Ship Finance: Record Breaking Transaction Is Impressive in Today's Market

Ship Finance International Ltd. (SFL) has entered into a purchase then lease back of two deep water drill rigs with Seadrill Ltd. (SDRLF.PK). (Press Release)

The total purchase price of the rigs is $1.7 billion with SFL contributing $300 million and obtaining financing for the $1.4 billion balance. Of the $1.4 billion note, Ship Finance will only be liable for $100 million. The leases to Seadrill will be 15 year bareboat charters.

As a result of this deal, Ship Finance will be increasing the quarterly dividend to 60¢, pushing the yield on the current stock price to over 11%. SFL has paid a steady, growing dividend throughout its 5 year existence.

It is impressive that Ship Finance can put together a deal of this magnitude in the current financial environment. This is a record breaking deal for the maritime industry and SFL has now invested $3.4 billion in offshore equipment.

The dividend increase will be the 3rd in 2008, increasing the annual payout by approximately 10% over 2007. The recent market down turn has made strong dividend payers like SFL tremendous values. Ship Finance’s historical yield has been between 7.5% and 8.5%, indicating the stock should be at least $28 once the market becomes rational again. SFL is a component of my Income Portfolio and I will be increasing the position in the portfolio.

Note: I have a long position in SFL.

Comments

[Lee 99:]

SFL is one of the John Fredrickson companies. They are truly unique in that earnings are distributed as dividends. The mainstay is Frontline, FRO, not the pet pesticde. There are about a dozen others that deal in transportation, food production, deep sea drilling, etc. I've owned them for years and am much better off for it. I believe that Mr F has a business model that should be emulated globally. He, unlike most CEO's, has a stake in his companies. If they do well, so does he and his shareholders. If they do badly he doesnt get paid. He owns roughly 40% of stock in all of them.

2008 Sep 18 07:36 AM

[Joe Kunkle:]

Shorted this on 9/4, got my 20% gain, so yes it may be a buy now, but the short was much better timed.

Analysis from 9/4:

Swing Trader: Ship Finance International has rough seas ahead, drowning shares

Ship Finance Int’l has weathered the storm seen for the oil shippers and dry bulk shippers as commodity prices have crashed recently, and we feel that the easy ride is over and investors will begin to take notice of some fundamental and macroeconomic issues surrounding the company. Shares could see as much as a 20% decline in coming months as valuation multiples are contracted for the entire shipping industry.

Ship Finance International Limited, through its subsidiaries, owns and operates vessels and offshore related assets, and is focused on both oil transportation and dry bulk shipments. The company is a result of a spin-off from Frontline (FRO), which also looks like a weak stock in the environment.

Although some feel that SFL’s business model is “bullet proof” we think that the continued expansion of fleets may contract margins as empty ships sit around with the slowing demand wave crashing down on the dry bulk and oil shipping sectors.

The company had negative EPS growth this year of -7.23% and is expecting to see -10.36% declines in EPS next year. It is beginning to look like the growth story is done with this stock, and that a P/B multiple of 2.95 is overvaluing shares. There are also concerns fundamentally, with a long term debt-to-equity ratio of 3.36. Paying a generous dividend yield of 8.5% could be a cause for concerns if the company is unable to pay for its leased vessels as cash flow growth subsides.

We are looking to short shares on a fall below the $27 support level as selling volume has recently increased and we see declining MACD, RSI, and stochastics. The 200 day EMA is at $26.80 and a break below that level could send shares to our initial target price of $25, which may be followed by a move to $22.50. We will have a stop order at $28.75 which would negate the current downtrend.

This is a short term trade because the long term picture shows a stock that is paying a very high dividend yield and has a history of distributing excess cash flows. We intend to be out of this trade by the Annual Meeting on 9/19, where management could once again raise the dividend due to recent ship sales.

2008 Sep 18 09:28 AM

[thefuture007:]

Great Technical Advice...But adding in a " Real World ISSUE".All dividend paying stock,Muni's..ETC are also looking at a Possible Democratic Victory.Their Candidate wants to Raise TAXES on those Capital Gains/Dividends.Tradin... of these stocks on Technicals is one thing,Investing for the Longer term another.I see many of the Huge Momentum moves being Exacerbated by the Possibility of that Scenario..Higher TAXES.I Agree the Yield is Great here but when doing due diligence for income pls Factor in Higher tax rates for them and see where that puts your Analysis.
theres ways to play and add protection to that..the NEW ETF.."SEA" has exposure to this sector,playing it as a Short Hedge and buying some of the stocks..SFL etc.In the basket can offer some Downside protection as would buying "PUTS".
The EU has so far Excluded Shippers form the current CAP and Trade Requirements coming in Europe,that could change and the USA is working on that issue,would it include the Shippers/ SFL.?
Also stockpiles in China or Iron ore are ok...so far
the Aggregate Reports say grains are sufficient,for prices,shipping.
The Basis for SFL is on Drilling,so far the USA is pondering Several "OFF-Shore" drilling plans..one won't allow with-in 50 miles..2 other plans will,I Believe passage of the most Comprehensive plan will add more " Long-Term" Value to SFL's buisness model,and others.If the plan that doesn't allow Drilling with-in 50 miles passes...then that lowers the amount of area,off USA waters to be Drilled ,thus less Rigs needed Scenario and more competition with..RIG, NOV..ETC.
Do Bottom line to me is..Wait for analysts meeting,send them the above questions I've Raised vs competitors,see their answers.
Wait to see what energy plan passes may be a better entry point/higher Yields to offset the higher TAX Scenario's.Happy Trails.

2008 Sep 18 10:41 AM

[notsosmart:]

more or less,oil has to move.nobody has figured out how to pave over the ocean.the dividends have paid for my FRO stock.the ceo gets no pay-just dividends.would that all corps. be run lke that.

2008 Sep 18 12:54 PM