Ship Finance International reported total US GAAP operating revenues on a consolidated basis of $94.2 mill in the second quarter of 2017.
This figure excludes $8.7 mill of charter revenues classified as ‘repayment of investment in finance leases’ and $47 mill of charter revenues earned by 100% owned assets classified as ‘investment in associate’. Inclusive of those revenues, the total charter revenues were $150 mill.
Reported net operating income under GAAP for the quarter was $38.7 mill and reported net income was $20.1 mill. This is after non-cash amortisation of deferred charges of $2.3 mill and a $5.7 mill negative impact arising from mark-to-market valuation of hedging instruments. Adjusted for these two items, the result was $28.1 mill.
Ole Hjertaker, Ship Finance Management CEO, commented: “In light of the pending financial restructuring in Seadrill and also a softer tanker market, the Board has adjusted the dividend to $0.35 per share this quarter. We believe this is a prudent action that resets our dividend to a more sustainable level going forward. Today’s declaration brings total accumulated dividends to more than $23 per share since 2004 and we have a large, diversified fleet of 70 vessels and rigs in operation, a significant charter backlog, and remain in a very strong financial position.”
As of 30th June, 2017 and adjusted for subsequent sales, the fixed rate charter backlog from the 70 mixed vessels and rig fleet was about $3.4 bill, with an average remaining charter term of nearly five years, or more than eight years if weighted by charter revenue.
Some of the charters include purchase options which, if exercised, may reduce the fixed rate charter backlog and the average remaining charter term, but will increase capital available for new investments. In addition, several charters include a profit sharing feature that may increase operating results.
In the tanker division, Ship Finance owns 15 crude oil, product and chemical tankers, of which 13 are employed on long term charters.
The crude oil tanker market remained soft during 2Q17 and thus far, into the third quarter. In 2Q17, the vessels chartered to Frontline earned average daily rates below the base charter rates, and no profit share was earned.
The average daily timecharter rate of the company’s two modern Suezmaxes trading in a pool with two sister vessels owned by Frontline was around $26,900 during 2Q17 down from $28,100 per day in the previous quarter. Three of the four vessels in the pool have been chartered out until late 2017 with a profit share above a floor rate, mitigating an expected soft spot market for the second half of this year.
In May and June, 2017, Ship Finance delivered the 1998-built Suezmax ’Front Brabant’ and the 2000-built VLCC ‘Front Scilla’ to their new owners. The combined net proceeds from the sale of the vessels was around $39 mill, including compensation from Frontline for the early termination of the charters. Ship Finance recorded a book loss of $2.7 mill as a result of the two sales.
The company also agreed to sell the 1997-built Suezmax ‘Front Ardenne’ to an unrelated third party, and the vessel was delivered to her new owner in the third quarter. The agreed net sale price was $12 mill, including compensation for the early termination of the charter. Ship Finance expects a minor book gain from the sale, which will be recorded in 3Q17. Following this sale, Ship Finance had nine crude oil tankers remaining on charter to Frontline, all of which were VLCCs.
Ship Finance also took delivery of two 114,000 dwt LR2 newbuildings in August, 2017. Both vessels commenced their respective seven year timecharters to Phillips 66 immediately upon delivery, with options for the charterer to extend the period up to 12 years. The total EBITDA contribution from these two vessels is estimated to be about $11 mill per year.
As of 30th June, 2017, Ship Finance had around $278 mill of available liquidity, including $249 mill in cash and about $29 mill freely available under revolving credit facilities.
In addition, the company had restricted cash in connection with a guarantee of $9 mill and marketable securities of around $111 mill, based on prevailing market prices at quarter end. This included 11 mill shares in Frontline and financial investments in senior secured bonds and other securities.
In June, Ship Finance successfully placed a senior unsecured bond in the Scandinavian credit market with an interest rate of NIBOR + 4.75% per annum and maturity in June, 2020. The principal amount of the notes is NOK500 mill, or the equivalent of about $60 mill, and the company has swapped all payments to USD with a fixed interest rate of 6.91% per annum.
As at the end of the quarter, the company had remaining capital expenditure commitments of around $65 mill related to the two 114,000 dwt LR2s, which have now been delivered. The acquisition of the vessels has initially been funded from the available liquidity, but Ship Finance said that it had now secured a $76 mill long term bank financing for the vessels, which is more than the final payments made to the yard at the delivery of the vessels.
The company claimed that management was committed to continuing Ship Finance’s conservative profile, which encompasses a strategy of chartering out the majority of the assets on long term charters to reputable operators in the shipping and offshore markets.
The diversified and extensive charter portfolio provides the company with a strong business platform, irrespective of the outcome of Seadrill’s restructuring and the recent successful transactions in the debt and bond markets are indicative of Ship Finance’s position in these markets, the company claimed.
Management said it believed the combination of a challenging banking market for many players and low asset prices will create significant opportunities for Ship Finance in finding investment opportunities with limited downside on asset values. In this market environment, the company was also prepared to take on more asset exposure in order to secure upside from potential appreciation in asset values.