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Summary

  • SFL released its second-quarter results on August 28th, with a net income of $22 million or 0.24 per share, down from $41 million or 0.44 per share for the first-quarter.
  • The company has a solid balance sheet with a manageable long-term debt of $3.1 billion, which qualify SFL as attractive from a long investor's perspective.
  • The company stock is now high, however, it is still a good bet for the long term with a dividend of 8.4% per annum.

Ship Finance International Limited (NYSE:SFL)

Source: Ship Front Ardenne SFL website.

Company presentation:

Ship Finance International is one of the largest and most versatile fleet in the world. The company actually owns an impressive 72 vessels:

  1. 19 crude oil tankers (VLCC and Suezmax). Agreement to sell three older VLCCs.
  2. 2 chemical tankers.
  3. 14 dry bulk carriers. Two new dry bulks delivered during the second-quarter.
  4. 24 container vessels (Including four new buildings).
  5. 2 car carriers.
  6. 6 offshore supply vessels.
  7. 2 jackup rigs.
  8. 2 ultra-deepwater semi-submersible drilling rigs.
  9. 1 ultra-deepwater drillship.

Company important links regarding the second-quarter 2014:

1 - Second-quarter results.

2 - Conference call on August 28, 2014.

3 - Second-quarter presentation.

Dividend:

The Board of Directors has declared a quarterly cash dividend of $0.41 per share, and Ship Finance has now declared dividends for 42 consecutive quarters. The dividend will be paid on or about September 30, 2014 to shareholders on record as of September 12, 2014. The ex-dividend date will be September 10, 2014.

This is a dividend of 8.4% on an annualized basis. Ship Finance has now declared dividends for 42 consecutive quarters.

Ole Hjertaker, CEO said in the last conference call:

The backbone of our business remains to be 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.

Complete and most recent fleet analysis:

Link: Fleet analysis of SFL website.

1 - Crude oil tankers (VLCC and Suezmax.)

#Vessel: Oil TankersNature contract

Year

Built

Flag
a) Oil tanker: Suezmax
1Front SplendourFrontline (T/C)1995MI
2Front Glory1995
3Front Ardenne1997
4Front Brabant1998
5Mindanao1998
6GlorycrownShort term2009MI
7Everbright2010
b) Oil tanker: VLCC or Very Large Crude Carrier
1Front Vanguard (For sale)Frontline (T/C)1998MI
2Front Century (For sale)1998
3Front Circassia (For sale)1999
4Front Scilla2000
5Front Ariake2001BS
6Front Falcon2002
7Front Page2002LIB
8Front Serenade2002
9Front Stratus2002
10Front Hakata2002LoM
11Front Force2004Cyprus
12Front Energy2004

T/C : Time charter

SFL got an agreement to sell 3 older VLCC.

Note 1: The company's VLCC and Suezmax tankers are chartered to Frontline Ltd. (NYSE:FRO), and Frontline Shipping II Ltd., on long-term contract with fixed rate from 4 to 13 years. It is important to indicate also that Frontline is in a challenging financial position at the moment. FRO may have to sell a significant part of its fleet in order to meet its financial obligations (April 2015, for $190 million) or eventually file for bankruptcy (still a remote possibility with the backing of John Fredricksen, in my opinion). This situation poses a certain risk to the quality of the contracts with fix rate, which were signed with SFL.

Note 2: In November 2013, SFL sold 2, 15-year-old VLCCs Front Champion and Golden Victory and terminated the charters to Frontline. Three more VLCC ships will be sold soon, Front Vanguard, Front Century and Front Circassia.

2 - Dry Bulks.

#Vessel: Dry Bulks

Nature contract

(Chartered to)

Year

Built

Flag
1Western AustraliaWestern bulk2012HK
2Western Houston2012
3Western Copenhagen2013
4SFL SpeyShort term (T/C)2011
5SFL Medway2012
6SFL Kent2012
7SFL Trent2012
8SFL HudsonGlovis (T/C)2009
9SFL Yukon2010
10SFL Sara2011
11SFL Kate2011
12SFL Humber2012
13Sinochart BeijingSinochart2012
14Min Sheng 12012

3 - Container.

#Vessel: Container

Nature contract

(Chartered to)

Year

Built

Flag
1Green AceHeung-A (B/B)2005Malta
2Heung-A Green2005
3SFL EuropaShort term (T/C)2003MI
4SFL Avon2010
5SFL Tiger2006
6SFL Hunter2006
7SFL Hawk2007
8SFL Falcon2007
9SFL Eagle2007
10MSC Vaishnavi R.MSC (B/B)2002LIB
11MSC Julia R.2002
12MSC Arushi R.2002
13Santa Rebecca2002
14Santa Roberta2002
15Santa Ricarda2002
16Santa Rafaela2002
17MSC Vidhi2001
18MSC Margarita2002
19DSME Hull 4283(T/C) Hamburg Süd2014MI
20DSME Hull 42842014
21DSME Hull 42852015
22DSME Hull 42862015

4 - Offshore drilling and supply.

#Vessel: Offshore drilling and supplyContract nature

Year

Built

Flag
1Semi-submersible: West TaurusSeadrill (B/B)2008Panama
2Drill ship: West Polaris
3Semi-sub: West Hercules
4Jackup: West LinusNADL (B/B)2014Norway
5Jackup: SoehanahApexindo (B/B)2007Panama
6PSV Sea PikeDeep sea supply (B/B)2007Cyprus
7PSV Sea Halibut2007
8AHTS Sea Leopard1998
9AHTS Sea Bear1999
10AHTS Sea Cheetah2007
11AHTS Sea Jaguar2007

B/B: Book to bill.

5 - Chemical and Car Carriers.

#Vessel: Container

Contract Nature

(Chartered to)

Year

Built

Flag
a) Chemical
1Maria Victoria VSinochem (B/B)2008Panama
2SC Guangzhou
b) Car Carrier
1Glovis ConductorGlovis (T/C)2006Panama
2Glovis Composer2005HK

Order Backlog indication at the conference call:

We have $4.7 billion of fixed rate order backlog and the estimated EBITDA equivalent backlog is approximately $4.1 billion or around $44 per share. These numbers include only the reduced base rates from the Frontline vessels and do not include the cash flows from two Suezmax vessels operated in the spot market nor do they include revenues from our other vessels after the end of their current charter periods.

Important: So far, the company has taken delivery of 12 vessels and rigs in 2014, all employed under long-term charters.

Second-quarter results snapshot:

Q2 2014Q1 2014Q4 2013
Charter Revenues in $ million157147.9151.9
Aggregate EBITDA in $ million128.9129.7114.3
Net Income in $ million22.3640.7318.3
EPS in $0.240.440.20
Total Debt $ Billion (Gross Bearing interest)3.23.22.8
Dividend per share $0.410.410.40
Cash on Hand $ million49.4836.9859
Shares outstanding in million93.35993.285-

YTD chart:

SFL Chart

SFL data by YCharts

Commentary:

Ship Finance International is an offshoot of Frontline Ltd. And another child of the prolific billionaire John Fredricksen. I choose to study SFL for three main reasons:

1 - Its exposure to offshore drilling (Four rigs) and Seadrill limited (NYSE:SDRL).

2 - Its healthy balance sheet with long-term visibility, and a high-dividend of around 8.40% per annum.

3 - SFL's direct relationship with the billionaire John Fredricksen.

The shipping industry is mainly about day-rates and presents the same financial paradigm as the offshore drilling industry that I have covered more extensively. It is a tough industry to follow, and many companies have been struggling to survive the market, and its wild fluctuations. The day-rates have been rising recently and stay now at a healthy level, albeit a vessel oversupply potential situation is rapidly clouding the horizon.

Recently, Frontline Ltd., has gotten some negative interests about its ability to pay off its debt, coming due April 2015 for an amount of $190 million (convertible bond). Some believe that FRO will have to declare bankruptcy next year; however, I do not think it will happen, although it is a sad possible eventuality. Here are three major reasons against this possibility:

1 - John Fredricksen's involvement and its huge cash position at around $4 billion. John Fredricksen came already to the company rescue a while back, with the creation of Frontline 2012 Ltd. and will probably do it once again. JF has been very protective of his shareholders, in general, and he is likely to act again to save FRO from bankruptcy.

2 - Frontline Ltd. Can sell few vessels to meet obligations through Fredricksen's vast entity's network.

3 - There is still a remote possibility that a good part of the debt will be covered by cash from operations. FRO break-even day-rate price for VLCC is $24k and $18k for Suezmax (which is high compared to the Industry $15.5k/$12k). This means that average day-rate for VLCC should be $34K and $40K for Suezmax to allow the company to meet its obligations by April 2015 using the cash only. While these rates are possible, they are sensibly too high and will not be sustainable for a long period of time. Nonetheless, the cash generated will reduce the debt significantly, and will allow a refinancing through a combination of cash and sale of certain vessels, in my opinion.

This discussion about FRO is important to value the potentiality of an investment in SFL for the long-term; because of its strong business relationship, the company has with Frontline, which can be seen in the fleet status above. I believe SFL will be profiting somewhat from Frontline financial weakness, as well as Frontline 2012; however, this situation poses a certain risk to the quality of the contracts with fixed-rate that SFL signed with FRO, which will have to be changed depending on FRO's future business outcome.

I still remain very bullish for the long-term despite an actual stock price that has climbed too fast too high now. Based on this actual valuation and a RSI above 70, which is clearly in an overbought territory; I have downgraded SFL from BUY to HOLD.

Source: Ship Finance International: Complete Fleet Analysis And Second Quarter Results