all of them are currently trading. The market, as you know, fairly depressed and the rates are in the region low-$6,000 to mid-$6,000 per day. Our strategy will be to continue trading these vessels in the short-term market until rates pick up, and we do not have any current plans of disposing these vessels.

Just adding to this question, since you are not planning to dispose and given that there are a lot of reports of a lot of distressed sales of containerships, have you really seen any of the German banks willing to sell containership vessels? And would you consider potentially acquiring these types of vessels at the current very low prices?

This is Ole. I think if you want to, you can probably acquire as many containerships as you wish out from the, call it, from the KG market. The dilemma is how much debt is associated with the vessels and will you be able over time to service that debt. We have been -- and at the same time we are, of course, very mindful of the technological shift we're seeing, eco designs where we're seeing a much more pronounced effect in the containership segment compared to many of the other segments. That's partly due to the fact that the containerships have traditionally been operating at much higher speeds than they are currently trading at and therefore optimized for a different speed pattern and have therefore higher suboptimal construction figures compared to where they're trading now. Also, we've seen the effect of the new designs in the 5,000 teu range where vessels previously designed to go through the old Panama Canal. They will be difficult to trade, we believe, economically after the new canal opens because they have a very high fuel consumption and they need to carry around a lot of ballast water to be stable because they're designed to be very long and relatively narrow compared to a more optimal design, if you design that container capacity from scratch. I would say that we are, of course, looking at the opportunities in all sectors, including also the containership sector. We have not made any investments there. We invested in 2 car carriers, which are also liner vessels as we define them and we will see how that market develops and where we will find investment opportunities. But right now, we have not lined up any additional investments in the container space. We have, of course, the 4 newbuildings coming for delivery later this year and early next year.

I don't want to ask -- I know that you're not going to respond to what type of vessels you are thinking of getting into. But I would like if you can give us a little bit sense of the timing of these investments. We've seen the last few quarters that you are using your fleet with consecutive disposal of Frontline vessels and at the same time, reducing your risk to Frontline. But given the fact that you have very significant amount of capital, you have a very high availability to acquire vessels, the concern is how long it's going to take you to deploy this capital given the fact that you're Frontline fleet is likely going to be -- continue to decline.

Yes, I think for us, from a strategy perspective, I mean, we are looking at investment opportunities in all the 4 core segments we're targeting. Exact timing and details of that, of course, we cannot disclose before we do anything. But I think generally, the environment is more attractive now than it has been, say, for the last 18 months or so. And you are absolutely correct, we have been disposing of older vessels. Typically, we've been selling off vessels that are 18 to 22 years old at the end of their, call it, commercial life. And we've also generated very nice both book gains relating to these sales of around $40 million just in the fourth quarter and expected this quarter, and also the cash proceeds of nearly $70 million in those 2 periods combined. We hope, of course, to deploy that capital again efficiently, but can unfortunately not give you any more specific guiding on when that will take place.

I have one question for Harald. You recently refinanced the West Polaris, and I also saw in your statements that the debt of the ultra-deepwater, the deepwater rig was also called as a short-term debt. Can you explain what is the situation there and if you are in the process of refinancing this debt as well?

You are referring to the remaining ultra-deepwater unit. Now these were, of course, done in November 2008. We did a 5-year loan, which then matures in November 2013. The initial amount was $1.4 billion. We're now down to around $800 million. Both vessels are on profitable subcharters. The West Hercules has a new subcharter to start with for 4 years, which just commenced. So -- and the West Taurus is the initial subcharter to Petrobras. So we are discussing the refinancing there, but we have not started any sort of indication process yet. We are, of course, enjoying the nice margin we have on these -- on the existing loans and also based on the huge success of the West Polaris refinancing. We're not concerned about this refinancing.

Is it safe to assume similar amount to what you got for the West Polaris vessel?

Yes, it will probably be in that region.

We will now take our next question from Herman Hildan from RS Platou Markets.

I was just wondering how much of your $1 billion market transactions have you earmarked for growth?

When we raised the equity of $90 million, we communicated that, that would be earmarked for growth. We have invested approximately $25 million of equity in the car carriers so there's a chunk there leftover. Also when we did the convertible loan, we went out with -- and planned to raise $250 million, which was a refinancing of the outstanding amount in the 2013 notes. And as you know, it was a great success. We had more than $1 billion orders in that loan and we have therefore decided to upsize that loan from $250 million to $350 million. That leaves, of course, $100 million of call it the surplus capacity for us. It's a financing at an attractive coupon, but of course, carries the dilution of effect of being a convertible loan. But we still feel that it is attractive for us if we can deploy that capital in an efficient manner. We've also sold vessels in the fourth quarter and so far in the first quarter. These are Frontline-related vessels generating very significant net cash amounts to us of approximately $70 million in total. So between that, those amounts, there is clearly a good investment capacity. We will not sort of be specific on exact amounts and how we will allocate that capital between the sectors, but I think we have a good standing for investing new capital and at the same time, of course, have a conservative profile on our remaining debt and particularly relating to the Frontline vessels where there have been some increased attention lately particularly after Frontline numbers on Friday.

Okay. And also, I mean, we saw that you got about 20% return on equity to actually [ph] be accountable 5 years. Is this representative or should we assume a more conservative 15% return on equity for further growth? What's your hurdle rate basically?

Well, call it the equity return will vary from segment to segment. That's a consequence of several factors. It could have something to do with who the counterpart is. They call it the security of the cash flow. It has to do -- had to do with where you invest. And of course, if we acquire vessels where there are no purchase options, you will have to make certain assumptions for the residual value after the end of the chartering period. Typically, when we have invested capital, we have invested the capital with returns between, I would say, on equity between 13% and 22%, 23%. Hopefully, we will have very nice equity returns also on new additional deals, but we'll caution you to sort of to go out with call it specific percentages but because there are always a lot of assumption that will have to go into such returns and not least, as I mentioned, the residual value assumption.

Yes, obviously, I mean, it's more for, call it, getting a feel of how much you could potentially raise dividends with time and we have seen in the past that you raised dividends with growth. I mean if you add up the numbers that you refer to, you should have at least sort of $60 million, which means that you could raise dividends by say $0.40, $0.50? Could you elaborate a bit about the communication with the board in terms of the intention to increase dividends with growth or how should we think about that going forward?

Well, the board has always been cautious with respect to guiding on dividends and the board sets the dividends on a quarter-by-quarter basis. And we do, of course, hope that new investments will enable us to increase distribution capacity, but I can unfortunately not advise you with any specifics on how -- when and how that will take place. But of course, if you look at the company and the business model, our business model is to build the company and hopefully then by building the company, we can also make that meaningful for investors by also potentially increasing dividends over time. The Board, from -- when you look at how the board decides on dividends, the only guiding they can give is that the board does not necessarily only look at the current quarter when they set a dividend. I think they take a more long-term view and what they believe is a more long-term sustainable distribution level when they set the dividend. Therefore, we can see and for instance when -- in the past, when we had very significant profit splits from Frontline, we saw the dividend being relatively stable even though we got a very high, call it, cash payments. And part of those cash payments were then used to reinvest and continue build the company in a more long-term stable fashion.

Okay. And just finally, you had a comment where you said that the environment is more attractive now than over the last 18 months. I presume that you were referring to deal flow or could you elaborate a bit on that?

Well, we see the attractiveness both in terms of increased deal flow. We see banks now putting more pressure on what we call weaker owners to do something on the asset side where we believe that could be attractive opportunities. And we also see shipyards now quoting prices that are what we would say in modern time and an all-time low levels particularly if you adjust for inflation. So from that perspective and the influence, newbuilding prices have on secondhand values, we believe the timing is interesting now, particularly if you have a view on inflation in the main vessel-producing countries such as Korea and China.

Okay. So you're not worried that you won't be able to deploy your $250 million over the next 12 months?

No, I'm not concerned of our ability to do that. We could do that extremely quickly, but I think we take a cautious approach. We try to make the right investments. Of course, we will not know that until afterwards. But we hope that we over time can show that we make a good long-term investments that will build on the distribution capacity.

[Operator Instructions] There are no more questions, gentlemen.

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

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