Earnings Labs

SFL Corporation Ltd. (SFL)

Q2 2017 Earnings Call· Wed, Aug 30, 2017

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Transcript

Operator

Operator

Good day and welcome to the Q2 2017 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 Mr. Ole Hjertaker, CEO. Please go ahead.

Ole Hjertaker

CEO

Thank you and welcome everyone to Ship Finance International and our second quarter conference call. With me here today, I have our CFO, Harald Gurvin and 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 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. The dividend is lower than in the previous quarter, reflecting the current uncertainty relating to the Seadrill charters and also lower profit split from the tankers. While we do not know the final outcome of the Seadrill restructuring, we believe the market has already discounted the worst case scenario for Ship Finance as with prior to this dividend reset we are trading at more than 13% yield. And once the Seadrill restructuring is behind us, we will be able to return our focus to growing our cash flow by evaluating acquisitions that maybe accretive to our dividend. The $0.35 dividend represents $1.40 per share on an annualized basis or 10% dividend yield based on the $13.70 closing price yesterday. This is our 54th consecutive dividend and they have not paid more than $23 per share in dividends or $1.9…

Harald Gurvin

CFO

Thank you, Ole. On this slide, we have shown our pro forma illustration of cash flows for the second quarter compared to the first 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 second quarter, total charter revenues were $147.2 million or $1.57 per share, up from $143.8 million in the previous quarter. VLCC and Suezmax revenues were slightly down in the quarter mainly due to the sale of 2 VLCCs and 1 Suezmax tanker in the first and second quarters. Liner revenues were up in the quarter mainly due to the full quarter of earnings on the second 19,200 TEU container vessel delivered in March. Drybulk revenues were slightly up, mainly due to improved earnings on the smaller Handysize drybulk carriers trading in the spot market. Offshore revenues were also slightly up due to an extra day of earnings in the second quarter compared to the first quarter. Further, the jackup drilling rig Soehanah commences new bareboat charter at the minimum rate of $10,000 per day in the end of June which will have full effect in the third quarter. There was no profit share under the 50% profit share agreement with Frontline compared to $5.6 million in the previous quarter. The crude oil tanker market remains at soft levels during the second quarter and also so far in the third quarter. So overall this summarizes to an adjusted EBITDA of $117.6 million for the quarter or $1.26 per share, only slightly down from $1.27 in the previous quarter, despite no profit share in the second quarter. We will then move on to profit and loss statement as reported on the U.S. GAAP. As we have described in previous earnings calls, our accounting statements…

Operator

Operator

Thank you, sir. [Operator Instructions] We will now take our first question from Magnus Fyhr from Seaport Global. Please go ahead. Your line is open.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead. Your line is open

Yes, hi. Just a couple of questions. I guess the first one on the dividend, what kind of assumptions went into that $0.35 number as far as future cash flows?

Harald Gurvin

CFO

Well, the dividend is set by the board on a quarter-by-quarter basis and it’s typically not specifically tied to the quarterly results isolated, but more based on a long-term view and a balanced view for what the Board believes is more sustainable level on a longer term basis. Of course, we do not know currently, I cannot make any comments relating to the Seadrill restructurings and the discussions that we may have there, but the Board believes that a $0.35 dividend is a sustainable level. And also if you look at the share price and how that share has actually been trading, we are still in excess of 10% dividend yield. So, we believe this is – it has already been priced into the stock for some time.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead. Your line is open

Okay. And with the distributable cash flow potentially declining, what type of payout ratio are you guys comfortable with going forward?

Harald Gurvin

CFO

Well, we are not tying it to a specific payout ratio based on individual quarterly results as we know the quarter results may vary over time. What we focus on is we basically look at this management and our recommendation to the board, we base this on what we believe is long-term sustainable revenues from a various assets, asset by asset effectively. And then based on that, we make a recommendation to the board on what we believe is a sustainable level and that’s really – that factors in when there is uncertainty, we factor that into our effectively then long-term recommendation, but there is no specific payout ratio as such. But if you look at the long-term, in the long-term picture, we have paid out around 80% of net income from our inception. And I think for a dividend yield type company that is quite moderate. We have seen other dividend – other companies with significant dividends who have paid out over time significantly more than what they have earned. We believe that is – well, to do that you have to assume that your assets are going up in value and therefore that your depreciation is effectively wrong. And while we have taken a more conservative approach and paid out less than our net earnings over time which of course also has meant that we have been able to grow organically and not only by raising capital every time we buy new assets.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead. Your line is open

Okay. And once you – I mean you mentioned that you may start to focus on new projects once the Seadrill restructuring is behind, where do you currently see the best opportunities for Ship Finance as far as expanding further, is the container still one of the better areas?

Ole Hjertaker

CEO

Well, containers are still interesting. I mean it’s been down – there has been sort of a downturn on the container market for a time, it’s come back, it’s corrected back somewhat. We don’t see much ordering now on the containers side. There are rumors that some of the liners are looking at big assets again. But it’s been relatively slow from a comp ordering perspective or new building perspective. But yes, we believe containers are still interesting. These are assets that typically go into logistics systems where the users, the container lines have a long-term use for the assets within their systems. We also see opportunities on the tankers side and right now probably more on the LNG side – gas side. But there are also opportunities on the tankers side. So I think it’s fair to say that we see opportunities across the board and we are while we have been of course careful to ensure that we maintain a very strong balance sheet also what we say factoring in uncertainty around the Seadrill restructuring, we have continuously of course screened for new projects that we have taken a conservative approach and we believe that doing that is prudent. At the same time we see now that asset values and new building values and also fully deployed values based on what new building costs have come down to quite attractive levels in several segments. So we believe that from a cycle perspective it’s an interesting – it’s interesting point of time to invest capital. But of course we have to make sure we do that with the right assets and we work with the right customers and not least that we work with sound call it conservative assumptions, so we don’t get an asset surprise at the end of the charter if effectively the depreciated value then is higher than what the market may be. So it’s all a balanced approach. We do see project opportunities, but I cannot comment specifically on what we do. We prefer to try to do the right deals and not sort of promise a certain percentage in any specific segment because that could lead us to do the wrong – make the wrong decisions.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead. Your line is open

Okay. So would it be fair to assume that you would not any deals until you this Seadrill restructuring behind you?

Ole Hjertaker

CEO

Nothing we should never say never, but I think as Seadrill has communicated that their restructuring is pending within just a few weeks now, I think it’s fair to say that until that is certainly clarified and we have more visibility on sort of the impact on us and our leases we will be careful. But that said, there is hopefully a good chunk and that’s of the year and we will continue to look for deal opportunities obviously.

Magnus Fyhr

Analyst · Seaport Global. Please go ahead. Your line is open

Okay, great. Thanks. Thank you, Ole.

Ole Hjertaker

CEO

Thank you.

Operator

Operator

[Operator Instructions] We will take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Your line is open.

Fotis Giannakoulis

Analyst · Morgan Stanley. Please go ahead. Your line is open

Yes. Hello, gentlemen and I am sorry if my question were asked earlier, I joined the call a little bit late. Ole, I want to ask you about if there is Chapter 11 for Seadrill, how long do you think that it will take to be clarified what the exposure and Ship Finance is going to be and in relation to that how confident you are that the guarantees that you have provided to the banks for the three rigs are not going to involve West Linus that has already made contract with ConocoPhillips?

Ole Hjertaker

CEO

Thank you, Fotis. I cannot unfortunately not comment on the specifics relating to the Seadrill restructuring, as you have seen in other Chapter 11 proceedings, in other companies, it usually takes us some period, takes a few months before it’s finalized. But we believe we just have to wait and see exactly how it plays out relating to our leases. With respect to the financings, we have limited guarantees on the financings – on the bank financing attached to sort of to each of the rigs. And the guarantees there are of course only payable if and when the banks accelerate the loan i.e. and go after the securities which of course includes equally the mortgage over the rig and then our guarantee. So we then in any case have the opportunity at that stage to pay down the loans if that – if we believe that is a better viable opportunity for us and of course then they wouldn’t call on the guarantee and/or nor could they take the asset away from us. But again this is all hypothetical and we have to wait until there is announcement from Seadrill before we can comment on the expected impact on us. And we will – we expect of course to send out the press release whenever there is announcement to be made, we will also set a press release and give more information on status for us and what potential impact would be for our leases.

Fotis Giannakoulis

Analyst · Morgan Stanley. Please go ahead. Your line is open

Thank you, Ole. Just to a little bit clarification about the ConocoPhillips contract, is this contract on the rig or is this contract on Seadrill and how is this structured if – and what would happen if there is Chapter 11, will this contract continue to exist?

Ole Hjertaker

CEO

Well, this is into our chartering counterparty who has contracted ConocoPhillips. But in the agreement there, there is a step in right if there is a default type situation. But of course, that ConocoPhillips would then – and then of course if we want – if we would want them to step in, we would have to ensure that we have operational management lined up for the rig to take care of that. Again, very hypothetical, but of course any such step-in would also require the charter’s consent, but we have that built into the agreement that there is a step-in.

Fotis Giannakoulis

Analyst · Morgan Stanley. Please go ahead. Your line is open

Thank you, Ole. One last question about your capital allocation and if you can comment about how do you view the use of your liquidity between supporting or paying dividends and growth and what is your target capital structure, would you envision issuing some preferred or additional unsecured debt, what is the loan to value ratios that we are looking for?

Ole Hjertaker

CEO

Well, we will of course try to optimize our balance sheet all the time. We typically – what we do when we do new transactions, we typically finance the transactions isolated and we try to limit the guarantees all depending on where we think the risk profile is and specifically call it project that could one vessel, it could be 10 vessels, but in a package. And typically finance that and so far finance that in the bank market where we have the amortization [ph] on the assets and that’s also how we also think we can justify having some financing at corporate level which currently includes two NOK denominated bond loans and two convertible notes at the parent level. But we – so it’s all about sort of optimizing capital at the different levels and I would also say that leverage its relevant. What we do give out to everyone like who wanted is our full charter backlog asset by asset. And you could say what this a value of an asset in our portfolio, well, one it’s the cash flow they generate and two, it’s whatever residual value you assume after the end of the charter period. And I would say that depending the various counterparties and the various assets should probably depreciated back – this is mathematically with different factors implying the call it the relevant risk in the deal. So we don’t communicate sort of loan to value as such. But what I would say is that we have never been in violation with the covenants in our various loan facilities over the 13 years that the company has been in assistance. So I think we have a very strong standing in the bank market and that we get very good financing in turn. As illustrated by the two – our two prototankers that we have just secured financing for where the amount is higher than the final installment, so you could say that the final deliveries it’s a net cash positive for us. We had the $280 million approximately of cash and available liquidity at quarter end. Then we had $110 million, $115 million of liquid securities on top of that. So I think we have a relatively robust financial position and hopefully decent investment capacity to build our distributable cash flow going forward.

Fotis Giannakoulis

Analyst · Morgan Stanley. Please go ahead. Your line is open

Thank you very much, Ole.

Ole Hjertaker

CEO

Thank you.

Operator

Operator

We will now take our next question from John Prochaska [ph]. Please go ahead. Your line is now open.

Unidentified Analyst

Analyst

Good morning. My question is concerning the political and military uncertainty in Asia to what impact is that affecting the company’s outlook and its financial stability?

Ole Hjertaker

CEO

Yes. Thank you. We are of course following the developments in Asia closely through the media as I am sure all of us are. Our vessels trade all over the world, so they are not specifically only trading in Asia or within the regions where there is attention. But I would also say that over the years, there is always the attention here or there whether it’s in Korea or North Korea or whether it’s relating to terrorist or sort of the hijacking and in Eastern Africa. So you need to be vigilant. We are of course working very closely with also with our insurance companies and also making sure that our vessels do not violate any trading restrictions on the various governmental rules including of course the U.S. rules. So they trade all over the place. If you look at what the impact of us would be, the question is how will this affect world trade because after all our assets are in the end used to transport primarily raw materials. Tankers and bulkers are basically the cheapest way to move raw material from one place to another. And then container ships and car carriers are more finished goods moving from between the various areas. And what we have seen over time is that the raw material is dislocated from where it’s been used and therefore there has been also in times of call the international conflicts that have always been used for transportation capacity. But more than that it’s difficult to judge a specific impact on us, of course if it should affect the capital markets that would of course have an impact on our ability to raise capital internationally, I am sure, but that’s something that would affect everyone involved in the overall business.

Unidentified Analyst

Analyst

Thank you. One last question if I may, I came in late, the restructuring under Chapter 11, is this for Ship Finance International or just a subsidiary?

Ole Hjertaker

CEO

Well, it’s our customer Seadrill Limited, the drilling operator whom we have [Technical Difficulty] drilling rigs to. So we have owned – we own through our subsidiaries we owned 3 drilling rigs that are chartered into Seadrill to subsidiaries of Seadrill that fully guaranteed by Seadrill. Seadrill is in the midst of a financial restructuring and they have announced that it may well be through Chapter 11 proceedings and they have also indicated that it could be on or before September 12. Of course, when Seadrill and these 3 rigs, which is effectively the charter of the two rigs, file for Chapter 11 that also has an impact on our charters we assume. So, we have engaged in discussions both with Seadrill and also our financing banks relating to this. But I can, unfortunately, not give any specific details on our discussions unfortunately, because I am prohibited to do that, but once it’s clarified in and once Seadrill is announcing something, we will of course also make an announcement on our side giving more details on what we think the effect would be on relating to our charters.

Unidentified Analyst

Analyst

Thank you.

Ole Hjertaker

CEO

Thank you.

Operator

Operator

[Operator Instructions] There are no further questions left.

Ole Hjertaker

CEO

Thank you. Then I would like to thank everyone for participating in our second quarter conference call. If you do have any follow-up questions there are contact details in the press release where you can get in touch with us through the contact pages on our webpage, www.shifinance.bm. Thank you.

Operator

Operator

Ladies and gentlemen, this concludes the Q2 2017 Ship Finance International Limited earnings conference call. Thank you for your participation. You may now disconnect.