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Ship Finance International Limited (NYSE:SFL)

Q2 2011 Earnings Call

August 25, 2011 10:00 am ET

Executives

Eirik Eide - Chief Financial Officer

Ole Hjertaker - Chief Executive Officer and Chief Executive Officer of Ship Finance Management AS

Analysts

John Parker - Jefferies

Brian Grad - DLS Capital Management

Justine Fisher - Goldman Sachs

Operator

Good day, and welcome to the Ship Finance International Q2 2011 Results Presentation. Today's conference is being recorded. At this time, I'd like to turn the call over to your host today, Mr. Ole Hjertaker, CEO. Please go ahead, sir.

Ole Hjertaker

Thank you, and welcome to Ship Finance International and our second quarter conference call. My name is Ole Hjertaker, and I am the CEO in Ship Finance Management. And with me here today, I also have the CFO, Eirik Eide; and 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 statement. 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 of Directors has declared a cash dividend of $0.39 per share. This represents $1.56 per share on an annualized basis or 12% dividend yield based on closing price yesterday. We have now declared dividends for 30 consecutive quarters and paid out more than $13 per share in total aggregate cash dividends. Net income for the quarter was $41.5 million or $0.42 per share. Positive profit sharing was generated also this quarter, but marginal compared to previous quarters. There was a $5.8 million gain on sale relating to 2 old combination carriers in the second quarter, and also a $4.1 million gain on the sale of the jack-up drilling rig, West Prospero.

The net cash effect of these transactions were $54 million. The 6 straight charter revenues in the quarter, including subsidiaries, accounted for as investment and associate, was $202 million before profit share contribution. The EBITDA equivalent cash flow, including profit share, was $171 million or $2.16 per share. Despite a weak spot tanker market in 2011, $2.4 million of profit share has accumulated in the 2 first quarters. Several of Frontline's vessels have been sub-chartered on profitable terms above our base rate, and will provide a positive contribution to profit share calculation irrespective of the spot market. The base rate for the VLCCs is approximately $26,000 per day. The profit share calculation is based on contribution on a yearly basis, so we will not have the final number for 2011 until the end of the year.

In total, more than $500 million in profit share has accumulated since 2004 in addition to the base charter rates. The final profit share will be based on -- will be calculated based on actual performance in the full year of 2011, and therefore also impacted by revenues generated by the vessels in the second half of the year. We have now secured financing for all the newbuildings and also a containership delivered in 2010. As we have paid significant installments to the shipyards already, there will actually be a significant positive cash contribution for the company from the newbuilding program in excess of $100 million in the second half of 2011 alone.

In March, we announced the acquisition of 2 13,800 teu container vessels from CMA CGM in combination with long-term time charters back. Net acquisition price after Seles credit is $116 million per vessel, which is 30% lower than construction costs. The vessels were delivered at the end of March and in the beginning of April and our equity investment is $25 million per vessel. The vessels are financed through a French tax lease structure, where title to each vessel has been transferred to a French company and Ship Finance's investment is effectively secured by junior mortgages. The 2 container vessels are managed by an affiliate of CMA CGM and the time charters include a compensation clause whereby Ship Finance will be compensated for any increase in operating expenses. CMA CGM has purchase options for the vessels first time in 2014, and we are earning a 15% return on our invested capital and potentially more based on profit split arrangement if a purchase option is exercised.

In May 2011, Ship Finance contracted to acquire 4 newbuilding 4,800 teu container vessels at a state-owned shipyard in China with scheduled delivery in 2013. The vessels are high specification so-called wide-beam container vessels optimized for higher cargo intake, a radically improved speed consumption economics compared to existing vessels of similar size. The aggregate yard contract price is approximately $230 million with the majority of the payments due on delivery of the vessels. The vessels will be employed by the European-based Hamburg Süd container line for 7 years from delivery, and the net time charter rate will be approximately $26,250 per day per vessel. We have already sourced 80% financing on these vessels with very long maturities.

In the second quarter, we also sold, we sold 2 20-year old combination carriers and Frontline had to pay a $14 million compensation to us for the termination of the contracts. Net cash proceeds was $17 million after prepayment of associated financing and recorded a book gain of $5.8 million in the second quarter, relating to these 2 vessels. At the end of the second quarter, Seadrill exercised the pre-agreed purchase option for the jack-up drilling rig, West Prospero. We acquired the rig in 2007 and it was chartered to Seadrill on a long-term payable charter, where Seadrill was granted certain payment options first time in 2010. The purchase option price was $133.1 million and the transaction was affected as a sale of the shares in the asset-owning subsidiary. The bank financing in the asset-owning subsidiary continues after the sale, including a $20 million corporate guarantee from Ship Finance. The loan amount is currently less than 50% of the charter-free value of the rigs as reported by brokers, and the guarantee obligation will expire in 2013 at the latest. We have full indemnity from Seadrill for this obligation and we will receive a 2% per annum fee for continuing to provide this guarantee.

Ship Finance received approximately $36.2 million in net cash proceeds from the sale and recorded a book gain of $4.1 million, classified as gain on sale of associates. One of the very important features with Ship Finance is our long-term charter portfolio that gives us a very transparent and predictable cash flow. Ship Finance is in a different league than most of the shipping and offshore companies with more than 11 years weighted average charter coverage. We have nearly $7 billion of fixed rate order backlog or approximately $87 per share, and the EBITDA equivalent backlog is approximately $5.5 billion or around $70 per share. These numbers are before profit share and do not include any rechartering after the end of the current charter.

Looking at the segments where this cash flow will be generated, we see that offshore is still the largest segment for us with 43% or approximately $3 billion of the backlog, while tankers where the company started, now represents approximately 34% of the backlog. Containers have recently increased to 16% through the new acquisitions and the dry bulk segment is 8%. Over time, we expect to balance these segments. But for us, it's more important to do the right transactions than to focus on a specific percentage per segment.

We have recently added to both the container and offshore sectors, but we do see interesting opportunities for growth across all 4 segments. One of the key strengths of the company is the charter portfolio and our counterparties. We have a total of 14 customers and all are current with their charter payments to us. 84% of our charter backlog is with public companies, which gives us and our investors and stakeholders a very good opportunity to monitor the quality of our backlog. 41% of the portfolio is with companies with a market capitalization in excess of $5 billion. Also, the charter tender, as indicated on the right side, is quite unique with more than 70% of the portfolio in excess of 10 years and only 3% shorter than 5 years.

Our 2 largest counterparties are Seadrill and Frontline. Seadrill represents more than 40% of our backlog and the assets are state-of-the-art ultra-deepwater drilling rigs. There are 12 years remaining under the charter and we have already paid down $200 million per rig or $600 million in aggregate on the financing of these assets. And this is after only 2.5 years of operation. Due to the conservative structure of the transactions with front loading of charter hire which has quickly taken down our exposure to the asset, the offloading of interest rate risk and residual value risk, we have to account for these wholly-owned assets as investments in associate.

In 2004, Frontline was our only client and all the assets were employed in the tanker segment. There was a mutual dependency as we effectively owned all the assets they operated. While we had diversified across segments and with multiple counterparties, we have not done any new transactions with Frontline for more than 6 years. In the meantime, we have enjoyed significant cash flows from the charters and more than $500 million of profits paid. But equally important, we have used a significant part of this cash flow to pay down on financing relating to the vessels. Frontline on their side, have also grown significantly and based on information from their first quarter reporting, they now have more vessels owned and charted in from others than they have charted in from us.

In addition to the chartering obligation, which is fully guaranteed by the ultimate parent in Frontline, there is also a $2 million cash deposit per vessel in favor of us. This is additional security for us and cannot be touched by Frontline. Six of the vessels are employed in the dry bulk segment now and we have a fixed-rate operating cost agreement, which we believe is very attractive for us.

If you look at normalized contribution from our projects, which includes vessels accounted for as investment in associate, the EBITDA, which includes charter hire and profit share, less operating expenses and general and administrative expenses, was merely $700 million last 12 months. The net interest was $157 million or approximately $2 per share. But more importantly, more normalized ordinary projects was more than $400 million or approximately $5 per share. We have approximately $3.5 billion of net interest-bearing debt if we also include the investment in associates. And our steep loan amortization represents a less than 9-year profile to 0. This compares to our weighted average age of around 5 years in the fleet. So if you continue paying down our debt at this rate, we will then effectively be debt-free when the vessels are on average 14 years, while estimated commercialized is 25 to 35 years for these types of assets depending on asset class. The net contribution from our projects last 12 months after this aggressive debt repayment profile was $127 million or $1.61 per share.

And with that, I will leave the word over to Mr. Eirik Eide, our Chief Financial Officer, who will take you through the numbers for the second quarter.

Eirik Eide

Thank you, Ole. On this slide, we have shown our pro forma illustration on cash flows for the quarter and compared to the first quarter of 2011. Please note that this is only a guideline to assess the company's performance and is not in accordance with U.S. GAAP. For the second quarter 2011, the company had an EBITDA, including profit share of $171 million or $2.16 per share compared to $168 million or $2.12 or share for the first quarter 2011. Of the VLCCs and the Suezmaxes, the revenues were more or less in line with the first quarter, despite the lower profit share contribution from Frontline. The slight reduction on the VLCCs is due to the sale of the single-hull vessels, Front Ace and Front Highness, which were both delivered to their buyers during the first quarter.

For the chemical tankers, revenues were in line with the first quarter. The container vessels showed revenues of $21.2 million compared to $11.5 million in the first quarter. This increase is mainly due to the delivery of the 2 new CMA CGM vessels, Corte Real and Magellan, which are both fixed on 15-year time charters to CMA CGM. As these vessels are financed through a French tax lease and title of the vessels have been passed on to a French company, Ship Finance is taking these vessels back on bareboat charter, which will be reflected in our operating expenses, together with the daily operating expenses for the vessels, which is passed on to CMA CGM. The time charter rate for the next 4 years is approximately $61,900 on average per day while the bareboat rate is $46,800 per day. Operating expenses for these vessels is estimated to $8,800 per day on average. As we have stated earlier, these vessels are expected to contribute approximately $7 million per year in free cash flow or approximately $1.75 million per quarter on a $50 million investment.

Of the dry bulk vessels, charter hire came in at $16 million compared to $18 million in the first quarter. The reduction is mainly due to the sale of the OBOs Front Leader and Front Breaker, which both were sold during the second quarter. Ship Finance received sales proceeds of $37.3 million, and the net proceeds after repayment of debt and commissions was approximately $17.2 million. The 2 OBOs generated approximately $1.7 million per quarter of charter in use. In addition, 2 other OBOs, the Front Climber and the Front Driver had a scheduled step down in their charter rate during the quarter as per the agreed leasing schedule with Frontline. Now offsetting this reduction in revenues are deliveries of 2 newbuilding dry bulk vessels in the third quarter: 1 Handysize vessel, which is chartered to the Hong Xiang Shipping group; and 1 Supramax, which is chartered to Glovis. These 2 vessels are expected to generate charter revenues of approximately $2.7 million for a quarter in total with full earnings from the fourth quarter of 2011. Both vessels were delivered during the month of August.

On the offshore side, charter hire increased to $109 million compared to $104 million in the first quarter as a result of a full quarter of earnings from the jack-up drilling rig, Soehanah, in addition to stable revenues from our other offshore units. In June, Seadrill exercised the pre-agreed purchase option on the jack-up drilling rig, West Prospero, which was delivered to Seadrill on June 24. The lost revenue from the West Prospero, which generated approximately $4.7 million in charter revenues per quarter is offset by the revenue from the Soehanah, which is expected to generate approximately $6.5 million of charter hire per quarter. The vessel operating expenses were $30.8 million compared to $23.5 million in the first quarter, which is partially due to delivery of the new dry bulk vessels and also the 2 containerships on charter to CMA CGM, which I mentioned earlier.

The profit share for the VLCCs for the quarter was only $0.2 million compared to $2.3 million in the first quarter. As our profit share is payable annually and as we have not seen any improvement in the tank markets so for the third quarter, we do not expect the profit share for the year to be significant.

As we have described in previous earnings calls, our accounting statements are slightly different than those of an ordinary shipping company due to the fact that our business strategy focuses on long-term charter contracts. And as a result, a large part of our activities are classified as finance lease accounting. Therefore, a significant portion of our charter revenue is 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 interest income from associates. In order for analysts and investors to gain more understanding of our accounts, we have published a separate webcast, which explains the finance lease accounting and investments in associates in more detail. This webcast can be viewed on our website, www.shipfinance.no.

So overall for the quarter, we reported total operating revenues according to U.S. GAAP of $73.7 million. Gain on sale of assets was $9.9 million in total, of which $5.8 million is the book gain related to the sale of the OBOs Front Driver and Front Leader. The book gain from the sale of the West Prospero of $4.1 million can be found in the line gain on sale of associates since the shares of the subsidiary was sold. Now overall according to U.S. GAAP, the company showed net income of $41.4 million or $0.52 per share.

On the balance sheet, we show $88.5 million of cash at the end of the quarter. In addition, we had available credit lines of $24 million and we have invested $17 million in short-term tradable securities as a short-term liquidity placement. Newbuildings and vessel deposits have increased from the first quarter since we have paid the first installment on our 4 newbuilding container vessels that are scheduled for delivery in 2013, in addition to scheduled payments for the dry bulk vessels under construction.

The $50 million investment in the 2 CMA CGM vessels is booked under other long-term assets. Long-term interest bearing debt in the company totaled $3.5 billion, of which $2 billion is consolidated long-term debt and $1.5 billion is long-term debt in our subsidiaries accounted for as investments in associates. During the quarter, we have repaid approximately $102 million of debt as scheduled.

Stockholders equity stands at just over $1 billion, if we include $171 million of deferred equity mentioned in this footnote. The book equity ratio, including deferred equity was 32.6% at the end of this quarter.

On the cash flow statement, we showed net cash flow from operating activities on the U.S. GAAP of $23.4 million in the second quarter. Under investing activities, you will note that the cash proceeds from the sale of the OBOs of $30.2 million and the cash arising from sale in associate of $37 million, which relates to the sale of the West Prospero. The $37.8 million under other assets investments is mainly related to the investment in the second CMA CGM vessels which -- with $25 million, and the remaining amount is investments in securities as a liquidity placement. In addition, we have continued to repurchase more of our bond maturing in 2013 where we bought another $12.4 million in the second quarter. As for today, approximately $274 million of the bond is outstanding, which is only about 8% of our total outstanding long-term debt.

Including undrawn credit lines, the company had liquidity of $113 million at the end of the quarter, where $24 million is related to undrawn credit lines. On the debt side, we have $3.5 billion of long-term debt as mentioned, of which $2 billion is consolidated long-term debt and $1.5 million is long-term debt in our subsidiaries accounted for investment in associates.

During the quarter, we have entered into several new financing agreements, which secures long-term financing for all our vessels under construction plus an existing vessel, which was delivered in the fourth quarter of 2010 and has previously not been financed. The total commitments for 2 of these facilities are up to $388 million, and finances between 75% and 80% of the vessels contract price. The maturity will be 10 and 12 years from drawdown, respectively. In addition, we have agreed with some of our banks to extend the maturity of a facility relating to 5 VLCCs unchartered to Frontline. The facility now matures in the second quarter of 2018, which is an extension of 6 years compared to the previous maturity. Hence, all our newbuildings are now financed long term and we have no refinancing needs in the near term.

In this graph, we have compared the total scheduled investments relating to our newbuilding program with the financing, which has recently been obtained. In the second half of 2011, we have approximately $94 million of scheduled payments on our newbuildings, while we can draw up to $174 million of related financing, which means a potential cash positive effect of about $80 million. In 2012, we have about $83 million of investments, which is matched by about $81 million of financing. And in 2013, we have $167 million of investments, while we can draw approximately $133 million on loan facilities.

So in summary, from now until 2013, we have a positive cash effect of $44 million from the financing relating to our newbuilding program, wherein the second half 2011, this cash effect is expected to be positive with approximately $80 million. In addition to that, we have $26 million of available long-term debt on an unfinanced container vessel, which if drawn, would result in a total positive liquidity effect of more than $100 million in the second half of 2011.

We're in compliance with all covenants with healthy margins. Free cash, including undrawn credit lines was $113 million compared to the minimum requirement of 25. Working capital was $195 million compared to the requirement of being positive. And the book equity ratio was 33% compared to a minimum requirement of 20%. During the financial turmoil in 2008, where several shipping segments saw a reduction in asset values of up to 50%, we had no issues with our covenants, no concessions or no waivers from our banks.

Then to summarize. For the first quarter 2011, the board has declared a quarterly cash dividend of $0.39 per share. This is a dividend yield of 12% based on the closing share price as of August 24, the quarterly net income of $41.5 million or $0.52 per share and aggregate EBITDA of $171 million or $2.16 per share. We have secured financing on all vessels under construction with a substantial positive cash contribution from these new facilities. We have ample headroom on our covenants. And combined with a strong liquidity position, Ship Finance is positioned well for continued selective growth going forward. The current backlog provides long-term stable revenues. We have premium access to capital and no near-term debt maturities. And with that, I give the word back to the operator, who will open the line for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now move to our first question today, which comes from Brian Grad from DLS Capital Management.

Brian Grad - DLS Capital Management

A couple of things. Do you have intention to continue to buy back the 8.5%s in the marketplace opportunistically?

Eirik Eide

We have, over time, bought back a significant portion of those bonds. The bond was originally $580 million in late 2003, and now there is in the region of $270 million remaining outstanding in the market. We, of course, we have done that opportunistically. We treat those bonds -- we do that on a relative basis. And of course, whether we buy those bonds or whether we place our, call it, liquidity elsewhere, is just a matter of, as you said, an opportunistic approach. We have no specific plans, we have no specific targets or size for the volume that we may or may not buyback over time. That bond is, it's callable on 30 days notice. And from December this year, we can call the bond at par. So of course that is also something that may or may not be done. But again, we will do that on an opportunistic basis. And as I recall, as I mentioned, the remaining amount is if you look at the overall balance sheet of Ship Finance, it's not a very significant amount in our view and we are not concerned with maturity in 2013.

Brian Grad - DLS Capital Management

Okay. The second question I had regards to something I was reading this week. There was I think you mentioned trade wins about the possibility that Frontline would be interested in renegotiating long-term charters. How do you feel about the possibility that, that could occur? And are you seeing pressure from any of your other customers given that rates have fallen so far to renegotiate charters? And what impact would that have on the company?

Ole Hjertaker

Yes. The charter contracts are fixed so there is no opening in the agreements to renegotiate charter rate, and that goes for that specific client. And it's the same thing with our other clients unless there are pre-agreed purchase options, which is of course disclosed in detail in our annual reports. The report you’re referring to and we also noted that, was based on what we would call speculation by an analyst that the Frontline -- for Frontline's various actions and what they could do. All we can say is that Frontline is and has been a client of ours for 7 years. They are current with their payments. There was a positive profit share generated in the second quarter. And over the course of these 7 years, there has been more than $500 million of profit share contribution. And when the profit split base is 20% to Ship Finance and 80% to Frontline, we could do the math and you can see that there's been very significant cash flows for Frontline over that period of time. So anything else would be a speculation. We have in the past from time to time, of course, had requests if we would be willing to look at the charter rates typically from smaller operators. But so far, we have not entertained such discussions.

Operator

We'll now move to our next question from John Parker of Jefferies.

John Parker - Jefferies

Eirik, you probably [ph] have mentioned a point about the full year profit share mechanism. If you got into a point in the back half of the year where there was a calculated negative profit share, would you show a negative profit share on your income statement? How would you account for that? I mean, I assume the full year could never go below 0, but how would you account for that on the back half of the year if did get to that situation?

Eirik Eide

Yes. I mean as we said in the statement, the profit share is calculated annually. So potentially, there could be a clawback of what we have booked so far in the year. But the impact for us, as you know, so far we booked something like $2.4 million this year. So I mean the potential negative impact for us is marginal. But yes, you're correct in interpreting that agreement that way that it's only payable annual and you sort of stated on an annual basis.

Ole Hjertaker

I think to add to that, I think just want to maybe also clarify how the profit share mechanism works. We have 3 separate profit sharing pools. And in each of those pools, 1 pool are the VLCCs that were acquired in 2004; 1 pool are the Suezmaxes and OBOs in combination acquired in 2004; and 1 pool is for 5 VLCCs, which were acquired in 2005. And there is a profit share mechanism for each of those 3, call it, blocks of vessels. So what you could see is, of course, that you have, call it, 0 contribution from 1 or 2 of those packages and positive contribution for a third. But as you pointed out, the profit share can never be negative.

John Parker - Jefferies

And these are small numbers this year, obviously. But from an accounting perspective, would you show a negative number in your income statement in the third and fourth quarter if that were the situation?

Ole Hjertaker

Yes. If that happened, there would be a negative impact.

John Parker - Jefferies

Okay. And then I just noticed on your balance sheet, you have some available for sale securities. Can you give us any more color? Do you consider those to be fairly liquid and part of your war chest?

Ole Hjertaker

Yes, those are securities that are liquid and tradable and where there is a market. And we do that, of course, when you have -- you'll call it available liquidity, we try to manage that in a sensible and conservative way. So we take a quite conservative approach to how we invest that capital. But when we see interesting opportunities and where we think if the risk parameters are interesting for us or risk reward parameters to be specific, we do invest smaller amounts and on a selective basis.

John Parker - Jefferies

Okay. And then finally, it seems we could be headed toward a period, I guess naughty periods or alike, but some similarity to what happened in 2009. There's a lot of talk of credit getting more and more difficult for your client base, for your potential customers. And I know in the last real steep downturn in shipping, you guys didn't really do many transactions. I think you've told me that was a function of the fact that you thought asset values were still too high. I'm just wondering if there's any lessons you've learned from kind of what you went through in 2009 that you're prepared to deal with this potential go around. And it sounds like you do have a fair amount of liquidity lined up. And based on your press release, it sounds like you are looking, as you mentioned, opportunities. But anything you can tell us about how you think things could unfold differently this time for you?

Eirik Eide

Yes. First of all, of course, the financial crisis in 2008 and 2009 was of course very dramatic, and at least for the banks who had the real issues with their own funding. We have not seen that, certainly not yet. And we don't have sort of immediate signals that, that will happen. If you look at, call it, on the asset side, you saw that, we also saw it. And we, at the time, had thought that asset values could come down quicker than what happened. And of course, one can speculate why that didn't happen and why there were not more opportunities available. One of the factors could also be that there were many shipping companies who had earned a lot of cash in the boom years of 2005, '06 and '07 and therefore, of course, had more cushion in their own balance sheets before they had to do something, and also had ordered vessels and where installments due in shipyards have not been due yet. Of course, now we're 3 years after that. Some companies have had access to the capital markets, but that has predominantly been in the offshore segment. There's been relatively few players in the, call it, traditional shipping segments, who have had access and who have done transactions in the, call it, public markets. So from a market per segment perspective, shipping, which has predominantly been more of a private equity type of financed structure, there hasn't really been raised much public money over this period of years. So if we then are in a period where we see some segments are suffering and where we see potentially negative, call it, cash flow contribution from operating the vessels, theoretically, more of the smaller operators could potentially come under pressure. And that is, of course, situations that could be of interest for us. But I think what we have always communicated is that we invest as conservatively as we see it. We try to look for the best type of risk reward opportunities and hope that we, over time, make good and sound investment decisions for our investors.

Operator

[Operator Instructions] We'll now move to our next question from Justine Fisher from Goldman Sachs.

Justine Fisher - Goldman Sachs

I have just a follow-up question on the Frontline charters. I know that you said you have not been approached by Frontline yet to renegotiate any of those charters, and obviously, there's $2 million per ship that is set aside for Ship Finance from those. But you said that you were approached by other counterparties, and you said no in response to that. And my question is, hypothetically, if Frontline did approach you, would they be treated as a completely independent entity in terms of your response? I mean would this be similar to the response that we've seen from other shipping companies, for companies like Costco, where there's no relationship between the companies and so they have every incentive to say no? Would Frontline be treated as an absolutely independent third party in the event that they did approach you guys?

Ole Hjertaker

Well, we are separate companies. We have separate management teams. I, myself and the rest of management have no incentives for Frontline or any other companies. We have our own incentives for Ship Finance and also, that's where our obligations and responsibilities lie. So that is, of course, our form. That is really where we're focused. As I had mentioned, we have had some requests from smaller players in the past where we have been requested to potentially amend the charters. When you also mentioned the, call it, the relationship aspect, I think it could be worth noting that back in 2009 or late 2008, early 2009, we did have an agreement with Golden Ocean, which is also -- where we also have a large shareholder in common, where we had agreed to acquire 2 Capesize bulk carriers, which was entered into a year before that but they were due for delivery at the end of 2008. Because the market had turned and because Golden Ocean at the time could not fulfill the so-called conditions precedence that we had set in order to take delivery of the vessel, we at Ship Finance turned down the transaction and they had to -- and stop the transaction because we felt that, that was the right thing for our company to do at the time. So I think that is at least a demonstration of how we have acted in the past. And we, as I said, we are an independent company and we have a separate management team, we have a separate board, and our obligation and responsibility is to take care of Ship Finance's interest.

Justine Fisher - Goldman Sachs

Okay. And then can you remind us how many of the total Frontline vessels are chartered out by Frontline at rates that make the in-charter from you to Frontline at least cash positive from a Frontline perspective? I mean, how many of those has Frontline basically covered on so that they're not burning cash at the moment?

Ole Hjertaker

Yes. Frontline will report their second quarter numbers tomorrow so we can only relate to the first quarter report, which they published back in May. And in 2011, they gave, call it, charter coverage depending on vessel class. And for the year or for the second half of the year, they indicated -- no, sorry. For the 3 last quarters, second through fourth quarter 2011, they indicated that for double hull VLCCs, they had average charter coverage of 12% with an average rate of $43,600. And for the double hull Suezmax, they had a 6% T/C coverage at an average rate of $38,500. While for the OBOs, which are owned by us and chartered to Frontline, they had 91% T/C coverage at an average year of $43,500 per day.

Justine Fisher - Goldman Sachs

So based in those numbers, which obviously could change for the second quarter. Based on those numbers, it seems like they would not have an incentive to even attempt to renegotiate anything on the OBOs because they'd be making money on those at the current levels. But it does seem as though the charter coverage that they had as of the end of the first quarter would, if it did relate to the specific Ship Finance vessels, make them cash flow negative at present.

Eirik Eide

Well, we will not speculate in how they think or anything. But as I mentioned earlier, there's no opening for Frontline to renegotiate any of those charters. They run -- some of those charters run all the way through to 2026 and 2027. So we're talking about long-term charter cover from our end.

Justine Fisher - Goldman Sachs

And can you remind us who the counterparties are for the new dry bulk vessels that you have coming on delivery? And this is just because this is obviously an issue in the dry bulk industry. Now can you remind us who the counterparties are for those vessels that you're taking delivery of over the next couple of years?

Ole Hjertaker

Yes. We have taken delivery now of 4 Supramax bulk carriers, and we are -- there's a fifth vessel due for delivery in the fourth quarter. They are all chartered to Hyundai Glovis, which is an investment grade Korean operator with a market cap in excess of $6 billion. Then we have 4 Handysize vessels. We have just recently took a delivery of the first, and the other 3 vessels will be delivered -- we'll deliver over the course of the next few months. They are chartered on 5-year charters to a company called Hong Xiang group. That is a privately owned Chinese operator. But they're part of a very significant Chinese conglomerate called Beijing Jianlong Group, which among other things they have a steel production of 9 million tons and they own mines in different parts of the world. And at least what we understand is that these vessels will be used to transport their own cargoes between mines and their other facilities. And then we have 3 also Handysize bulkers, where 1 vessel will deliver in the fourth quarter as expected and the other 2 during 2012. They are chartered to a smaller -- it's a Norwegian-based, the dry bulk operator called the Western Bulk Carriers and it's a 3 -- they are on a 3-year contract.

Justine Fisher - Goldman Sachs

Okay. I have one more question, if you would be so kind as to give me the time for it. The last question is just on cash flow statement. I know that Eirik, you have mentioned in your explanation that the negative amounts relating to other assets and investments were payments that were made for the CMA CGM vessels. But it did seem that at least for the 6 months, this amount basically offset the positive inflow of cash from associates. So I'm wondering if that negative item will continue going forward because if it doesn't, then you get a significant amount of cash from your financing for your newbuilds which is positive. I mean, that $80 million is huge, plus the actual cash flow from associates. But if this negative item continues, should we expect it to offset some of the cash inflow for the second half?

Eirik Eide

No, it won't. I mean the $25 million basically, the investment is posted under other assets because we have actually structured. This is a very structured type of transaction and we have actually provided loans, we actually have junior mortgages on the vessels. And that's why you see that cash coming in on the other investments and not actually posted under associates. So the income, the revenue stream from those vessels is actually split in 2. So some is coming as interest on that loan, and some is coming as a fee directly from the associates. So you don't need to expect that, that negative item is going to continue. And as I said in my statements, those 2 ships will generate in excess of $7 million on net free cash flow per year or $1.75 million per quarter.

Operator

[Operator Instructions] As we have no further questions, I'd like to turn the call back over to you, sir, for any additional or closing remarks.

Ole Hjertaker

Thank you. Then I would like to take the opportunity to thank everyone for participating on our second quarter conference call, and wish everyone a 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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