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Most of the Fredriksen-backed entities reported this week. I've already posted on his primary offshore
drilling company, Seadrill (SDRL), after it reported results earlier in the week. The end of the week
(2/27 and 2/28) featured the Q4 results of 5 Fredriksen-backed shipping companies. I was going back-and
-forth between two of the ideas before I settled on Ship Finance International (SFL).

I decided on Ship Finance Intl (SFL) for two reasons
1. Because SFL has financial and asset-related ties with other Fredriksen-backed companies. In my case,
I recently added to my North Atlantic Drilling Limited (NADL) stake, and SFL finances that asset.
2. Keeping with the theme of the other shipping ideas reviewed already- big changes. To be fair, three
of the SFL changes are probably medium sized rather than big.

So let me start with the changes to SFL's fleet during Q4 2013, and shortly thereafter.
- SFL terminated two VLCC leases with Frontline (FRO), and sold the vessels for scrap
- SFL terminated an agreement with CMA CGM involving two huge container vessels in Q1 2014
- SFL did not take delivery of a harsh environment jack-up drilling rig in December 2013. The rig did
deliver in 2014, and is headed to Norway.
- Two contracted midsize containership newbuilds did not deliver on schedule. The vessels are
among a set of four container vessels that were each scheduled to work a multi-year contract for
Hamburg Sud.

What does this all mean for SFL? To explore that, we have to delve into HoHum's grouping of
SFL's vessels into special categories. The categories are
- Vessels leased to Frontline (FRO)
- Off Balance Sheet assets
- Other vessels

I. Vessels leased to Frontline (FRO)
15 VLCCs
5 Suezmax vessels
In Dec 2011, FRO went through a financial restructuring, and this resulted in a change to the
tanker rate compensation and profit-share arrangements for four years (2012 - 2015). Five of the
the VLCCs had a slightly higher compensation rate. Two of those five vessels had their lease
terminated. The vessels were on the older side (1998 and 1999 builds) and SFL received a combination
of cash ($43M) and notes ($79M) for the two vessels. The fleet still includes 4 VLCCs delivered in 1999
and 2 VLCCs built in 1998. The newest of the 5 Suezmax vessels delivered in 1998.

II. Off Balance Sheet assets
3 UDW drilling assets
1 HE Jack-up drilling rig in transit to Norway
The two huge container vessels used to be part of this group. CMA CGM were the original owners of
the two vessels and had established a special sale-and-leaseback transaction with SFL. The HE jack-up
rig was acquired as a newbuild in mid-2013 from North Atlantic Drilling Limited (NADL), a Seadrill (SDRL)
subsidiary, and was supposed to deliver in Dec 2013. The three UDW drilling assets are SDRL assets.

III. Other vessels
2 Suezmax vessels
5 Supramax vessels (dry bulk)
7 Handy-size vessels (dry bulk)
1 Jack-up drilling rig
2 chemical tankers
6 offshore service vessels
9 smaller (each carry less than 3K TEU units) Container vessels
2 car carriers
2 mid-size container vessel newbuilds (delivery in 2014)
4 Panamax container vessel newbuilds (delivery late 2014 - early 2015)
In their earnings call, SFL management indicated the company still owned the two mid-size
container vessels. This was a slight surprise to me as several shipping brokers have reported
all four vessels as acquired by Hamburg Sud. SFL had secured financing on the four vessels, but does
not have financing on its other four newbuilds.

Towards the end of January 2014, I started getting a little concerned about the HE Jack-up rig
schedule. The rig was supposed to spend several months in transit to Norway, and start its drilling
contract with ConocoPhillips (COP) in April 2014. The NADL fleet status report now shows the contract
start month as May 2014 - Phew! ... That's a relief. While the rig, West Linus, is a specialized
drilling rig, finding a replacement contract could have been impacted by the cautious mood in the
offshore market. SFL have indicated that the West Linus will generate annual cash flow of
around $19M annually the first five years of operation.

SFL bumped up their dividend, from 39c/sh to 40c/sh. That might be a small surprise, considering the
company did not add new revenue streams in Q4 2013. Also, in Q1 2014, SFL will be losing the cash flow from
the two huge container vessels (I think 5-8c annually). The West Linus can help, but it won't
start operations for the next few months. My guess, ... the two VLCC lease terminations, which generated
about $20M net cash after debt repayments. SFL surprised me by severely whacking down the debt
associated with the tankers leased to FRO in Q3 2013. The current debt on the 20 tankers is less than
their scrap value (@ $400/LDT).

Most shipping companies will not admit their assets are over-valued. Some companies might concede that
a few of the assets are impaired. But they won't tell you which assets and by how much. SFL is one of
the few shipping companies that actually provide a lot more data in their annual report (20F). For
example, they will group all their dry bulk vessels together and provide the delta between the
carrying value of the dry bulk assets and what SFL thinks is the actual value. Of course, their most
valuable assets are their UDW drilling rigs, and those are accounted for slightly different. In my
categories, the assets have a pecking order
- Assets in II: Was 5 assets, now only 4 - maybe 60-75% of SFL's value
- Assets in I: While vessels are getting older, they probably generate 30-50% of the dividend payout
- Assets in III: The Jack-up drilling rig. Okay, maybe the two Suezmax vessels and the two
car carriers. Only considering operational vessels here, so the container newbuilds don't count.

Even though the VLCC rates increased late in 2013, I thought there was enough time to generate some
cash-sweep. I was a little surprised that the VLCCs generated no cash-sweep in Q4 2013. VLCC
rates in Q1 2014 has been holding up quite nicely, so maybe Q1 is when SFL gets some decent cash sweep.
OTOH, a pleasant surprise in Q4 were some of the Handysize dry bulk vessels, they generated around
$0.5M in profit-share.

The Q4 presentation slides:

The more detail Q4 report:

I'm sure there will be small surprises in the annual report (20F) when it eventually gets released.

Generally, SFL is an income idea. With a little timing, it is both a growth and an income play. All three
UDW assets were refinanced in the last 17 months, so no real issues there for another 3.5 years. The
UDW asset that needs a new contract earliest is West Taurus, a drilling rig currently working in
Brazil on a Petrobras contract. As mentioned in the SDRL review, Seadrill management are in ongoing
discussions with Petrobras about contract extensions. IIRC, West Taurus has its rate step-down
around the same time frame.

SFL positions for both income and, growth & income
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