Ship Finance International's (SFL) CEO Ole Hjertaker on Q3 2016 Results - Earnings Call Transcript

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Ship Finance International Limited (NYSE:SFL)

Q3 2016 Results Earnings Conference Call

November 29, 2016, 10:00 AM ET

Executives

Ole Hjertaker - CEO

Harald Gurvin - CFO

Analysts

Fotis Giannakoulis - Morgan Stanley

Magnus Fyhr - Seaport Global

Herman Hildan - Clarksons Platou

Øyvind Hagen - Nordea

John Reardon - Western International

Operator

Good day and welcome to the Q3 2016 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 Ole Hjertaker. Please go ahead.

Ole Hjertaker

Thank you and welcome all to Ship Finance International and our third quarter conference call. With me here today I have our CFO, Harald Gurvin and our Senior Vice President, Andre Reppen.

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 within the Securities and Exchange Commission.

The Board has declared a quarterly dividend of $0.45 per share. This dividend represents $1.80 per share on an annualized basis or nearly 13% dividend yield based on closing price of $13.90 yesterday. This is the 51st consecutive dividend and we have now paid nearly 22 dividends per share overtime or $1.8 billion in aggregate since 2004.

Aggregate charter revenues recorded in the quarter including 100% owned subsidiaries accounted for as investment in associate was $149 million and the EBITDA equivalent cash flow in the third quarter was approximately $115 million. Last 12 months the EBITDA equivalent has been $524 million and the reported net income for the quarter was $32 million or $0.35 per share.

In September 2016 we announced a issuance over $225 million senior unsecured convertible notes due to 2021 in the U.S. market. Most of the proceeds were used to repurchase a significant portion of the 2018 convertible note but there was also an incremental cash proceeds of approximately $40 million adding to our investment capacity. We are of course happy to see that the capital markets are open to us and the transaction builds under a long-term strategy of diversifying not only assets and customers but also our funding sources.

If you look at distribution of charter revenues per segment this is changing with a continuing rebalancing from offshore to container and drybulk vessels. In the third quarter 34% of revenues was from the offshore segment down from 37% one year ago and more than 50% a year before that. The container segment on the other hand now represents 25% of charter revenues up from only 8% two years ago. And with the delivery of the two very large container vessels soon, we expect the relative share from this segment to continue increasing going forward.

We have now taken delivery of all three container vessels to Maersk line with full cash flow effect in the third quarter. The charter period is five years fixed plus two optional years and we estimate average EBITDA from these vessels to more than $32 million for year after all vessels now have been delivered.

We have also two large 19,200 TEU container vessels in the pipeline with scheduled delivery at the very end of 2016 and in early 2017. This is in combination with long-term bareboat charters to Mediterranean Shipping Company or MSC, the world's second-largest container line. We estimate average EBITDA from these vessels to $31 million per year after delivery and the financing is by way of a finance lease matching the term of the charter. This financing is without recourse to ship finance and the remaining net CapEx is approximately $30 million or $50 million per vessel payable on delivery.

In addition we have two 114,000 deadweight ton product tankers also called LR2 type under construction with delivery scheduled for second half 2017. The vessels have been chartered out on time charter basis to Phillips 66 with a minimum period of seven years, plus five optional years. The minimum period represents a backlog of approximately $113 million and the aggregate annual EBITDA contribution from the vessels is estimated to approximately $11 million on average. Remaining yard payments are approximately $41 million per vessel and financing will be arranged in due course.

Divesting of older vessels is a part of the Company's ongoing strategy to renew and diversify the fleet and we've recently sold 18-year-old VLCC Front Century with delivery in the first quarter next year. Net proceeds from the sale will be approximately $24 million including compensation due from frontline.

I would like to note that all the tankers we have sold in the last few quarters have gone out of conventional trading in the spot market which then effectively reduces capacity in the market and is benefiting the remaining vessels.

After the sale of Front Century, we will have 10 VLCCs and two Suezmaxes remaining on charter to a subsidiary frontline down from nearly 50 vessels at the peak in 2004. The profit share arrangement on these vessels gives us an interesting leverage through the tanker market and kicks in the ready from $20,000 per day for the VLCCs.

Last year, we also changed a profit split calculation basis from annual to quarterly basis, adding optionality value for us. And as we can see on the right side of this slide, the actual charter revenues were significantly higher than the backlog going into the quarter, illustrating the upside potential from profit-sharing arrangements and spot trading vessels.

The forward market, as illustrated by the TD3 forward rates, is currently quoted as $31,300 per day for the first quarter next year which is well above the level three months ago. At this level, the net contribution per share from the crude oil tankers is estimated to nearly $0.20 per share in the first quarter.

And in addition, we also have the dividend potential from our $11 million Frontline shares with a dividend payout of $1.1 million due in December based on the $0.10 dividend announced today. In total, we will then have received more than $14 million in cash dividends from Frontline since 2015.

In addition to the Frontline vessels, we also have exposure to the crude oil tanker market through two modern Suezmax tankers which have traded in a pool with sister vessels owned by Frontline. For these vessels, the average charter rate in the third quarter was approximately 24,300 per trading day compared to a breakeven level of approximately $17,000 per day after interest and amortization for the vessels.

Over the next year, we have covered nearly 3/4 of the vessel days with a combination of charters with the floor rate and profit split which will create a buffer if markets stay soft and still with some upside if and when markets strengthens.

We now have 22 drybulk vessels in the fleet with a 15 larger vessels chartered out on long-term basis and 7 Handysize vessels traded in the spot market. One of our long-term objectives is to combine stability and predictability in cash flows with optionality, as we have seen over time that market volatility can generate super returns from time to time. So when we negotiated a deal with Golden Ocean last year, we included a 33% profit split on top for the base rate. At the time, not much value was attributed to the profit split due to the soft chartering market then but we see now charter fixtures at levels above our base rate of $17,600 per day.

Going back in time as illustrated by the graph on this slide and even if you exclude the Chinese super cycle for bulkers from 2004 to 2008, we've seen charter rates levels well in excess of our base rate from time to time and while we did not expect it to happen so soon, we're not surprised to see market rates move upwards.

The profit split will be based on actual performance by these specific vessels so we could not guide you on if and when a profit share will materialize on these capsize bulkers but that's a profit share is calculated and payable on a quarterly basis, we believe there is good probability for profit shares over the remaining 8 to 9 year charter period.

For the 7 Handysize drybulk carriers we currently trade in the spot market, the rates achieved in this quarter were marginally above operating expense level. There are however indications that market sentiment may be gradually improving from this segment as well, and we intend to continue trading these vessels in the spot market until long term rates improve.

In light of the weak charter market for rigs, we have the last few quarters discussed our drilling exposure on an asset-by-asset basis. In 2008, we acquired West Taurus and West Hercules at a cost price of more than $850 million per rig, and we financed them with $700 million in the bank market. These deals were all on the back of strong sub charters for the rigs and we structured it with front heavy charter payments and also we limited the corporate guarantees relating to the financing structures.

Now, we have amortized more than 60% of the loans and the average net payable charter rates for the two deepwater units is below $150,000 per day on average, which is only 40% of the initial charter rate. One of the rigs is the harsh environment rig West Hercules, which was upgraded for a very substantial amount in connection with the cool winterization for Arctic operations a few years ago. The rig has been operating for Statoil in Canada until recently but is now idled in Norway and being marketed for new contracts, while the other semi-submersible rig, the West Taurus is in layup in Spain.

The harsh environment jackup drilling rig West Linus has a sub-charter to ConocoPhillips at the rate of $326,000 per day until 2019. And there is no termination rights for ConocoPhillips in that charter as long as the rig performs on the charter. And during this charter, the debt will be reduced from $475 million initially to $237.5 million after only five years. Thereafter, we will still have 10 years remaining charter to Seadrill but then at a significantly lower rate, giving Seadrill a comfortably low breakeven rate.

As Seadrill stated during their most recent earnings release, they are in advance stages with their banks to extend their secured credit facility out to the 2020 and 2023 timeframe, reduce fixed amortization and cash debt service costs and amended financial covenants. They have also initiated dialogues with several of their large bondholders and also with potential providers and new capital.

We have likewise commenced discussions regarding our charter arrangements with Seadrill. While these discussions are preliminary and subject to confidentiality, we are hopeful that the solution will be reached at both supports the value over charter arrangements, as well as helps to ensure that Seadrill remains a stable counterparty.

We cannot comment on anything relating to this process but Seadrill has never missed a charter hire payment and is continuing to pay us the full agreed charter rate. And we continue our steep scheduled repayment profile on the loans.

We also own the 2007 build jackup drilling rig, Soehanah. This is a modern 375 foot jackup drilling rig built in Singapore and the rig is currently idle in Indonesia and is being marketed for new work in the Southeast Asia and Middle East regions.

Apexindo who has chartered the rig since 2011 is covering all expenses relating to the rig for the time being including a full special survey of the rig which is estimated to be finalized by the end of the year. This rig is debt free.

The illustration on the page demonstrates the rapid deleveraging over drilling assets and at least illustrates the limited recourse to our balance sheet. Aggregate loan balance for all the rigs is no below $900 million which is less than 50% of the initial loan amounts. Of this only a quarter is guaranteed by Ship Finance and the rest is nonrecourse to our balance sheet. We have also depreciated the assets significantly over the charter period and have book values below charter free valuation quoted by rig brokers despite a significant drop in rig values.

We have $3.9 billion fixed rate order backlog after our recent acquisitions and sales and with a rebalancing of the portfolio, the container segment now stands at more than 1 billion. The estimated EBITDA equivalent backlog is more than $3.2 billion or around $34 per share.

Most of the vessels are chartered out on long term basis and we have nearly 9 years weighted average charter coverage with a relative similar charter coverage in all our segments. The charter backlog does not include any contribution from the various profit-share arrangements nor does it include cash flows from the two Suezmax vessels operated in the pool arrangement with Frontline.

It also excludes the nine container vessels and bulkers in the spot market and the jackup rig Soehanah. And as this backlog is based on fixed-rate charters only, we have not included revenues from any vessels after the end of the current charter period.

And we not only have a diversified fleet but also diversified customer base with 16 chartering counterparties in total. Full vessel details on a vessel by vessel basis and including finance lease breakdown is available by contacting us via our webpage under the contact heading. On the webpage we also have a fleet map function where you can see where our various vessels and rigs are at any given time updated daily.

If we then switch to our performance last 12 months, the normalized contribution from our projects including vessels accounted for as investment in associate the EBITDA which we define as charter hire plus profit share less operating expenses in general and administrative expenses was $524 million in the period.

Net interest was $96 million or approximately $1 per share and our normalized ordinary debt installments relating to the Company's projects was $187 million or nearly $2 per share in the 12 month period. This is excluding prepayments relating to sale of older assets.

Net contributions after this, is $241 million or $2.60 per share over the last 12 months. For the same period, we have declared dividends of $1.80 per share or $168 million in aggregate which is below our historic average payout ratio of approximately 70% to 75% since 2004.

And of the distributable cash flow, the Seadrill rigs contributed $61 million in aggregate or 25% of the total in the 12 month period. So even if we subtract this from the distributable cash flow in the chart, we would still have a positive margin compared to the dividends declared.

And with that, I will leave the floor over to our CFO, Harald Gurvin, who will take us through the numbers for the third quarter.

Harald Gurvin

Thank you, Ole. On this slide we have shown a pro forma illustration of cash flows for the third quarter compared to the second quarter. 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 third quarter, total charter revenues before profit share were $141.3 million or $1.51 per share, slightly down from $143.4 million in the previous quarter. VLCCs and Suezmaxes revenues were slightly down in the quarter due to the sale of an older VLCC in early July and lower revenues from the two Suezmaxes trading and approval where one is traded in the spot market. Liners revenues were up in the quarter following delivery of the last of the three container vessels to Maersk line in May, which had clearly earnings affects in the third quarter.

The reduction in drybulk revenues was due to the drydocking of one of the vessels during the third quarter with a slight reduction in offshore revenues was due to the temporary reduction in the rates for the five offshore supply vessels on charter to Deep Sea supply.

We recorded a profit share of $5.4 million under the 50% profit share agreement with Frontline, down from $14 million in the previous quarter. The tanker markets opened in the third quarter compared to the very strong second quarter but are strengthening in November. We also recorded our profit share of approximately $160,000 relating to some of our dry bulk carriers.

Revenues from financial investments were down in the quarter, mainly due to lower dividends received on our shareholding in Frontline. So overall, this summarizes to an EBITDA of $114.5 million for the quarter or $1.22 per share, down from $128 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 U.S. GAAP operating revenues and have set booked out revenues classified as repayment of investment and finance leases, resulting associates and long term investments and interest income from associates.

If you wish to get more understanding of our accounts, we will also this quarter publish a separate webcast which explains the financiers' accounting and investments in associates in more detail. This webcast can be viewed on our website, Shipfinance.bm, under investor relations and webcast.

Overall for the quarter, we reported total operating revenues according to U.S. GAAP of $193.5 million which includes the profit share from Frontline. Total operating expenses were $61 million, resulting in an operating income of $33 million.

We recorded a positive non-cash mark to market of derivatives of $4.9 million during the quarter and $2.7 million of negative non-cash amortization of deferred charges. So overall and according to U.S. GAAP, the Company reported net income of $32 million or $0.35 per share.

Moving on to the balance sheet, we showed $63 million of consolidated cash at the end of the quarter, excluding amounts freely available for drawdown under revolving facilities available-for-sale securities of $116 million includes investment in senior secured bonds with a fair value of $37 million at quarter-end and also our 11 million shares in Frontline. The three rigs on charter to Seadrill are included in the balance sheet under investment in associates 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 just a combination of the two and the splits between equity and shareholder loans from quarter-to-quarter will depend on the intercompany accounting.

Stockholders' equity was approximately $1.1 billion, giving a book equity ratio of 40% at the end of the quarter. Then looking at our liquidity and capital expenditure, the Company had total available liquidity of approximately $238 million at the end of the quarter which includes approximately $175 million freely available under revolving credit facilities. Available for sale securities includes our $11 million share in Frontline with a market value of approximately $82 million based on the closing share price yesterday.

Moving on to the CapEx, we had four new buildings under construction at quarter-end, all with long term charters to strong counterparts. The two large container vessels MSC have expected delivery in late 2016 and early 2017.

The vessels will be financed through a 15-year financial lease agreement matching the charter with MSC. The financing is nonrecourse through Ship Finance and the net remaining CapEx is limited to $15 million per vessel payable upon delivery. We also have the two new-building prototankers under construction, with scheduled delivery during the second half of 2017. The remaining CapEx before financing is approximately $41 million per vessel.

We have not yet arranged financing, but given the strength of our charter and our strong standing in the debt financing market, we expect to secure a competitive financing well before delivery. And I’ve already reduced the interest from several financing institutions.

In October 2016 we issued $225 million in senior unsecured convertible notes. The five year notes have a coupon of 57.5% per annum and initial conversion price of approximately $17 and $0.77 per share.

The higher coupon on the new notes compared to the existing $350 million convertible notes is due to limited dividend protection and a higher conversion price. The strike price on the new note is only adjusted for dividends in excess of $0.025 share per quarter and based on the current dividend, the new notes are potentially significantly less value based on existing notes.

The majority of the proceeds from the new notes were used to repurchase the existing notes maturing in February 2018. The average ship purchase price was approximately 108% of par value due to the adjusted strike price on the existing notes and the net outstanding has been reduced from $350 million to approximately $184 million, which is also reflected in the graph on the slide.

The new notes were issued in October and the transaction will be reflected in the accounts for the fourth quarter. The repurchase of the existing notes has reduced the potential for equity dilution but based on the purchase price and rate of related to deferred charges, the net book effect in the fourth quarter is expected to be a cost of approximately $17 million in our profit and loss.

The net cash proceeds from the issuance of the new notes was approximately $40 million. On the debt side, we had approximately $1.6 billion of consolidated interest-bearing debt outstanding at quarter end, which includes approximately $1.1 billion in bank loans and approximately $500 million in senior unsecured notes.

In addition, our 100% owned subsidiaries accounted for as investment in associates at approximately $900 million in bank loans at quarter end. The debt to new subsidiaries is not included in the consolidated accounts but they are included in the graph on the slide.

The company has no bank or bond maturities until the fourth quarter 2017 while we continue our scheduled debt amortization of close to $45 million per quarter. We are in compliance with all financial covenants under our loan agreements at quarter end, it is worth noting that not only our ship finance been profitable and paid dividends each of the 51 quarters since the Company was established, we have also been in full compliance with all financial covenants on our loan agreement which gives us a strong standing in the bank market.

Then to summarize, the Board has declared a quarterly cash dividend of $0.45 per share for the quarter. This represents a dividend yield of 12.9% based on yesterday’s closing price. Net income for the quarter was $32 million or $0.35 per share.

We successfully placed 225 million of convertible notes in October and use the proceeds to repurchase substantial portion of the convertible notes due 2019. We had full cash flow effect from the three vessels to Maersk in the third quarter and continue our divestment of all the vessels through the sale of two older VLCCs. We have a strong liquidity position and limited remaining CapEx.

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 will take our first question from Fotis Giannakoulis from Morgan Stanley.

Fotis Giannakoulis

Yes, hello guys. Hi Ole. Ole, I want to ask you about opportunities to deploy capital because you have scrapped the number of vessels, tanker vessels with Frontline and I was wondering where can you put new capital to work right now given the weakness in the containership market and the other sectors in the shipping space?

Ole Hjertaker

Yes, thank you Fotis. We decided at the beginning of the year, we took what was a, call it internally decided to what we say step back a little bit, sit on the fence if you call it that, because we saw that there was significant shift [inaudible] maritime stocks into other segments. Effect of that, as we all know was of course the significant drop in share prices around in many of these sectors but it also of course means that then there is less capital available for investments in that segment which means again that there will be less price pressure.

I think so far we are very happy with that decision because obviously we look at new projects. I will say we screen new project basically on a daily basis but any deal we've looked at so far this year would probably have been even better if you did it today. So from that perspective, terms have only improved I would say in our favor but you’re absolutely correct, what we have seen it's a significant drop also an asset prices which makes it more interesting to invest.

We are looking as we speak as opportunities both I would say be looking at opportunities in the tanker market right now. We're looking at some drybulk sort of things, we also look at - of the container market. Of course we cannot comment and we will not be specific on the exact segment or the exact dollar amount that we expect to invest over the next call it few months but the deal opportunities and deal economics I think is certainly approved over the year but for us it’s so important to do the right deals instead of running out and just do a lot of deals just because we have promised to invest a certain amount of capital.

That said, with available liquidity we have, has probably never been better so we have a very strong balance sheet I would say and good capacity to grow if and when we see new opportunities. So, we will continue to screen for projects and then hopefully we will find something that is truly accretive also in the long run.

And I agree with you we have sold older assets, we have sold some older tanker vessels but we will also taken delivery of new vessels during the last few quarters. So it has been, look it's not been a one-way road but we're also looking at larger transactions that could or could not be very beneficial for the company.

Fotis Giannakoulis

And can I insist a little bit about the type of transactions because a few years ago, where typical transaction was a sale and leaseback with that you could lever up the return with around 60% or 70% debt financing, are we still talking about sale and leaseback transactions or given the fact that asset values have declined so much, you might be tempted to try some to take some market exposure, some greater market exposure by naked assets or assets which short term or medium term period contracts in order to benefit from the backend then anticipate the appreciation in asset values.

Ole Hjertaker

I'd say that we look at both and we have invested from time to time in as you say called it naked assets, i.e. assets without specific charter attached to it. It's typically for assets and segment where we believe that we will be able to find a good charter and where we see that there are interesting dynamics for instance on the new building price side et cetera. We did that for the containership we have one charter Hamburg Süd, which we ordered than on speculation and then fixed the charter a few months later.

I think with our association to the wider you call it Fredriksen Group our main shareholder Mr. John Fredriksen announced 36% of the shares in the company, we have a very strong position with the different shipyards. I don’t think anyone have ordered more new building than Mr. Fredriksen or company is associated with him at the various yards over, we call it modern history.

So from that perspective I think we do see from time to time some interesting opportunities also on that side. But I would not be specific on that because again it all goes down to doing the right deals and we do not want to be sort of tied to the Maersk, if you can call it that in terms of what kind of deals we will do.

But we can certainly and we have done in the past, we can build, own, operate is our preference than we control the vessels technically, but of course we can also do more regular say leasebacks which have good a cost of capital arbitrage type nature.

Fotis Giannakoulis

Well of course I appreciate that. And I would like to ask you about your existing contracts, I know that you monitor very closely all of your charters. And I want to focus on the offshore assets with Seadrill and also with Golden Ocean in the drybulk sector. And if you can also comment about some of the containership deals given the fact that we have leased some of the bankruptcy of the Hanjin. I know that you do not have any exposure to Hanjin, but how do you view the credit quality of your charter and I am not talking about overall I am talking about how this has changed from the previous quarter do you feel more confident, less confident?

If there anything that you would like to point out about the difference in the credit risk you announced during the last three months?

Ole Hjertaker

Well, you are absolutely correct, we monitor very closely our various counter parties. And when we have structured deals we are also building a very steep repayment profile on the loans to take down, call it exposure also on the financing side.

But I would say all of our customers are performing 100% and if you look at our collateral exposure on a container side as you pointed out there, we are - our vessels on charter two the largest container line, Maersk line. We have a number of assets on charter two, the second largest MSC. We also have some vessels on charter two Hamburg Süd, who is irrelatively smaller player like seven or eight place, but with a very strong balance sheet.

So our preference is of course to charter our assets to market leaders with strong balance sheets. And what we focused lot on is also trying to invest in the right assets. So for instance where we have committed capital on the container side is generally to the big new type of assets and we have very limited exposure to the old Panamax class of vessels where we have seen market have been really poor and where we have seen - even now we have seen a seven year old vessel being scrapped which is something we haven't seen since 80s in the shipping market.

So I think one of the things we focused on is being a top of what happening, what kind of assets our customers will demand overtime and positioning ourselves accordingly. But there is not much other than active comments on our various customers. You mentioned Golden Ocean, we now see that the charter rates are now - we see spot fixtures at least in excess of the base rate levels and we did – when we did the deal back in 2005, we structured it with the profits bid at the time. I don’t think that call it that profits bid was priced much into the deal if you can call it that because the market wasn’t that strong at the time.

But we’ve seen – as we have seen over the years on with the tankers, we have a profits bids, volatility in these markets, if you have the option that’s a friend. So what we preferred is of course we get options and we will give options.

Fotis Giannakoulis

Thank you very much all. That’s very helpful.

Operator

And we’ll take the next question from Magnus Fyhr from Seaport Global.

Magnus Fyhr

Thank you. Most of my questions related to deployment of capital, but just one question on the payout ratio, can you talk a bit about you’re thinking there I mean lot of the cushion there has been attributed by the high profit sharing from the tankers, that’s likely to drop here as we’re go into 2017 and just little bit what kind of levels you guys are comfortable with?

Ole Hjertaker

Well, that the dividends levels are set by the board on a quarter-by-quarter basis and typically, the focus if I can comment on that from the board has been on what we say, what they believe is the long-term sustainable level and so it’s not directly linked to any profits with in any individual quarter.

That’s also what you will see from time-to-time that we make a lot more money than we payout in dividends. And if you go back over the years and if you go back to – from the very start in 2004, you will see that we have related to – compared to net income, we’ve paid out around between 75% and 80% of net income and dividends over the years, but for time-to-time with learning significantly more than to payout.

So and if you look at distributable cash flow, the ratio is lower typically. So I cannot give any sort of specific guiding on that of course we monitor the tanker market. We will so reduce the number of tanker vessels on charter to Frontline as to have grown old and we have to sold them, so that is of course taken into consideration when the board looks at the dividend.

I think we should not forget also that the liquidity position we have and hopefully good investment capacity we have where we could potentially add new assets to the portfolio that could also build on the distribution capacity.

Magnus Fyhr

All right. Thank you.

Operator

We’ll now take the next question from Herman Hildan from Clarksons Platou. Please go ahead.

Herman Hildan

Good afternoon. Hi, so I mean if we going back you just been raising your dividends multiple times went through quite an aggressive investment period, since then – since Q3 you kept your dividends unchanged and you sold on your investments and de-leverage some of your offshore assets were some of the peers have continued to invest and grow their dividends and so on?

And then I fully appreciate that any deal you did yesterday or any deal you did today is better than 2007, 2008? But how should we read the situation on you becoming more careful by your strategy or supposed to be investing throughout the cycle and is it mainly finding counterparties there are that you believe are so sustainable throughout the cycle or what’s the key reason for the probably somewhat more conservative approach over the last year?

Ole Hjertaker

Well, thanks for that. I wouldn’t say we have – we’d more conservative. If you look at our investment profile over time, you will see that it’s almost been sort of one-year with lots of investment, the next year was lower investments and then again significant investments. As I said for us it’s more important to do the right deals than necessarily the programs amount per quarter of the year and what we’ve also seen and this I hope is one of the benefits of having a diversified segment approach, we can also benchmark deals between segments.

Unfortunately, what we have seen in the market generally is that, both the capital markets and also the financing banks are very, very cyclical. So typically towards the peak of the market that’s when you see, the capital markets being very aggressively, call it putting equity into companies and also when the banks are willing to finance the most and leverage the highest.

Of course it's a classic recipe for disaster because what we always try to do is to not invest on the peak, but instead try to invest when we are at the lower end of the cycle in a segment.

So the fact that we haven't invested so much so far this year shouldn't be really be - you should really read anything specific into that. It’s just being that you haven’t felt that you find the fund the right opportunities for the right deals with the right structure, and that may change of course on short notice.

But I cannot give you any specific guidance, because as I mentioned earlier, if we gave you guiding on how much money we would invest next quarter, a next few quarter et cetera, it will - it could create the situation where we feel that we have to invest, where we shouldn’t have invested.

So what we do hope over time is that we will steward the company in a way that we build a portfolio with truly accretive deals instead of doing deals that looks good in the short-term, but could end off being diluted deals for shareholders.

Herman Hildan

I mean from the outside, obviously, I guess you need to know where that you are still very good access to bank financing. And when you look at the asset prices, there are in certain segments in the all time level and I fully appreciate this kind of give guidance on what segments or one million less what amount of capital, but with at least the asset prices being very low that’s a good starting point to be able to do a deal.

So what’s kind of the key hurdle to find - what makes you pass on these deals that you’re seeing in the market today, is that counterpart there, is it the residual risks? What's the key hurdle to task in order to do deal with respect to the…

Ole Hjertaker

Yes, it's differs from deal to deal really. But we have seen some deals where there are expectations, very high residual values that we are not being comfortable with. But it’s difficult to specific because again it’s all deal related, but what you’re saying is more from a combine perspective that's why we haven’t ended up fair doing the deal.

So of course that also we have - we do have expectations for returns over time. So, but that said, last year, we invested $1 billion. So we haven’t been sitting all still. It’s just that the last few quarters, we haven’t announced any new transactions.

Herman Hildan

But is it fair to kind of say that it's hard to structure deal with the base return in environment where few segments actually generating any returns?

Ole Hjertaker

Well that - it all depends on the counterparty. But of course if you - in a market where the - where potential charter rates is losing money day out and day in, that’s of course not a good starting point. So it’s always better for counterparty to actually make money.

But what we offer and this is more for sort of traditional, sort of say leaseback type structures. What we offer is of course a very long-term stable provider and what we can also offer because – as a preference is to operate vessels on the time charter basis, I think we have a very efficient operating platform.

We don’t have any - like we say hidden fees or call it fees with in some other structure. So I think we can deliver very good value for money and with our access to the capital markets as we illustrated by the convert placement, as you pointed out, we believe we still have very good access to the bank market at least that’s what the banks are pitching on us when they come and propose things for us. And I think we are in an interesting position where we can, where we can grow the portfolio with the right deals of course.

Herman Hildan

And just a final question, how should we think about Frontline acquisition? You mentioned that’s a part of your liquidity, is that one way of keeping capital, one better opportunity rise or is it a long-term investment like what’s the thinking around that position?

Ole Hjertaker

Well, we have full flexibility relating to those shares. So from that perspective it’s a financial investment. But we’ve also generated very good returns on it with more than $14 million in dividends, since 2015. So from our side, it's an opportunistic ownership position. But so far it’s been quite good for us so.

Herman Hildan

Yes, okay. Thank you very much.

Operator

We’ll now take our next question from Øyvind Hagen from Nordea.

Øyvind Hagen

Yes, hi guys. Thanks for taking for my question. I understand you cannot provide any details on the negotiations that you stated that you have entered into a Seadrill. But could you give any indication on what you are prioritizing in those negotiations? I mean we have seen you revised charter agreements with all their counterparts in Fredericks and systems in the past and they will come out slightly different. What will you be looking to protect and what will you be more willing to give up when you start these discussions with Seadrill?

Ole Hjertaker

Thank you. Well as I said, we cannot really comment anything relating to those discussions other than there has been a contact now with the Seadrill and us. So I hope you appreciate that that this is something that we expect will take some time. I think Seadrill has indicated that they expect to have a solution sometime in the first half of next year.

What do you see if you look at other, call it situations, we’ve been into I mean all situations are different, call it, our position is different, the level of guarantees are different. So there are many factors here building in, but what we - our objective is to make sure that we get the best possible, deal out of it for us and our shareholders.

That’s our paramount objective. And what we say, I think over time and in other situations, I think we have come out with a reasonably good deal such as the Frontline restructuring back in 2012 where we now sit and generate a lot of the profit split relating to those assets.

But as I said, no comments on any specifics there and we just have to wait and see what the solution will end up like.

Øyvind Hagen

Okay, thank you. Could you comment if you have involved the banks on your side in the discussions?

Ole Hjertaker

I cannot really comment on the discussions or the process. So we will - when there is an announcement we made, we will of course make all the appropriate disclosures.

Øyvind Hagen

Okay. Thank you very much.

Operator

[Operator Instructions] We’ll now take our next question from John Reardon from Western International.

John Reardon

Good morning or rather good afternoon. Thanks for taking my call. It seems like the company is trucking right along, and you are in a position to really take advantage of some opportunities as they present themselves. Now in your comment, you talked about tankers and bulkers, and containers, and maybe because of your discussions with Seadrill, you didn’t mentioned anything about offshore drilling, recently [indiscernible] on their call said, that they felt that the offshore drilling market had actually bottomed and was showing some signs of life? Would you agree with that or would you just rather not comment about that at all?

Ole Hjertaker

Thank you. I think I would leave the market commentary on the drilling side to the market specialists. So I think there are many very good analysts out there who I’m sure, can guide you there. What we do observe is of course that there are a number of idle rigs out there. So - and when we see the charter rates for the vessels that are being fixed now at levels at what was a plus, minus operating expenses.

So from that perspective, the market is certainly not very strong. But we do see some fixtures every now and then, but at least what we hear when we speak to analysts is that they expect that what you say - this is also based on the various oil companies budgeting. The expectation is that 2017 may continue to be soft, simply because there’s not so much work to be done and then the analysts hope that 2018 will be better if we have some stability in oil price and the oil companies start spending again because, the flipside for oil company as, yes they may save a lot of money not doing any drilling but of course it also means that their depletion rate will accelerate and that of course is not a good thing into long run.

So, I think it's really - I can certainly not call the market, I cannot give you any guiding that the market has turn in any way. I think it will be from a financial investment perspective, I think it will still be painful in that sector but at the same time we do hope that that market will pick up again as steel companies start spending and start building the reserves.

John Reardon

Okay. As a follow-up if I may, we recently had an election here in the U.S. and Mr. Trump got in and he supposedly has been buddies with Mr. Putin. I was wondering if you have a perspective on some developments in the event that say the sanctions against the Russians for their adventures in the Crimea and Ukraine kind of fade from, from the focus on a foreign-policy basis i.e. other opportunities in Russia that have been denied to Ship Finance because of the sanctions.

Ole Hjertaker

Well, I don't think - I wouldn’t say that there are many opportunities that there was that, we haven't been in a position to do. I think in most of the drilling assets in the Russian markets are more specialized than that sort of standard deepwater and standard jackup drilling rigs that we primarily look at.

So from that perspective I don't anticipate any change. We do of course - we also of course we will be try to be very careful of with the sanctions and not be sort of infringed with sanction exposure so, but so far I know, I don't think we've seen many deals and you know relating to those assets in that area for us that would be interesting for us even without sanctions issues and I really don't expect lot of other opportunities either.

John Reardon

Okay. Thank you very much Ole.

Operator

As there are no further questions in the queue, I would like to hand the call back over to your host for any additional or closing remarks.

Ole Hjertaker

Thank you. And then I would like to thank everyone for participating in our third quarter conference call and if you do have any follow-up questions, there are contact details in the press release where you can get in touch with us through the contact pages on our website www.shipfinance.bm. Thank you.

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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