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Ship Finance International Limited (NYSE:SFL)

Q1 2014 Results Earnings Conference Call

May 27, 2014 10:00 AM ET

Executives

Ole Hjertaker - Chief Executive Officer

Harald Gurvin - Chief Financial Officer

Magnus Valeberg - Senior Vice President

Analysts

Fotis Giannakoulis - Morgan Stanley

Herman Hildan - RS Platou Markets

Operator

Good day. And welcome to the Q1 2014 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. Please go ahead, sir.

Ole Hjertaker

Thank you. And welcome, everyone, to Ship Finance International and our first quarter conference call. With me here today, I also have our CFO, Harald Gurvin; and 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.

The Board has again increased the cash dividend and it is now $0.41 per share. This is incidentally also the 41st consecutive dividend declared by the company. The dividend represents $1.64 per share on an annualized basis or 9% dividend yield based on closing price on Friday.

Net income for the quarter was $41 million or $0.44 per share. Aggregate charter revenues recorded in the quarter, including 100%-owned subsidiaries accounted for as investment in associates was approximately $160 million. This is including the $11.7 million or approximately $0.13 per share cash sweep from the Frontline vessels in the quarter.

EBITDA equivalent cash flow in the second quarter was approximately $130 million and last 12 months, the EBITDA equivalent was approximately $490 million. Several new assets will be delivered to a fleet in 2014 and we have significant capital available for new accretive investments.

In the fourth quarter and including all our 100%-owned assets, 48% of our charter revenues came from the offshore segment around 35% from tankers and remaining 17% split between our drybulk and container assets. This includes cash sweep and profit-based contribution.

In March, we announced the acquisition of nine second-hand container vessels between 4,100 and 5,800 TEU built in 2001 and 2002. These vessels originate from the German KG market and the sales were under instructions by the financing banks. Three of the vessels were delivered to us in March and remaining six vessels were delivered to us in April and May.

After the financial crisis in 2008 and 2009, we have paid special attention to the German market due to the volume of deals placed in the KG market before that and the liquidity squeeze many of these came under, but we have not seen many opportunities combining lower concession costs, good technical quality and long-term charter opportunities, like these deals.

While the aggregate acquisition costs in this specific deal is not very high. It is interesting to note that the banks are getting more realistic in the price of expectations and willingness to book losses where loan amounts significantly exceed underlying values. We will, of course, keep our eyes open for more opportunities in this market, but we’ll be very selective with respect to the assets we do require.

Due to the circumstances, we cannot disclose the exact terms of the deal, but prices only a fraction of the construction costs and marginally higher than the current scrap values. The vessels have good specifications, including 1,300 reefer plugs and some of the vessels have also been upgraded with shore-based power systems.

We have secured long-term bareboat charters for all the vessels for periods between five and six years, there are purchase options with profit that feature at the end of the charter periods. We also have an expansion option in our favor if the purchase options are not exercised. The vessels are expected to generate approximately $15.5 million in aggregate EBITDA per year.

The company’s four 8,700 TEU container vessels under construction in Korea are ahead of schedule and three vessels are now expected to be delivered this year, with final vessel in early 2015. The vessels are built to very high specifications, including high reefer capacity and the latest eco-design features. We have now secured long-term charters for the vessels with the major container line at terms we believe reflect an expected operating efficiency for these new vessels.

We cannot disclose the exact terms of the chartering arrangement, but the EBITDA contribution from the vessel is estimated at approximately $46 million per year on average during the seven-year charter period, giving us a very good return on invested capital. There are no options for the charter to extend the charters or purchase the vessels at the end of the chartering period.

We have also recently agreed to acquire two 82,000 deadweight ton Kamsarmax bulk carriers in combination with long-term charters to a state-owned charter in China. The vessels are built in China in 2012 and the charter is for a period of approximately eight years.

We expect to take delivery of the vessels within the next two months and the annual EBITDA contribution is estimated to approximately $7 million on average during the eight-year charter period. Similar as for the 8,700 TEU container vessels, there are no options for the charter to extend the charters or purchase the vessels at the end of the chartering period.

The $600 million West Linus transaction was agreed in June last year and repaid $195 million of the purchase price at that time. The drilling rig was delivered from the Jurong Shipyard in Singapore in February and the $405 million balance was paid at that time.

The total financing of the transaction is the combination of $125 million equity investment, which was already arranged in June last year and $475 million in bank loans. The remaining payment of delivery was therefore fully covered by the committed bank facility.

The rig has been mobilized to Norway and this week and it commenced the subcharter to ConocoPhillips for five years. The charter rate to North Atlantic Drilling from the subcharter is approximately $375,000 per day for the charter period and there are also additional extension options for up to four years on top of the five-year period.

While charter rate between us and North Atlantic Drilling was approximate -- was approximately $85,000 per day during the mobilization period and has now increased to $222,000 per day for the next five years. This gives us approximately $80 million EBITDA contribution per year in this period.

As for the Seadrill rigs, North Atlantic Drilling will compensate us for fluctuations in interest rate. We have a put option at the end of the 15-year charter period and this rig will also be accounted for as an equity investment under U.S. GAAP.

In the first quarter, we agreed to settle a claim relating to four Handysize drybulk carriers, which were redelivered to us in 2012 before the expiry of the charters. We started an arbitration process and the charter has now agreed to pay off and settle the claim.

The total settlement amount for the Ship Finance is approximately $30 million of which approximately $15 million must received in the first quarter and remaining balance is scheduled to be paid in three installments of approximately $5 million each during 2014.

The company book the gain of $10.2 million relating to this settlement in the first quarter and the next payments will also be recorded as gains. We have security for the remaining payments and we therefore expected to be paid when due.

The tanker market rebounded sharply towards the end of the fourth quarter with scale of the first quarter a very good start. The market softened later in the quarter and has remained at soft levels into the second quarter.

We have an expose to the crude oil market -- tanker oil market via the cash sweep agreement with Frontline, which gave $11.7 million contribution in the first quarter and also through our two modern Suezmax tankers operated in the spot market. These vessels are approved with sister vessels owned by Frontline 2012 and the average time charter equivalent for the first quarter was approximately $26,300 per day.

Due to the significant delays of the shipyard in China, we had to cancel the last two contracts for 4,800 TEU container vessels. The deliveries were originally scheduled for 2013 with long-term charters financing arrangement and newbuilding contracts closely tied together.

While the contracts allowed for some flexibility with respect to construction time overruns, the delays exceeded this limit and following negotiations with all parties involved, it was deemed that the best solution for us was to terminate the contract.

The amount is paid to the shipyard will be refunded to us with interest within the next few weeks and the termination of the newbuilding contracts will not lead to any book losses or assets impairments. We have already received the refunds relating to the first two vessels.

The back bone of our business remains our significant portfolio of long-term charters. Most of our vessels are chartered out on a long-term basis and we still have nearly 10 years weighted average charter coverage.

Full details on vessel-by-vessel basis is available by contacting us on email ir@shipfinance.no. We have $5.1billion of fixed rate order backlog and the estimated EBITDA of equipment backlog is approximately $4.4 billion or around $47 per share. These numbers include only the reduced base rate from the Frontline vessels and do not include the cash flows from two Suezmax vessels operated in the spot market.

I would also add that most of our offshore assets and tanker assets have been down significantly already and underlying asset exposure is very limited even in our softening market scenario.

With respect to Frontline, we have the interesting combination of very low financial leverage, actually way below current scrap levels and significant leverage to the market through the cash sweep arrangement. We have amortized down the debt on these vessels very quickly and have reduced the loan amounts by more than 80% since 2008. Even compared to reported scrap values, the financial leverage is only 50% as illustrated by the red line in the graph on Slide 7.

With this low leverage, there is no net loan amortization required. And even with the scratch base rates for Frontline, the free cash flow is approximately $17 million or $0.18 per share per quarter this year. On top of that, if the VLCC market for the year should hit $25,000 per day, the cash sweep could be around $0.11 per share per quarter, increasing to $0.13 per share per quarter in a $30,000 per day market like we saw in the first quarter.

The threshold level kicks in already at $17,675 per day for most of the VLCCs and $13,200 per day for the Suezmaxes and is capped at $6,500 per day per vessel. The cash sweep is an annual calculation, so the average over the year will determine the final payment. And with the strong first quarter, there is actually a buffer here for the next three quarters.

Frontline, on their side, reported more than $111 million of free cash at the end of the first quarter, and they have raised more than $50 million over the last two quarters by issuing new shares.

If we then switch to our performance last 12 months, the normalized contribution from our projects, including vessels accounted for as investment in associates, the EBITDA, which we define as charter hire plus profit share less operating expenses and general and administrative expenses, was nearly $490 million in the period.

Net interest was $113 million or approximately $1.21 per share. But more importantly, our normalized ordinary debt installments relating to the company’s project was approximately $202 million. This is excluding prepayments relating to sale of older assets and without net amortization on the Frontline vessels.

As mentioned earlier, the Frontline-related assets have very low leverage currently and no amortization was required during the year. If the loads had been fully drawn in the period, the amortization would have been $74 million or $0.79 per share for the full year. Going forward, we expect the positive contribution from our recent acquisition.

And with that, I will leave the word over to Mr. Harald Gurvin, our Chief Financial Officer, who will take us through the numbers for the first quarter.

Harald Gurvin

Thank you, Ole. On this slide, we have shown our pro forma illustration of cash flows for the first quarter compared to the fourth quarter of 2013. Please note that this is only a guideline to assess the company's performance and is not is in accordance with U.S. GAAP.

For the first quarter, total charter revenues were $147.9 million or $1.59 per share compared to $151.9 million in the previous quarter. Revenues from VLCCs was slightly down due to the sale of two older VLCCs during the fourth quarter, while revenues from Suezmaxes were up in the first quarter due to basic earnings on the two Suezmaxes trading in the spot market.

Revenues from liners which increased container vessels and car carriers was down in the quarter following CMA CGM’s exercise of purchase options for the two 13,800 TEU container vessels which were delivered to them in end of January and beginning of March this year. This is also reflected in the total operating expenses for the quarter.

The increase in offshore revenues is due to West Linus being delivered in February of 2014. The rig dayrate was lower during the initial mobilization period but the rig is now earning full day rate following commencement of the sub-charter to ConocoPhillips in end of May which will have a full effect in the third quarter.

Vessel operating expenses and G&A were $34 million compared to $41.2 million in the previous quarter, mainly due to the exercise options on the two CMA CGM vessels and no dry dockings in the first quarter. We recorded a cash sweep of $11.7 million from Frontline in the first quarter representing a full cash sweep on all Frontline vessels and also a profit share of approximately $500,000 relating to four of the Handysize drybulk carriers.

Income from financials as estimated were $3.6 million in the first quarter, slightly up from the previous quarter. So overall, this summarizes to an EBITDA of $129.7 million for the quarter or $1.39 per share compared to $114.3 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 our book 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 will also, this quarter, publish a separate webcast which explains the finance lease accounting and investment in associates in more detail. This webcast can be viewed on our website, shipfinance.org.

Overall, for the quarter, we reported total operating revenues, according to U.S. GAAP, of $82.7 million, up from $71.7 million in the previous quarter. The figure includes $11.7 million in cash free from Frontline in the quarter.

We recorded a gain of $10.2 million following the settlement of a claim relating to four handysize drybulk carriers which were redelivered to us before expiry of the charters. The total settlement is $30 million, of which $15 million was received in the first quarter with the remaining balance to be paid during 2014.

Total operating expenses were $46.2 million, giving net operating income of $46.6 million, up from $23.4 million in the previous quarter. So overall and according to U.S. GAAP, the company reported net income of $40.7 million or $0.44 per share in the quarter, up from $18.3 million in the previous quarter.

Moving on to the balance sheet. We showed $37 million of consolidated cash at the end of the quarter. In addition, we had approximately $297 million available for drawdown under revolving facilities. Available-for-sale securities of $60.7 million includes $39.4 million invested in short-term tradable securities as a short-term liquidity placement.

In addition, the second lien notes in Horizon Lines are recorded as available-for-sale securities at $21.3 million or 40% of par value, including accrued interest. The $79 million amortizing Frontline notes are included in amounts due from related parties on the current and long-term assets.

The remaining balance as during March 31st was $76 million, but the notes are conservatively recorded in our balance sheet at 72% of par value. The three ultra-deepwater units on charter to Seadrill and the harsh environment jack-up drilling rig to North Atlantic Drilling are included the in the balance sheet under investment in associate and amount due from related parties long-term.

Our investment in the subsidiaries owning the units is in the form of both equity and shareholder loans from the parent company. The total equity investment in the rigs is thus a combination of the two, and the splits between equity and shareholder loans from quarter-to-quarter will depend on intercompany accounting.

Short-term debt and current portion of long-term debt at quarter end includes a $72 million on one of our NOK bonds, which was repaid at maturity in April. Stockholders equity stands at approximately $1.3 billion, including the $105 million of deferred equity. The book equity ratio, including deferred equity, was approximately 42% at the end of the quarter.

Then looking at our liquidity and financing status. As mentioned, the company had a total available liquidity of approximately $334 million at the end of the quarter, which includes $37 million in cash and approximately $297 million freely available under revolving credit lines. It should be noted that $73 million of available liquidity was used to repay the NOK500 million bond at maturity in April. We also had $61 million in available for sale securities at quarter end as previously described.

In March, we successfully placed the 5-year senior unsecured bond in the Norwegian market. The offering was significantly oversubscribed and was upsized from the originally targeted amount of NOK600 million to NOK900 million, equivalent to $150 million.

The pricing of the bond is very attractive at NIBOR plus 410 basis points, significantly down from a NOK bond issued in October 2012. All payments have been swapped to U.S. dollars with a fixed interest of 6.03%. As mentioned, part of the proceeds were use to repay the $73 million net outstanding under the NOK bond maturing in April 2014, giving a net increase in liquidity of $77 million.

On the debt side, we had approximately $3.2 billion of gross interest-bearing debt outstanding at quarter end. Consolidated bank loans were $900 million, down from $1.1 billion at December 31st.

We continue our steep repayment profile on the bank debt and also had reduced drawings under revolving facilities at quarter end to reduce interest expenses. In addition, the $70 million pre-delivery facility for West Linus, after a $7 million of bank debt relating to the first TEU counts of newbuilding in China was repaid during the quarter. Bank loans in our subsidiaries accounted for as investments and associates was $1.5 billion at quarter end, up from $1.1 billion at December 31st, following drawdown of the $405 million post-delivery facility for West Linus in February.

In addition, we had approximately $790 million of consolidated senior unsecured notes outstanding after March 31st. The figure includes the NOK500 million bond repaid at maturity in April 2014, of which $72 million was net outstanding at quarter end. The new five-year NOK 900 million bonds issued in March 2014, of which $150 million was outstanding and the NOK600 million bonds maturing in 2018, of which $93 million was net outstanding.

The figure also includes the $350 million convertible notes maturing in 2018 and $125 million convertible notes maturing in 2016. Both are [astounding] (ph) convertible notes can be repaid in shares at the company’s auction and maturity.

The graph shows the scheduled installments and amounts to be refinanced over the next years. Following the refinancing of the three ultra-deepwater units and our senior notes in 2013 and a NOK bond in March this year, we have very limited refinancing requirements over the next years.

We are also constantly in compliance with all financial covenants under our loan agreements. It is worth noting that Ship Finance has been in full compliance with all financial covenants for each of the 41 quarters since the company was established. Given the financial turmoil and depressed shipping markets over the last years, this gives us a very strong standing in the banking market.

The next slide provides some more detail on our remaining CapEx after quarter end. Follow delivery of West Linus in the fourth quarter and adjusted for the cancellation of the last two container vessels in China in the second quarter, we have four remaining container vessels under construction in Korea at quarter end.

The newbuildings are state-of-the art 8,700 TEU container vessels, with the total contract price of $340 million, of which $119 million has been paid so far. The yard payments has so far been from our available liquidity irrespective from the quarterly refinancing for the vessels at very attractive terms well before delivery, which is expected to give a positive cash affect on delivery of each vessel.

The remaining six of the nine container vessels, which we acquired in March this year, were delivered to us in April and May. The vessels are being funded from our available liquidity and we are in the process of arranging financing for the vessels at attractive terms.

In addition to the above, we announced the acquisition of two Kamsarmax dry-bulk carriers with long-term charters in May this year, which are expected to be delivered before July this year. We will arrange financing of these vessels in due course.

Then to summarize, net income for the quarter was $40.7 million or $0.44 per share, including $12.2 million in cash sweep and profit split. The aggregate EBITDA was $129.7 or $1.39 per share. The Board has declared an increased quarterly cash dividend of $0.41 per share for the quarter. This represents a dividend yield of 9% based on the closing price as of May 23rd.

We have taken delivery of 10 vessels and reach so far in 2014, all employed under long-term charters and supporting our long-term distribution capacity, with the investment opportunities in multiple segments and capital available for investment.

And with that, I give the word back to the operator who will open the line for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll now take our first question from Fotis Giannakoulis. Please go ahead.

Fotis Giannakoulis - Morgan Stanley

Yes. Good morning, guys and congratulations for all this good new deals. I just want to ask you to give us a little bit more color to define these acquisitions and these charters that you announced. First of all, how was the German KG market and what was the background behind this charter with the container line, did this deal come from banks or it came directly from the liner companies?

Ole Hjertaker

Yes. And I know you referred to the line 4,100, 5,800 TEU containerships, right?

Fotis Giannakoulis - Morgan Stanley

That is correct, yes.

Ole Hjertaker

Yes, thank you for this. Well, these KGs had filed for insolvency a couple of months ago. So there were actually a couple of players out there who were looking at the vessels and expecting the vessels. The KGs were under administration by the bank, by the appointed administrator and the banks were willing to sell or let the KG sell the asset and then effectively face the music and the losses relating to their exposure.

What we did we teamed up with the charterer in this instance, and therefore, we went in and did for the vessels on -- basically on cash basis and we managed the cost because of who we are we believe. I would think that the banks would know that we could pay off and actually perform on the new obligation. So we won the asset basically. And at the same time, we had the arrangement with the charters lined up, so we could combine like that. I think we would have been a little bit careful with buying the vessels just based on the spot market or based on deployment in the spot market because the market there is really soft.

I would say you can charter any vessel virtually up to 5,000 TEU and the charter revenues will just barely cover your operating expenses and there will be nothing left for the capital. Instead, we secured a long-term charter, which is servicing the capital. It was giving us a nice return. And also based on where bought the asset and the scrap value, we have a very, very comfortable call it exposure. So we can say that well if the vessels have to be scrapped at the end of the charters, so be it, even if you scrapped it, it would be a very nice deal. But we believe the specification of these vessels will -- could give these vessels a significantly longer life than the base charter period.

Fotis Giannakoulis - Morgan Stanley

Thank you. Can you tell us -- give us some idea over the returns that you’re expecting of how much equity are you investing and what will the financing that this deal comes together with?

Ole Hjertaker

Well, we bought the vessels for cash. And you can say that cash return on the deal is in the 12% to 13% range if you compare the EBITDA contribution and the investment. But we have had banks contacting us who are very keen on financing so we will look into most -- putting some relatively small financing amount on these vessels which will enhance quality equity return.

But we believe particularly based on where we bought the assets which is only a fraction of construction price, high specifications we believe these assets may well have a very good value going forward. Most, many or several of these vessels have already been deployed in the new trade by the charterer where they have replaced reefers -- dedicated reefer vessels, because one of the unique features here is that these have very high reefer capacity and the one that we built in 2002 I believe they were the biggest reefer vessels in the world.

Fotis Giannakoulis - Morgan Stanley

Thank you. Would that be too much to ask how much equity have you invested in this deal (indiscernible) disclose?

Ole Hjertaker

Well. Yeah. We have not given the exact numbers, but I would think that at the end we would be looking at sort of let say $40 million to $50 million call it equity investment...

Fotis Giannakoulis - Morgan Stanley

Okay.

Ole Hjertaker

… we secure, but as we have not concluded it, it’s a little bit early to give you specific details.

Fotis Giannakoulis - Morgan Stanley

Okay. Thank you. That’s very helpful. And regarding the acquisition of the Kamsarmax vessels, what kind of returns are you expecting there and I assume these are new vessels, you would get some financing, what kind of that debt financing we expect there?

Ole Hjertaker

Well, similar for these vessels and that’s maybe the benefit of having a strong balance sheet as we do have. We can go and do transactions without having financing subject etcetera. So when we see a deal where we see good strong vessels, so we see a strong chartering counterpart, we’ve seen strengthening in the financing markets recently where banks are, I would say compared to a year there are a lot more banks out there who are very keen to financing the segment.

We have comfort to go ahead and do acquisitions without financing subject. So at the same this deal similar to the containers vessels we have talked about, we concluded the deal without any financing subject. We do of course expect the financing to be secured, but we have not done that yet.

Fotis Giannakoulis - Morgan Stanley

And in terms of returns, I mean, this is a very interesting transaction, I didn’t expect that there are available this kind of long-term contracts for drybulk vessels. Can you give us an idea of the cash on cash return that you are getting right now?

Ole Hjertaker

Well, the cash on cash return is relatively in line with container vessels I would say, as I mentioned, but we plan to arrange financing in due course. So as we cannot communicate the acquisition price, it’s a little bit awkward for me to be too specific on that other than that cash on cash returns are good. And then we believe there is also good opportunities linked to the residual value there because there are no purchase options or extension options for the charterer on these vessels.

Fotis Giannakoulis - Morgan Stanley

I fully understand. Thank you this answer. And in terms of additional opportunities, obviously these deals will have opening vessels appetite for a more transactions, where are the opportunities more possible to arise, is it drybulk of containership sector or other sectors that you are exploring right now?

Ole Hjertaker

I would say right now we are looking at deals across all our four main sectors. We are looking at offshore related opportunities. We are looking at tankers. We are looking at bulkers and containerships. Generally, I would say that bulkers is the segment where we have also communicated previously, it’s a segment where we are obviously more careful because we see more counterparty issues in that segment as we also experienced with the four handysize bulkers where we’ve received the settlement recently.

So while in the container and offshore space, you see more long-term chartering opportunities. But we also and we are selective and we are out there, I think, one of the benefits we have and that’s also with the association to Mr. Fredriksen and I think we’re standing in the market. I think we see a good, a lot of deal opportunities. So, hopefully, overtime by picking deals, we can perhaps secure better long-term returns then we would certainly then we would have only looked at one single segment.

Fotis Giannakoulis - Morgan Stanley

Thank you. And if you had to give us your outlook for over the next couple of years for each of the sector that you are involved, what would that be given the current weakness of both drybulk and the tanker markets?

Ole Hjertaker

Yes. I think with our business model, we are set up so we can invest and make hopefully good transactions, both in the low cycle and also in the high cycle. I would say that the deepwater rigs that we structured back in 2008 was a good example of how we structure deals when asset prices are peaking, restructured to front-loaded charter payment, reducing asset exposure quickly and also financial average.

When we’re down in the cycle, we can do shorter charters, take more asset exposure like we order four 9,000 TEU container vessels on speculation in year ago. And as we consider it and basically get better returns by having a little bit patience and ice in our stomach. What we have done also in the past is acquiring vessels from one party and finding the charter and combining -- where we combine the charter, which also gives us interesting opportunity.

So, well, I don’t want to give specific guidance on markets. I would say that there are definitely opportunities in all these segments, but we structure the deal very differently, depending on where we believe we are in the cycle.

Fotis Giannakoulis - Morgan Stanley

Okay. Thank you very much, Ole. Thank you for your answers.

Ole Hjertaker

Thank you, Fotis.

Operator

Thank you. We will now take our next question from Herman Hildan, RS Platou Markets. Please go ahead.

Herman Hildan - RS Platou Markets

Good afternoon, guys.

Ole Hjertaker

Hello, Herman.

Herman Hildan - RS Platou Markets

Hi. Just a quick question, I’m wondering, you must have booked Frontline bond [73%] at par, if you look at the unsecured bond in Frontline it’s shooting up 92%, is there any particular reason, why your rig been sold off?

Ole Hjertaker

No other particular reason then at the time, we had a preference for booking it as conservatively as we could under U.S. GAAP and that’s the number we came up with. I mean, we have our claim for the full amount and as you hopefully -- we also have seen in the past that we look after our interest and of course, expect Frontline to perform on their obligations.

Herman Hildan - RS Platou Markets

Yes. Okay. And also you mentioned that some opportunities in the tanker market as well, any particular segments like the example of Suezmax segment where you see deals?

Ole Hjertaker

I would say we see deals in several sub segments in the tanker space. Also both on the crude side but also on products chemical, we see deal opportunity in the gas. So it’s a difficult answer. I mean, we’re looking at a lot of opportunities but of course, not everything materializes. So, I think we prefer to comment on when we do the transactions. But I think we have the flexibility to look at multiple broader segments and also a lot of the sub segments.

What we typically prefer is commodity type of assets. And we have call it bigger group of companies, we have exposure to many of the sub segments and can find employment if need be. If and when we get the vessels back, I need to employ them ourselves in the market, like we’re doing in the Suezmax market where we have two modern Suezmaxes that we’re operating effectively in the spot market.

Herman Hildan - RS Platou Markets

To be a bit more precise, I mean, should we get some plan that’s being kind of derisking by ATM offering and as we mentioned a very low leverage on those aspects. Would you wait until call it the balance sheet sometime it’s fully repaid or are you willing to do deals with and call it potential restructuring?

Ole Hjertaker

Well, a prominent shipowner once said, the fat lady has not sung yet. Then, I think, that is certainly also the case with the Frontline, where we see -- where it’s still too early to tell exactly what the solution will be. But we look after our interests. We have 20 vessels remaining on charter to Frontline and we actually saw in the first quarter, the market may surprise us.

And if we look at the analyst expectations like yourself, we should base it on those kind of the projections both later in 2014 and certainly in 2015, the markets could change. So other than that I cannot really comment on the Frontline situation. They are fully performing on the obligations and they have not been late with any payments to us.

Herman Hildan - RS Platou Markets

Okay. Thank you very much.

Ole Hjertaker

Thank you.

Operator

Thank you. Our next question is from [Kenneth Coleman] (ph), private investor. Please go ahead.

Unidentified Analyst

Yes. Good morning and thank you for the fine report. My question is also revolved around Frontline. So I think you’ve addressed them probably as much we’d like. Thank you.

Ole Hjertaker

Thank you.

Operator

Thank you. As there are no further questions, I would like to turn the call back to the speaker for any additional or closing remarks.

Ole Hjertaker

Well, thank you. And thank you everyone for joining our first quarter conference call. And as we hopefully conveyed in the calls, we are of course happy to again increase our quarterly distribution. And we believe there are good opportunities out there to continue building our portfolio with creating accretive investments. If you do have any follow-up questions, there are contact details in the press release. And with that I wish you all a very nice day.

Operator

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

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