Ship Finance International Is Worth Holding Even In Troubled Waters

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Dec 05, 2014
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Ship Finance International (SFL, Financial) is an international ship owning and chartering company, with a fleet size of 70 vessels and rigs in its asset portfolio as of September 2014. The company's assets include oil tankers, dry bulk carriers, jack-ups and ultra-deep-water rigs. Ship Finance International earns its major revenue share from chartering of assets primarily under medium- to long-term bareboat or time charters.

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Going by the industry experts, Ship Finance International is a stock to stay invested in, which currently doles out a quarterly dividend payout of $0.41 per share and a dividend yield of 9.8% considering the current stock price standing at $17.04. Let us get a close up shot at why the industry experts think the shipping conglomerate is a good bet.

Looking into the order backlog

The most important reason to be bullish about Ship Finance International lies in the company's order book which holds a valuable backlog record. As of September 2014, the order book had an order backlog of $4.6 billion with clients of the caliber of Seadrill (SDRL, Financial), North Atlantic Drilling (NADL, Financial), Deep Sea Supply and Frontline (FRO, Financial), among its most prominent clientele.

As of the third quarter of 2014, Ship Finance International generated 54% of its charter revenue from offshore rigs. Now let us have a look at the cash flow and dividend generation capacity of the offshore rigs segment.

The company holds three ultra-deep-water units that currently are into a contract with Seadrill with nine years more to go on the contract. Recently, Seadrill announced it Q3 2014 results and has suspended dividend payout since then.

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West Polaris rig ship is currently into a contract until March 2018 with Exxon Mobil (XOM, Financial), therefore, Seadrill will continue depending on the assets of Ship Finance International in the long term, which means that Ship Finance International will enjoy the charter revenues inflow for a considerable period in the future. West Hercules, the second UDW unit, is on a contract with Statoil (STO, Financial) until January 2017. West Taurus, which was going off-contract in February 2015, has been contracted by Petrobras (PBR, Financial) for a period of three years and this means that it will stay contracted till February 2018. This guarantees revenue inflow from the UDW rig segment at least till 2018 for Ship Finance International and the liaison between the company and Seadrill has no near term expiration date. Also the UDW is the highest earner as its daily rates are higher and thus generates a major chunk of the company’s earnings. Also, as all the UDWs has been put to work hence the lion share of Ship Finance International’s earnings has been somewhat secured.

The revenue contribution remains firm across segments

Ship Finance International also owns a jack-up rig built in 2014 to perform in adverse climatic ambience that is leased out to North Atlantic Drilling. But NADL looks to be in a rather bad shape and in such a situation the future of the jack-up looks rather alarming.

The jack-up, West Linus, entered into a five year contract with Conoco Phillips (COP, Financial) in May 2014. In my last article on Conoco Phillips, I had illustrated the reasons for being highly positive in Conoco Phillips, and hence this implies that the jack-up rig of Ship Finance International is in safe hands ensuring steady revenue generation. Ship Finance International has a remaining 14.5-year charter with North Atlantic Drilling of which at least the coming five years’ revenue stream is expected to be firm. By then, the oil sector might see a sea change in the positive direction since it is a limited natural resource and not a synthetic material.

Ship Finance International also has a charter agreement with Apexindo for one jack-up rig. The jack-up rig is on sub-charter to Total (TOT, Financial) with 3.3 years remaining as contract period.

Such offshore rigs generated about 54% of Ship Finance International’s revenue during the third quarter of the fiscal year, and considering the given contract periods, the major portion of the revenue inflow for the company seems to be locked well in advance. In the third quarter 2014, the company stood at $146 million as EBITDA of which 61% equating to $89 million came from the above discussed rigs and it is worth noting that all of them are locked into contracts at least till 2018, which means even the larger proportion of the company’s EBITDA is secure through 2018.

The company's tanker segment contributed to 29% of the quarter's revenue, and the revenue inflow projections from the tanker segment also looks rock solid over the next few years. The chart below illustrates the revenue visibility from the tanker segment, which is expected to remain robust over the next 3 years.

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Going by the management guidance, the oil tanker market is slated to improve in the fourth quarter of 2014. In particular, the market for Suezmax tankers will see a considerable upside and the company currently owns two modern Suezmax tankers operating in the spot markets.

The revenue visibility factor that looks bright for Ship Finance International, the company also sports an impressive balance sheet. As of September 2014, the company sits on a debt of $1,778 million.

With an annualized EBITDA of approximately $550 million, the company holds a leverage factor of 3.2, which looks quite decent considering the current market conditions. Also, there seems to be no worry in servicing the debt as the company will secure good cash flow from the above contracts in the near future.

With Seadrill suspending dividends, Ship Finance International is an interesting bet as the company's 9.8% dividend yield certainly looks more sustainable by analysts.

Bottom line

Ship Finance International is really a bright spot in its segment and has a strong future outlook that is apparent from the above discussed contracts and the strength of its balance sheet.

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Even in the present highly volatile market, Ship Finance International stock has moved higher by 4% year to date in the fiscal year, and this strongly speaks about the fundamental strength of the company and the solid revenue earning prospects. The ability to generate sustainable revenue in turn secures the dividend payout of the company in the near term. In fact, investors holding position in Seadrill might consider repositioning their portfolio as Seadrill has currently suspended its dividend payout. But on the contrary, Ship Finance International holds a strong guidance with regard to future dividend payout. At the current levels, analysts worldwide recommend a strong buy and hold in Ship Finance International for reaping income benefits from the stock since the top brass have provided a strong dividend guidance in the near term, and for yielding value appreciation due to the operational contracts in the mid to long term period.