Ship Finance International Limited's CEO Discusses Q1 2011 Results - Earnings Call Transcript

Ship Finance International Limited (SFL)

Q1 2011 Earnings Call

May 23, 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

Phyllis Camara - Pax World Funds

Presentation

Operator

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

Ole Hjertaker

Thank you, and welcome, everyone, to Ship Finance International on our first quarter conference call. My name is Ole Hjertaker, and I'm the CEO in Ship Finance management. And with me here today, I also have our CFO, Eirik Eide; our Commercial Director, Peter Lund; and our 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 an increased cash dividend of $0.39 per share. This is the fifth consecutive dividend increase and represents $1.56 per share on an annualized basis, or 7.8% dividend yield, based on closing price on Friday. We now have declared dividends for 29 consecutive quarters and paid out nearly $13 per share in total aggregate cash dividends.

The net income for the quarter was $32.1 million, or $0.41 per share. This is including profit share contribution and a minor gain relating to the sale of 2 single hull VLCCs in the first quarter. The fixed rate charter revenues in the quarter, including subsidiaries accounted for as "investment in associate" was $189.1 million before profit share contribution and $191.4 million after profit share.

The EBITDA equivalent cash flow including profit share was $167.8 million, or $2.12 per share. Despite a weak spot tanker market in the quarter, the profit share contribution was marginally higher than the fourth quarter and generated $2.3 million. According to Clarksons, the spot market so far in the second quarter has been softer than the first quarter, and Clarksons reported average modern VLCC earnings of $33,600 per day in the first quarter and $21,800 per day so far in the second quarter. Please note that the numbers from Clarksons do not factor in waiting time for cargo, so actual numbers may be materially different based on actual waiting time for the specific vessels.

Many 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, and the profit share generated in the first quarter, as I mentioned, was $2.3 million. 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.

In February, we acquired a 2007-build jack-up drilling rig from Apexindo, Indonesia's largest independent drilling contractor. The agreed purchase price was $151.5 million, of which $146.5 million was paid on delivery. The rig was delivered to us at the end of February and has been chartered back to Apexindo for 7 years. The agreed purchase price is very attractive compared to the estimated charter-free value of $190 million for the rig.

In addition to the fixed charter rate, we also have a profit split agreement at the end of the charter where Ship Finance will receive 25% of the charter-free market value in excess of $70 million.

The rig is accounted for as an operating asset and fully consolidated into our balance sheet. A net of estimated depreciation and interest, the rig is contributing $0.04 to $0.05 of earnings per share capacity per quarter and slightly more in distributable cash flow.

In March, we announced the acquisition of two 13,800 teu container vessels from CMA CGM in combination with long-term time charters back. Net acquisition price after seller's credit was $116 million per vessel, which is approximately 30% lower than the construction cost for the vessels.

The vessels were delivered at the end of March and in the beginning of April, and our equity contribution 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 will be 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 capital and potentially more, based on a profit-split arrangement if a purchase option is exercised.

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