Ship Finance, SeaDrill and Frontline: 3 Shipping Recovery Plays

Includes: FRO, SDRL, SFL
by: Power Hedge

Ship Finance International Ltd. (NYSE:SFL) owns 62 vessels and oil drilling rigs with nine additional ones currently under construction. These 62 units each fall into one of six classifications:

  • Suezmax oil tankers are the largest ships capable of navigating through the Suez Canal which connects the Mediterranean Sea with the Red Sea. Suezmax tankers have an approximate deadweight of 150,000 – 160,000 tons, a width of 164 ft. (50m), and a maximum height above water of 223.1 ft. (68m). Suezmax ships have a maximum draft (amount of hull below the waterline) of 66 ft. (20.1 m). Ship Finance currently has eight Suezmax tankers in its fleet, all of which are double hulled.

  • VLCC oil tankers are larger than Suezmax-class tankers and can have a deadweight of up to 320,000 metric tons. VLCC tankers are approximately 330m (1082 ft.) long, 55m (180.4 ft.) wide, and have an approximate draft of 21.2 m (69.5 ft.). These ships are mostly used to haul oil over very long distances such as from the Middle East to North America or the Asian countries of China and Japan. Ship Finance currently has twenty VLCC tankers in its fleet, all of which are chartered to Frontline Ltd. (NYSE:FRO).

  • Dry bulk ships are designed to carry freight such as coal, steel, or agricultural products. Some of these ships are classified as OBO (ore-bulk-oil) vessels that are designed to be capable of carrying both wet and dry cargoes. These ships can change between ore, bulk cargo, or crude oil based on market conditions. In theory, OBO units can also switch between cargoes on different legs of a trip, thus reducing the number of unprofitable ballast voyages (a ballast voyage is a trip where a ship sails with no cargo) that need to be made. Ship Finance owns twenty of these vessels, eight of which are OBO units.

  • Container ships are cargo ships that carry their cargo in intermodal containers which make it much easier to get products to customers. Approximately 90% of non-bulk dry cargo is transported via these intermodal containers. Container ships are the most cost-effective way to ship manufactured goods over oceans (think China and other Asian nations exporting to the U.S.A. and Europe). Ship Finance currently owns fifteen container ships, four of which are currently under construction.

  • Offshore drilling rigs are various types of structures that are used to drill and extract oil and gas from the ocean floor, process it, and export the products to shore. Offshore rigs can be fixed to the ocean floor, may consist of an artificial island, or may float independently. Ship Finance owns five types of offshore rigs: two semi-submersibles, one drillship, two jack-ups, two PSVs, and four ATHS rigs. This gives the company a total of eleven offshore drillings rigs.

  • Chemical tankers are ships designed to transport chemicals in bulk. These specialized ships are much smaller than oil tankers, ranging from 5,000 metric tons deadweight to 40,000 DWT in size. Ship Finance owns two chemical tankers, both of which are chartered to Sinochem.

Ship Finance International was spun off of Frontline Ltd. in 2004 and, indeed, Frontline is Ship Finance’s largest customer to this day. The ships that are chartered to Frontline are on longer term time charters that are still under contract for another two to sixteen years. Ship Finance also has an agreement in place with Frontline that entitles Ship Finance to receive 20% of the revenues that its tankers generate for Frontline above a certain level. The end result is that Ship Finance will share in any recovery of the shipping sector. Investors who want to play a shipping recovery would be better off by buying Frontline (FRO) itself however, as it will benefit more from a recovery than Ship Finance will.

Ship Finance has a similar profit sharing agreement in place on the West Prospero oil rig that is currently leased to another of John Fredriksen’s companies, SeaDrill Ltd. (NYSE:SDRL). As with Frontline, SeaDrill itself will benefit much more from offshore drilling strength than Ship Finance will.

Ship Finance is much more stable than either Frontline or SeaDrill though. The company’s stock has had a rather narrow range of $15.60 to $23.07 over the last 52 weeks. Likewise, barring the dividend cut in 2008, the company has continued to pay a strong dividend straight through the recession. In the past year, the dividend has increased every quarter and currently stands at $0.38 per share per quarter. That is an annualized dividend of $1.52 per year or a 7.6% yield at the current stock price of $19.93. The lowest dividend that the company has paid since the first quarter of 2004 (the first quarter that the company’s shares traded publicly) was $0.30 per share per quarter, or $1.20 per share annualized from Q4 2008-Q4 2009. That would be a 6.02% yield at the current price, let alone at the price at the time.

Ship Finance enters into long-term charters for the ships that it owns. These long-term leases ensure that the company will always receive a minimum amount of money for the use of their ships. Currently, every ship in the fleet is chartered out, many to one of the other Fredriksen companies, notably SeaDrill and Frontline. This is how Ship Finance is able to leverage its fleet to have much more stability than a typical shipping company.

Disclosure: I am long SDRL.