Good day and welcome to Ship Finance International Q1 2009 earning release conference call. This call is being recorded At this time I would like to hand the call to Ole Hjertaker.
Thank you and welcome everyone to Ship Finance International first quarter conference call. From the company here today we have the Chairman, Mr. Hans Petter Aas. We have the Chief Executive Officer, Mr. Lars Solbakken and my name is Ole Hjertaker, and I'm the Chief Financial Officer.
Slide 2 of the presentation, 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 expect, anticipate, intend, estimate or similar expressions are intended to identify these forward-looking statements. These statements are based on current trends and expectations and while risks and uncertainties as a result operations may differ materially from the forward-looking statements.
Important factors that could cause actual results to differ [inaudible] credit markets. For further information please refer to Ship Finance's reports and filings with the Securities and Exchange Commission. Furthermore, this presentation does not constitute an offer to sell or solicitation of an offer to buy shares in the company's securities.
Slide 3, today we will discuss first the quarter financial highlights and we will look into the financial results for the quarter. Afterwards, we will open up for a question and answer session.
Slide 4, the Board of Directors has declared a cash dividend of $0.30 per share this quarter. This presents $1.20 per share on an annualized basis with 12% dividend based on closing price yesterday. We have now declared dividends for 21 consecutive quarters and more than $10.00 per share in total aggregate cash dividends.
Net income for the quarter of $50 million or $0.69 per share before $7.3 million of non cash mark to market of swaps. The reported net income after mark to market was $42.7 million or $0.59 per share.
Most of our interest rate swaps are now restructured to hedge accounting based on strict SEC guidelines. This means a lower variance in mark to market than we would otherwise have for a significant interest swap portfolio.
We also had a very strong profit share contribution in the first quarter with $14.5 million or $0.20 per share contribution. On average, since 2004 we have $88 million per year or $1.20 per share in annual aggregate profit share contribution.
The expectations for the tax book tanker market in the remainder of 2009 is expected to be lower than the first quarter of 2009 based on ship booker estimates and based on forward rates as quoted by Imerex.
However, sub chartered several vessels at higher rates and the break even level makes the break even level for the vessels in this book market lower than our base rates in our charters with Frontline and the base rates are currently on average approximately $26,000 for the deal to cease.
Slide 5, we have during the first quarter renegotiated delivery and payment terms for five container ships constructed in China. These were previously scheduled to be delivered in 2010 and we have now agreed to up to 18 months delayed delivery. This also means that more than $70 million of installments are pushed into 2011 and 2012 which of course is very positive for the company.
We have a very low remaining net CapEx after committed sales of two West Taurus tankers as we will comment on a little bit later in the presentation.
In the second quarter, we will have full effect of the new ultra deep water drilling rigs as the second semi-submersible rig was on location in Brazil and commenced the sub charter to Petrobras from mid February 2009. We therefore now receive the full base charter hire. This represents close to $100 million per quarter from these three ultra deep water rigs.
These rigs are all accounted for as investment and associate and therefore, only the net income from these wholly owned subsidiaries appears in our consolidated income statement.
We also want to inform our investors and analysts that our Chief Executive Officer, Lars Solbakken, has informed the Board that he wishes to leave the company to pursue other interests. He will remain with the company until the end of July and our Chairman, Mr. Hans Petter Aas, will take the position as interim Chief Executive Officer in the management company until a permanent replacement for Mr. Solbakken is found.
Slide 6, with respect to the dividend for the quarter, shareholders can elect to receive this in stock instead, similar to the dividend with respect to the fourth quarter. Then 55% of shareholders, elected to take the stock dividend and the effective subscription price was $5.68 per share. 2.1 million shares were issued in a non diluted way for existing shareholders and it has been a very nice performance since that with 77% increase in share price compared to close yesterday.
Companies indirectly controlled by Mr. John Frederickson have informed us that they want to take the stock dividends also for the first quarter 2009 dividend.
Slide 7, we have a unique backlog. Companies with a large charter backlog typically have five to seven year with coverage while Ship Finance is in a different league with more than 13 years weighted average charter backlog. We have $7.8 billion fixed rate order backlog and EBITDA equivalent is $6.8 billion or more than $90.00 per share.
These numbers are before any profit sharing contribution and on a fully diluted basis, net of the stock dividend with respect to the fourth quarter of 2008. Also, it does not include any re-chartering after the end of the current charters.
This charter backlog is of course very important also for financing banks in the current economic climate where access to capital is not as easily available as in the previous few years.
Slide 8, Ship Finance generates a very significant cash flow per quarter. This overview which is the operation performance is all 100% owned vessels irrespective of accounting treatment and therefore also includes vessels classified as investments in associates.
The EBITDA equivalent for cash flow before profit share for the quarter was $181 million, up 18% compared to the previous quarter. $196 million or $2.69 per share was the EBITDA contribution after profit share.
The main difference from the fourth quarter 2008 until the first quarter of 2009 was that full revenues for the two latest ultra deep water drilling units [inaudible] and Petrobras. Increased rate commenced mid February at the rate of approximately $320,000 per day.
If we look into the second quarter, we will then have total cash flow effect from all these rigs and we therefore expect the fixed charter hire to increase further into the second quarter.
Slide 9, if you look at normalized contribution from the projects, net interest in the quarter of $0.08 per share and ordinary installments from the company's projects was approximately $93 million or $1.28 per share. This excludes $47 million of payments relating to adjustments under revolving credit facilities and related to loans.
There is a net contribution from projects in the quarter was $53 million or $0.73 per share which is slightly lower than the fourth quarter contribution of $0.82 per share but still significantly higher than the declared dividend of $0.30 per share.
Slide 10, in the profit and loss statement, we want to highlight [inaudible]. First of all due to our very extensive charter backlog, most of our assets are counted for as finance leases. Therefore, the charter revenues are classified into repayment of investment in finance leases which is not included in operation revenues and interest income and service income which is included.
As we can see from the highlighted section at the top of the profit and loss statement here, we have illustrated the effects that are not included in the operating revenues of $45.8 million only for the fully consolidated subsidiaries only. We have a similar statement also of those subsidiaries that are accounted for.
On the line below operating income, we have the results in associate. This represents the contribution of three ultra deep water rigs and also a Panamax bulker. This is effectively the net income from these subsidiaries and we expect as I mentioned earlier, that we will have full effect from the revenues from all three ultra deep water units in the second quarter after the second ultra deep water rig went on the full charter hire in mid February.
We want to mention that the ship operating expenses are stable and slightly down from the previous year and this is due to improvements [break in audio]. All the vessels to front line are operated by fixed rate operating expenses of $15,000 per day which includes dry docking. Ship Finance reported $12,000 per day average operating expenses for 2008.
The depreciation in the quarter was also stable compared to the fourth quarter.
Slide 11, on the balance sheet we want to point your attention to the line called investment and associate which is effectively the investment in the ultra deep water rigs and the Panamax bulk classified as investment and associate.
On Slide 12, on the cash flow statement, we want to point your attention to the line under investing activities called retained investment finance leases. For assets that are accounted for finance leases, this is the element of the cash charter hire that is deducted before we get to operating revenues on the income statement.
Also, further down on the investing activities, we have a line called cash received from invested and associates. This is the net payment to and from these investments and associates and for the first quarter we had net cash contribution from these subsidiaries up to the parent company of $12 million.
Slide 13, this is an overview over the assets that are classified as investment in associate. SFI is the owner of one of the deep water drill ships; also the owner of two ultra deep water semi submersible rigs and front shadowing is the owner of the Panamax bulk.
All these assets within their separate accounts also have finance lease accounting and therefore a significant portion of the charter hire is subtracted before you get to operating revenues also from these subsidiaries. Approximately 50% of the revenues are excluded from the operating revenues on that basis.
Also, we just want to highlight here for you that the aggregate net income from the subsidiaries of $20.5 million is the equivalent of the results in associate that appears on our consolidated income statement.
In the balance sheet, the aggregate consolidated stockholders equity is approximately the amount that is classified as investment and associate in our consolidated balance sheet.
Slide 14, we have a portfolio of loans consisting of approximately $2.6 billion which is classified on our balance sheet. In addition, we have $2.1 million of loan in subsidiaries that are accounted for as investment and associate.
We have demonstrated the ability to source capital in an otherwise difficult financing market for most companies and also with our portfolio long term charters, our strategy has been to hedge a substantial portion of this through interest trade swaps or through interest compensation with our charters. Currently approximately 80% is effectively hedged.
We had $50 million of cash on our balance sheet as of the first quarter. In addition to that, we had $54.3 million of restricted cash predominantly linked to our swap agreements. In the year, we expect to receive additional cash from the sale of the Suezmax buildings and also as we mentioned earlier, we have rescheduled cash payments this year linked to the container buildings which also adds to the net cash contribution for the year.
We are in full compliance with our bank covenants and we have no near term refinancing needs.
Slide 15, after the two drilling rigs have been delivered, we have only a very marginal investment program compared to our fleet size. Net of the sale of the two vessels, the estimates are that there will be a positive cash contribution from vessel investments in 2009 and 2010.
For the container vessels, previously scheduled in 2010, a significant portion of payments have been pushed into 2011 and 2012 and we also expect part of this to be funded by borrowings through banks or export credit solutions.
Expected delivery of vessels under construction is always uncertain and timing of the investments may be adjusted over time.
Slide 16, our two larger counterparts are Seadrill and Frontline and we have a very robust charter backlog close to $800 million estimated for 2009 and we do provide full details on an asset by asset basis upon request to the email address firstname.lastname@example.org.
If you look at our two main counterparts, Seadrill charters which is the largest, is in the basis of 100% guarantee from the ultimate time listed, Seadrill Limited. All the ultra deep water units which is the majority of this cash flow are sub chartered to major oil companies such as Petrobras, Husky and Exxon. We also have a front loaded charter rate structure and loan repayment profile which reduces our financial exposure to these assets very quickly over time.
The Frontline charters have a slightly different structure. These are based on the various conservative base rates because the deal was structured before the market really took off in 2004. 20% profits agreement that we have relating to these vessels have generated an average $88 million both aggregate and incremental cash flow per year.
And there is also $260 million to charter, security for charter payments in case the market should be lower than the base rate.
Slide 17, as we mentioned the profit share agreement with Frontline has generated a lot of additional cash flow for Ship Finance, $88 million on average or more than $400 million over the last five years.
This has enabled the company to fuel significant growth and based on the market we expect there to be a profit share contribution in 2009.
The base rate [break in audio] under our agreements with Frontline is approximately $26,000 per day but due to the extensive sub charter by Frontline, we anticipate that the average break even level is closer to $10,000 for the year 2009.
Slide 18, in summary, we want to highlight that this has been a strong quarter from a cash earnings perspective fueled by a substantial profit share contribution also this quarter. We have increased fixed rate revenues in the quarter and we expect further increases in the second quarter when all ultra deep water drilling rigs are on full charter rate.
We have successfully renegotiated delivery dates and payment schedule for five container buildings by up to 18 months effectively postponing more than $70 million of our installments previously scheduled in 2009 and 2010 until 2011 and 2011.
We will look for opportunities that may arise in the financing environment we see currently and our main focus will always be the long term interest of our shareholders. Not least, we continue our policy of paying a significant dividend and we announced $0.30 per share, effectively 12% dividend yield annualized this quarter.
And now we'll open up for questions.
(Operator Instructions) Your first call comes from Jonathan Chappell – J.P. Morgan.
Jonathan Chappell – J.P. Morgan
On the sale [break in audio] I know that you put down $33 million but I'm also aware that prices have been falling significant since that deal was arranged. Have you spoken to the counter party and do they still plan on acquiring those assets, and if they do try to back out of it, what's the options for Ship Finance? I imagine you would keep the $33 million in down payments. Would you like to sell the ships to someone else, can you talk about how that's progressing.
I would say that we have of course an ongoing dialog with the buyer; they have fulfilled all their legal conditions. They paid in 16% of the purchase price as cash deposits. The last 5% was paid back in November when after the financial turmoil kicked in. They have an active [inaudible] at the ship yard and they're actively participating in the construction of the vessels so we have no indications that they are not going to fulfill their obligation under the purchase contract.
Of course, if you talk about what our options, we have not disclosed to the buyers. We cannot do that based on the agreement, but there is a buyer with substance with other assets and as you pointed out, they have deposited more than $16.5 million pre vessel in cash deposits. If worst comes to worst, the net cost price to us would then be fairly attractive I would say.
Jonathan Chappell – J.P. Morgan
Sticking on the asset price decline or likely asset price decline, you mentioned a couple of time you're in compliance with your entire bank covenants, when was the last time you had to remain in compliance with that. Was that December 31 or March 31?
Most of our assets were on March 31 our assets were valued.
Jonathan Chappell – J.P. Morgan
It seems like as long as these sales go through, you'll be net cash positive from an investment versus sales perspective. I know this is something the Board probably talks about every quarter, and there's not much insight you can give but the $0.30 dividend looks to be fairly easily covered by contracts. Would it be safe to assume that this is the type of run rate we should look at going forward as far as distributions are concerned?
We cannot commit to anything. That's at the Board's discretion every quarter. We do of course have a very substantial charter backlog and a fairly predictable cash flow as we see it so of course from the management perspective, we hope that we can continue to pay a distribution. But again, we can not make and specific commitments to what kind of amounts that would be.
Jonathan Chappell – J.P. Morgan
You mentioned you're looking at some projects still. Can you talk about the potential to do projects at the asset value if returns look attractive or do you think at this point in the cycle you probably just want to stay a little bit conservative and stay on the sidelines for a couple more quarters?
We have as you've seen no deals in this quarter. I think it's fair to say that timing is still not right to invest heavily. We think there will be very interesting opportunities coming up so we will continue to monitor the situation and over time demonstrate that we can do a very nice accretive transaction.
Your next question comes from John Parker – Jefferies.
John Parker – Jefferies
If I can confirm the tankers are still expected in the first quarter and the first quarter?
John Parker – Jefferies
There are no further delays that you're aware of.,
John Parker – Jefferies
Can you comment on the [inaudible] status? I see you have it on your annual lease in 2009. When does that expire?
It expired and we have more on short term, or renewed for another month now.
John Parker – Jefferies
If you look at your APM filing, you kind of filed it, the market went way down. Obviously the equity markets, and now they've come back up to a level where you filed them in terms of the value of the stock and I'm just wondering at what point would you think your options to raise more equity.
We don't have a specific strategy relating to that. We did file the APM program back in December as more a link to the fact that we had to file a statement at the time because we lost of status with the SEC as a [inaudible] well known insurer. We think it's a very meaningful instrument to have in the tool box and as we also stated in the press release, we also today, we have not sold any shares under the program.
It is of course a potential source of additional equity assets, the subscription by investors per share dividend instead of cash dividend.
Your next question comes from [David Chappero – BGB Securities]
[David Chappero – BGB Securities]
On the financing, when you talk about perhaps looking at new projects or a little down the road looking for opportunities, maybe give me a sense of where the financing market is for shipping assets. If you were going to go out and buy a tanker or a bulker and plan on putting that into the stock market or on a one year, two year term, how much financing could you get on that, sort of on a LT loan to value type basis?
I think that's a very difficult question to answer and the reason for that is that the financing is very project related. It has to do with asset type. It has to do with the counter parties in terms of chartering and also who you are in terms of the owner company.
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