With a market capitalization standing at $1.5 billion and a very decent dividend yield (about 10% per annum) Ship Finance International Limited (SFL) is a major vessel owning company.
Presently the company has an operating fleet of 67 vessels and rigs. Since 2007 Ship Finance has involved in an off-shore vessels' business and this kind of activity weighs more and more in the company's operations. The core parts of the off-shore business constitute five rigs of various applications:
- West Taurus - semisubmersible rig
- West Polaris - drill ship
- West Hercules - semisubmersible rig
- Soehanah - jack-up rig
- West Linus - jack-up rig
Due to the fact that Ship Finance is not a drilling or an oil / gas company, these rigs have been chartered out on a bareboat basis, which means that the charterer is responsible for the technical and operational management of the rigs and incurs all the costs associated with it.
In this article I am analyzing the economics of one of such charters, namely a charter of West Linus jack-up rig (the newest company's acquisition).
On July 1, 2013 Ship Finance announced that it agreed to acquire the harsh-environment jack-up drilling rig West Linus from a subsidiary of North Atlantic Drilling Limited (the subsidiary of Seadrill Limited (SDRL)) with a scheduled delivery in December 2013. The acquisition cost is $600 million. After the acquisition the rig will be chartered to North Atlantic Drilling Limited and the main charter's parameters are as follows:
- charter period: 15 years or longer
- North Atlantic Drilling Limited has been granted four purchase options (the last at the end of the charter period)
- Ship Finance has an option to sell the rig to North Atlantic Drilling Limited at the end of the charter period
- North Atlantic Drilling Limited will sub-charter the rig to Conoco Phillips Skandinavia AS for at least 5 years
- the bareboat charter rate over the first 5 years is $220 thousand per day
- the bareboat charter rate for the remaining 10 years is $115 thousand per day
- the acquisition of the rig is financed by a mix of equity and debt (equity: $125 million; loan facility: $475 million with a maturity in the second quarter 2019).
To put this deal simply: Ship Finance acquires the rig for $600 million and then charters it to the subsidiary of Sea Drill for 15 years. For five years the Seadrill's subsidiary will be paying Ship Finance $79.2 million per year, then, for 10 years, it will be paying $41.4 million per year. At the charter's expiration Ship Finance will sell the rig to the Seadrill's subsidiary for $170 million.
After putting all these numbers into a spread sheet, one can calculate two very relevant financial measures: net present value of the project and its internal rate of return. These numbers are as follows:
What does it mean? Simply put it means that a project generates nearly no value for Ship Finance (NPV standing at $613 million is only a little bit higher than the acquisition cost, which is $600 million). IRR standing at 6.83% means that the project generates the rate, which is very close to the cost of capital for Ship Finance (in my calculations, due to the variable structure of financing, the company's cost of capital is between 5.03% - 8.21%).
To summarize, although the whole idea of having West Linus in the company's portfolio looks attractive in the Ship Finance's announcement, after looking at it very closely it seems there is not too much sense in it.
One final note. This economics of this transaction looks much better when you look at the Seadrill's side of it. The Seadrill's fleet status report (dated November 25, 2013) shows that the scheduled rate to be paid by ConocoPhillips to the Seadrill subsidiary is $375 thousand per day for the period April 2014 - March 2023. With Ship Finance getting paid $115-$220 thousand a day it looks like the main beneficiary of that project is rather Seadrill than Ship Finance.