SFL Corporation Ltd

NYSE:SFL

Earnings Call Transcript 2018-Q3

[Operator]

Good day, and welcome to the Q3 2018 Ship Finance International Limited's Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ole Hjertaker. Please go ahead, sir.

[Ole Hjertaker, CEO]

Thank you. And welcome everyone to Ship Finance International on our third quarter conference call. With me here today, I have our CFO, Harald Gurvin and Senior Vice President, André Reppen.

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 statements. 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 has declared a quarterly dividend of $0.35 per share. This dividend represents $1.40 per share on an annualized basis or 11.6% dividend yield based on closing price of $12.08 yesterday. This is our 59th consecutive dividend and we have now paid nearly $25 per share in dividends or more than $2 billion in aggregate since 2004.

The reported net income for the quarter was approximately $30 million or $0.28 per share. This is after an impairment charge of $6 million relating to the sale of VLCC after quarter end and also some positive mark to market on derivatives.

Aggregate charter revenues recorded in the quarter including 100% owned subsidiaries accounted for as investments in associate was approximately $155 million and the EBITDA equivalent cash flow in the quarter was approximately $121 million. Last 12 months, the EBITDA equivalent has been approximately $445 million.

2018 has been an active year with multiple transactions. We have grown our backlog by more than $800 million since April and seen a major change in the fleet mix. At the same time, we have divested several older uneconomic assets, including several VLCCs from the company's initial fleet in 2004. 45% of our backlog is now in the liner segment, up from around 25% at year-end 2017. The tanker segment has been reduced from nearly 20% to around 8% and offshore segment also come down from more than 40% at the end of last year to 34% at the end of the third quarter.

In August, we were pleased to announce the acquisition of three modern eco-design container ships built 2015 and with a capacity of 10,600 TEU. The first two vessels were delivered to us in the third quarter and the last vessel in early October, so we expect nearly full cash flow in the fourth quarter.

The EBITDA contribution is estimated to $35.5 million per year. The vessels are chartered to Maersk Line with a minimum period until late 2024 and options to extend until 2028. There is also a purchase option with profits bid at the end of the initial period for each of the vessels. Our backlog increased by approximately $260 million or approximately $430 million if the charter extension options are exercised.

In late May, we took delivery for 14000 TEU container vessels in combination with long-term time charters to Evergreen. At the time, we part financed the vessels with a $320 million intermediary financing and we have now refinance that with $400 million long-term lease financings effectively freeing up $80 million of liquidity. The lease financings for the first of the four vessels closed in the third quarter and the remaining in October and November.

In the third quarter, we also raise an unsecured bond loan of NOK600 million kroner equivalent to approximately $74 million. Interest is NIBOR plus 4.75% and all amounts have been swapped to U.S. dollars. Part of the proceeds were used to repurchase other notes due in March 2019, so we look at this as effectively a refinancing.

With a large and diverse fleet, we continue our fleet renewal processes and sold three older VLCCs in the third quarter and another two subsequent to quarter end. Three VLCCs were sold to ADS Crude Carriers where Ship Finance owns 17%. The ADS shares are listed on the Oslo Merkur Market and our shares have a market value of approximately $10 million.

ADS targets a full payout of net cash flow to its shareholders and for us this is an opportunistic financial investment close to a low point in the business cycle for tanker vessels with limited downside to current recycling values. Our investment as a shareholder in ADS could therefore give us good upside potential with very low risk exposure at the tail end of these vessels commercial life.

In the third quarter, we agreed to sell the 2007 build jack-up Soehanah for approximately $84 million, with delivery expected in December.

$15 million of the purchase price was paid to us earlier this month and the balance is payable on delivery. The rig is on a charter paying $10,000 per day currently and we will receive the hire until delivery. Book value at quarter end was approximately $76 million, so we expect a gain of approximately $8 million after delivery, which is expected in the fourth quarter.

We also have some financial investments and earlier this month Golden Close Maritime Corp., where we have had the financial investment for some time, sold its only asset the drillship DeepSea Metro 1 for $262.5 million. Net proceeds to us after redemption of the notes we owned and liquidation of the company is estimated to be approximately $47 million. This is significantly more than the book value and a gain of at least $10 million is expected to be recorded in the fourth quarter.

I don't think many analysts have allocated much value to our financial investments and ability to generate value out of that. The proceeds from these notes and securities adds to our investment capacity and we hope to put it to work relatively soon.

In terms of number of vessels, we now have more vessels operating in the liner market than the other segments combined. And as I mentioned earlier, the segment is the largest with 45% of charter backlog. Our focus has primarily have been on new design container vessels between 9,000 and 19,000 TEU and we continue to see opportunities in the segment as illustrated by the recent acquisitions.

We also have two car carriers the Glovis Conductor and the Glovis Composer, which were on long-term charters until the third quarter of 2017. Thereafter, we have rechartered the vessels on short to medium term in the medium charter term market. We could look at longer period for these vessels, but believe the timing is not optimal for that currently.

The spot crude oil tanker market remains soft for several quarters through 2017 and most parts of 2018 as a result of high fleet growth, cuts in OPEC volume and significant oil inventory draws. Currently there are seems to be a more robust market with forward rates in the fourth quarter and first quarter next year above the base rates for our VLCCs.

The remaining VLCCs are on charter to Frontline Shipping Limited, a non-recourse subsidiary of Frontline Limited and earned approximately $9,500 on average per day, which is well below the base charter rate of $20,000 per day. So far they've been able to pay the base rate by drawing on a previously built-up cash buffer. The market dynamics have changed into the fourth quarter however, and we expect charter rates achieved in the fourth quarter to be significantly stronger than in the third quarter and well above the $20,000 per day base rate.

The remaining three vessels are all built between 2002 and 2004 and our average cash breakeven rate is approximately $11,500 per day after financing costs. Only one of these assets were part of the initial fleet acquired from Frontline in 2004 after selling more than 40 older vessels profitably over the years.

In addition to the VLCCs, we also have exposure to the crude oil tanker market through two modern Suezmax tankers, which is traded in a pool with sister vessels owned by Frontline. For these vessels, the average charter rate in the first quarter was approximately $12,500 per day, which was marginally up from the previous quarter. As for the VLCCs, we expect earnings on these vessels to be significantly stronger in the fourth quarter, all the other assets in the segments are on long-term fixed rate charters.

We have 22 dry bulk vessels in the fleet with 15 larger vessels chartered out on long-term basis and seven handysize vessels traded in the spot market. One of our long-term objectives is to combine stability and predictability in cash flows with optionality as we have seen overtime that market volatility can generate super returns from time-to-time.

And the charters Golden Ocean is an example of this, we have a 33% profit split on top of the base rate of $17,600 per day plus the interest adjustment, which equates to around $18,600 per day currently. This quarter we recorded a profit share of $200,000 or around $300 per vessel per day on average. The market strengthened during the first part of the fourth quarter, but has softened lately. And it is uncertain if a profit share will accumulate this quarter.

The kamsarmaxes and most of the supermaxes are all on long-term fixed-rate time charters, while the seven handysize dry bulk carriers continue to trade in the spot market. The rates achieved this quarter were approximately $8,000 per trading day, which is down from approximately $8,700 per day in the previous quarter.

There is positive momentum in the drilling market, and we were happy to finalize the financial restructuring of Seadrill in early July. Seadrill has sub-chartered the harsh environment jack-up rig West Linus to ConocoPhillips until the end of 2028. The harsh environment semi-submersible rig West Hercules has recently been awarded multiple consecutive sub-charters in the North Sea and is now working for Equinor, previously known as Statoil.

The semi-submersible rig, West Taurus, remains in layup in Spain. Including the West Linus, we have reduced the debt from $1.9 billion initially on the Seadrill rigs to around $700 million currently. And of this aggregate outstanding loan balance, only $266 million is currently guaranteed by Ship Finance.

Ship Finance also has five offshore support vessels on long-term charters to a non-recourse subsidiary of Solstad Offshore ASA. The market for offshore support vessels remains challenging and the vessels are currently not employed on sub-charters. In light of the depressed market, the company and other financial creditors entered into restructuring agreement in July where we will receive 50% of the agreed charter hire for the two vessels, Sea Cheetah and Sea Jaguar, until the end of 2019. All other payments under the respective charters will be deferred until the end of 2019.

The offshore support vessels only represent approximately 2% of our charter backlog and our financial commitments is limited to a corporate guarantee of $30 million under the related bank financing of the five vessels.

If we then switch to cash flow last 12 months the normalized contribution from our projects, including vessels accounted for as investments in associates, the EBITDA which we defined as charter hire plus profit share less operating expenses and general and administrative expenses was $445 million in the period. This includes both the consolidated subsidiaries and also the subsidiaries which are 100% owned, but are classified as investment in associates.

Net interest was $126 million or approximately $1.20 per share in the period and our normalized ordinary debt installments relating to the company’s projects was $177 million last 12 months or approximately $1.70 per share. This is including continuing high amortization on the Seadrill rig loans last three quarters despite the reduced charter rate. This was done intentionally from our side to avoid extra fees and will gradually be adjusted down by nearly $50 million from the fourth quarter to second quarter next year in connection with scheduled rollover of the associated loans.

Net contribution after the high amortization was $141 million or $1.35 per share over the last 12 months, which is in line with the dividend declared. From our inception nearly 14 years ago we have paid out approximately 80% of net income in dividends, which illustrates the moderate dividend policy and it has allowed us to significantly grow our business organically.

And with that, I will give the word over to our CFO, Harald Gurvin, who will take us through the numbers for the quarter.

[Harald Gurvin, CFO]

Thank you, Ole. On this slide we’re shown a pro forma illustration of cash flows for the third quarter compared to the second quarter. Please note that this is only a guideline to assess the company’s performance and is not in accordance with U.S. GAAP.

Total charter hire for the third quarter was $150 million, up from $138 million in the previous quarter. The main reason for the increase is full quarter revenues on the four container vessels on charter Evergreen, which were delivered towards the end of May. We also took delivery of two of the three container vessels on charter to Maersk in September, with a third vessel delivered beginning of October, which should echo the full earnings effect in the fourth quarter.

Revenues on tankers was down in the quarter due to the sale of three VLCCs, partly offset by slightly better earnings on the two Suezmaxes trading in the pool. Now further two VLCCs have been sold post quarter end, with the first vessel delivered to this new owner in October and the second vessel scheduled for delivery in December. Dry bulk and offshore revenues were in line with the previous quarter, a slight reduction in dry bulk revenues was due to lower revenues on the seven smaller handysize vessels trading in the spot market.

We’re in profit share of approximately $240,000 on the eight capesize dry bulk carriers on charter to Golden Ocean where we received 33% of annual earnings above the base charter rates calculated and payable on a quarter basis. So overall this summarizes to an adjusted EBITDA of $120.5 million for the quarter or $1.12 per share, up from $107.7 million in the previous quarter.

We then move on for the profit and loss statement as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statements are slightly different than those of a traditional shipping company. As our business strategy, focused on long-term chartering contracts and large part of our activities are classified as capital leasing.

As a result, a significant portion of our charter revenues are excluded from U.S. GAAP operating revenues and instead booked as revenues classified as repayment of investment in finance leases, results in associates and long-term investment and interest income from associates. If you wish to gain more understanding of our accounts, a separate webcast which explains the finance lease accounting and investment in associates in more detail that maybe view on our website, shipfinance.bm under Investor Relations and Webcasts.

Overall for the quarter, we report total operating revenues according to U.S. GAAP of $111 million, up from $97 million in the previous quarter. As mentioned, this was the first full quarter of earnings on the four large container vessels to Evergreen delivered towards the end of May. We also recorded a profit share of $240,000 during the quarter and a gain of $820,000 on the three VLCCs sold during the quarter.

The impairment charge of $6.8 million relates to the sale of the VLCC Front Ariake, which was delivered to its new owners subsequent to quarter end. Total operating expenses, including the impairment charge of $6.8 million were $68.8 million, resulting in an operating income of $43 million.

We recorded a positive non-cash mark-to-market of derivatives of $8.4 million during the quarter, which mainly relate to the buyback of a portion of our NOK denominated bonds due 2019 in connection with the new bond issued in September, resulting in a D designation on the underlying cross currency swaps. So overall and according to U.S. GAAP, the company reported net income of $29.7 million or $0.28 per share.

Moving on to the balance sheet, we showed $144 million of consolidated cash at the end of the quarter, which excludes $9 million of freely available cash in our subsidiaries accounted for as investment in associates. We took delivery of two of the three 10,600 TEU container vessels, a long-term charters to Maersk during the quarter, included under vessels and equipment.

We also conclude the first of the lease financing on the four 14,000 TEU container vessels on charter to Evergreen. Whereby the vessel was reclassified vessel and equipment under capital leases. The corresponding lease liability is included under other long-term liabilities. Other current assets of $137 million includes a jack-up drilling rig Soehanah at $76 million, which is classified as a held for sale asset.

Short-term and current portion of long-term interest bearing debt includes the remaining $240 million of the original 320 intermediary financing for the four Evergreen vessels, which has been fully refinance post quarter end. Stockholders' equity was approximately $1.2 billion, giving a book equity ratio of approximately 34% at the end of the quarter.

Then looking at our liquidity and financing status. As mentioned, we had a total available liquidity of $153 million at the end of the quarter, including cash in our subsidiaries accounted for as investment in associates. In addition, we had available for sale securities of $127 million, which includes investments in senior secured bonds and other securities with a fair value of $63 million at quarter end and also our 11 million shares in Frontline with a market value of approximately $72 million based on the closing share price yesterday.

We had a total of eight debt free assets at quarter end, including two car carriers, two chemical tankers, three 1,700 TEU container vessels and a jack-up drilling rig Soehanah, which has been agreed and sold. The combined charter value of these assets is approximately $194 million based on average broker appraisals, and we may potentially enter into financing on some of these assets in the future.

Post quarter end, we also received net cash proceeds of $60 million from the three remaining Asian lease financings and also expect a further cash boost of approximately $84 million from the sale of the jack-up drilling rig Soehanah and $47 million from the redemption of securities in Golden Close, she also owner of the drillship Deepsea Metro I. The Golden Close investment is included under available for sale securities with a fair value of approximately $37 million at quarter end. In addition, the sale of Front Falcon is expected to give net cash proceeds of approximately $15 million after debt repayments.

On the financing side, we issued NOK600 million of senior unsecured notes in September equivalent to approximately $74 million. The five year notes bear an interest of NIBOR plus 4.75% per annum and the proceeds were used to part refinance a portion of the NOK900 million bonds due 2019 and for general corporate purposes.

As mentioned, we also entered into very attractive lease financings totaling $400 million with an Asian based institution, with the financing of the four 14,000 TEU container vessels. Each of the lease financing has a term of nearly nine years, with an option to purchase the vessels back after six years around expiry of the term period of the charters to Evergreen.

One of the financing closed in the third quarter and the remaining three in the fourth quarter. A portion of the proceeds has been used to refinance the $320 million unsecured loan facility arranged at the vessels’ delivery in May and the transaction freed up a total of $80 million of cash, of which $20 million was included in the third quarter and the remaining $60 million in the fourth quarter, as mentioned above.

We also enter into $200 million intermediary bank facility to part finance the three 10,600 TEU container vessels on charter to Maersk. Two of the vessels were delivered in the third quarter and the third in the fourth quarter. The facility after maturity of more than one year, but we are in the process of arranging long-term financing of the vessels at very attractive terms, which is expected to close in the fourth quarter.

Then to summarize, the Board has declared a cash dividend of $0.35 per share for the third quarter. This represents a dividend yield of 11.6% based on the closing share price yesterday. Net income for the quarter was $30 million or $0.28 per share. We have demonstrated our ability to secure attractive financings through the lease financing totaling $400 million and also the NOK600 million senior unsecured notes.

Since April, we have acquired a total of 22 vessels, adding more to $800 million to the charter backlog. At the same time we have seen a significant shift in the fleet composition, with increasing the diversified high quality counterparties. We have a very robust liquidity position giving us substantial investment capacity.

And with that, I give the word back to the operator, who will open the line for any questions.

[Operator]

[Operator instructions] We can now take our first question from Randy Giddens from Jefferies. Please go ahead.

[Christopher Robertson, Jefferies]

Hey, guys, this is Chris Robertson, on for Randy, thanks for taking our call. In terms of the current fleet composition is there any particular segment that you'd like to continue to enhance with some second hand vessel acquisitions? And kind of what are your thoughts on the market opportunities out there for each segment?

[Ole Hjertaker, CEO]

Thank you. We are -- we look at all the segments I would say in parallel. We've done more acquisitions in the container ship segment over the last few quarters. I would say that's more of a -- it's more of a coincidence. We are -- like we say our relative share in the tanker space now is lower than it’s used to be so we wouldn't mind increasing in that segment and certainly now the market fundamentals in the segment there looks better.

But I would say we are segment agnostics and focus on trying to do the best deals and some periods there is a concentration in one sector and another periods in other sectors. As we were very heavily invested in the offshore space a few quarters ago that has changed. So I would say it's a dynamic process.

We look at opportunities I would say across the board including the offshore space right now, but we can of course not comment on specific transactions before we do them. But, we hope to deploy the capital we have in new projects within not too long time. But it's all about doing the right deals and not what do a specific percentage in each segment.

[Christopher Robertson, Jefferies]

That's fair. In terms of the three containerships that were recently acquired, you mentioned that the annual EBITDA contribution will be about $35.5 million was the purchase price closer to maybe 8 times annual EBITDA or 10 times annual EBITDA? And kind of a follow-on to that with the intermediary financing of $200 million was that closer to 55% of the purchase price or 70%?

[Ole Hjertaker, CEO]

Well, I would say we are sort of midway there in your ratio, so it's below 9 times EBITDA for those vessels. We have an intermediary financing for those vessels and we expect to as, Harald, indicated, we expect the longer term financing to be put in place in not too long time. The leverage we have on them initially is a very comfortable just over 60%, which is I would say on the low side when you have a very strong chartering counterpart and high class assets as these vessels are. So we hope to revert with that once we have finalized the long-term arrangement.

[Christopher Robertson, Jefferies]

Okay. And final question for me. It looks like the coverage ratio should remain above 1.3-1.4 in coming quarters. With that, can you comment on the dividend sustainability and any plans to increase the dividend in the next few years?

[Ole Hjertaker, CEO]

Yes. Of course, when we make investments, we make investments because we believe they are accretive to the distribution capacity in the long-term. We -- but the dividend is -- and this is sort of always been the express strategy of the Board not to sort of give guidance on future dividends. So we really have to look in the mirror and over the 59 quarters now the dividend have been stable or increasing with very few individual sort of settings where they have been adjusted downwards.

So it is our objective to like we say, reinvest the capital and grow the dividend, but I cannot give you specific guiding on when. Right now we are -- from a cash flow perspective, we are -- we still pay down a lot on the Seadrill rigs, while we have -- we are in the period where we have -- we are reducing somewhat lower rate. That is expected to be balanced during mid-2019. And then is really a question how we can deploy the capital we have before we can -- I would say, before we can comfortably sort of increase the dividend level. This is management speaking, but I think we certainly have a very solid cash buffer now. So if we can deploy that hopefully we can also do something to the dividend then.

[Christopher Robertson, Jefferies]

All right. Appreciate the time and thanks for taking my questions.

[Ole Hjertaker, CEO]

Thank you.

[Operator]

Next question goes to Magnus Fyhr from Seaport Global. Please go ahead.

[Magnus Fyhr, Seaport Global]

Yes. Hi, guys. And just as a follow-up on the prior question. Looking at slide 10 on your payout, while the cash payout ratios currently -- or dividend ratio is higher than the free cash flow. Looking forward, at least on our estimates that payout ratio should decline to 85% within a year.

Would you like to deploy additional capital? I mean, you’ve got $400 million so of cash that you could deploy if you use the marketable securities. Or is that 85% a very comfortable level that's kind of going back to the historical range where you've been. So should we kind of assume that if you get below that level that leaves you some room to start addressing the dividend?

[Ole Hjertaker, CEO]

Yes, I mean, the cash flow when you look at the slide 10, of course that's -- there are sort of -- there are three quarters of -- three legacy quarters in that graph. And part of that period or as most of that period is now sort of in the period where we have continued paying high amortization on the Seadrill rigs as I mentioned, while we adjusted the cash or we agreed to adjust the rate downwards. We did it that way to simply to save fees. So we think that was from a cost of capital perspective, it was a -- we think that was a good trade, but the optics of that looks of course like the free cash flow is lower.

But we think this will balance and then we have the cash at quarter-end and then with a couple of I would say liquidity, expected liquidity events like the freed up cash on the relating to the leases on the Evergreen vessels. We have the sale of the jack-up rig Soehanah with $84 million.

We have the cash from the sale of the securities around $47 million, $15 million net cash from the sale of Front Falcon, et cetera, et cetera. So there is a significant call it hopefully a cash boost on our balance sheet. So hopefully we can deploy that in a meaningful manner, which can also then do something to the graph on page 10 in terms of charter revenues and free cash flow.

[Magnus Fyhr, Seaport Global]

Okay, thank you. The other question I had is related to -- I mean, most of these transactions you’ve done here in 2018 have been focused on the container segment, haven’t seen you, I mean, it’s been a lot of activity in the sale and leaseback on the tankers and product tankers we haven’t seen you done anything there. With the market improving at least for the crude tankers is that a market that’s still -- you still see opportunities or the returns are not satisfactory to you?

[Ole Hjertaker, CEO]

Well, we’ve looked at some opportunities there, but fair to say when we haven’t done it we can assume that it’s because we haven’t -- for us it has been really made good enough sense at the rate levels. Doing a deal and if you look at sort of sale and leaseback structures, which are certainly if they are bearable base then it’s really more a financing structure it’s all about buying the right asset at what price and what kind of residual value you assume in your call it calculation and then the financing you can combine with it.

We tried to be very conscientious on the residual values, we take on when we do deals and we haven’t done anything there in that segment, but we’ve looked at several opportunities. But I cannot comment specifically on that until we do the deal. So it’s certainly a segment we would like to have more exposure to, but it’s all about doing the right deals.

[Magnus Fyhr, Seaport Global]

All right, thank you. And just one more a question on the Soehanah the cash what’s in that proceeds there is $84 million net proceeds or are there some debt related to that asset?

[Ole Hjertaker, CEO]

No, that one is debt free, so it’s $84 million and then we have $10,000 per day bareboat hire coming in everyday, kicking in everyday until delivery.

[Magnus Fyhr, Seaport Global]

Yes. Okay, great. That’s it from me, thank you.

[Ole Hjertaker, CEO]

Thank you.

[Operator]

Next question comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

[Fotis Giannakoulis, Morgan Stanley]

Yes, hi, Ole and thank you. Ole, I want to ask you about the opportunities that you see out there and how do you compare the potential returns across different sectors? It seems that you have made more acquisitions recently on the containership side, but if I heard correctly you mentioned that that was coincidental, do you view structurally any sector being able to give better returns and I'm talking about returns for deals with long-term charters?

[Ole Hjertaker, CEO]

Yes, thank you. Yes, we’ve done most of deals this year in the containership space. But we have certainly looked at a lot of opportunities in other sectors too. And it’s, of course, a long term objective is to balance the segments, but by doing it deal by deal and doing the right deals.

So we would love to do deals in the tanker space, I would say maybe if you look at -- if there’s one segment that you can say you’re missing from our portfolio maybe it’s LNG simply because that’s the segment where you see long-term charters to solid counterparties and we haven’t got anything in the portfolio.

Again it’s all about doing the right deals. Now the tanker market seems to recover hopefully it’s easier to get deals done there at reasonable levels. So -- but we can only really comment on deals we do and generally we screen projects across the board in all our segments.

[Fotis Giannakoulis, Morgan Stanley]

How is the competitive landscape right now on the deals that you are negotiating or they come in front of you? And if you can expand beyond the containership space because we’ve been hearing that there are a lot of Chinese and Japanese leasing firms they are trying to do these deals at a very low returns, but I was wondering in other segments outside of containerships if you see higher or lower competition compared to let’s say at the beginning of the year?

[Ole Hjertaker, CEO]

Well, generally when you put deals with I would say sort of brand -- big brand names, very solid balance sheets and where they look for bareboat arrangements that's more about a financing sort of angle to it. What we have, we have really two different products. We have -- we can do the financial sort of bareboat charters leaseback, which is really -- where it's really a question of what kind of cost of capital, do you have an orb on the capital compared to your counterparty and what's happening on the residual value. Are you taking on the residual value exposure or do you not? That's one product, that's more of a financial cost of capital orb.

The other product where we -- I think we are very competitive is in the build own operate, call that type structures illustrated by the vessels we have with Phillips 66 ship finance, we qualified to run vessels for Phillips 66, who has very high standards for who they want to have -- who they want to do those services for them. And this is part of our, I would say group effort we are better affiliation with Mr. Fredriksen, Frontline, Golden Ocean, et cetera, is that we have very good access to; one, the shipyards; and two management, which means that we can combine these parts and hopefully offer very interesting and compelling time charter products to our customers.

So we look at both, but I think that’s certainly where we are on a relative base maybe more competitive than anyone else out there.

[Fotis Giannakoulis, Morgan Stanley]

Thank you very much, Ole.

[Ole Hjertaker, CEO]

Thank you.

[Operator]

We have no further questions on the line at this time.

[Ole Hjertaker, CEO]

Thank you. Then I would like to thank everyone for participating in our third quarter conference call. And particularly, I want to thank Mr. Harald Gurvin who will leave us to join Flex LNG from January. We have recruited Aksel Olesen from Pareto Securities as a new CFO and I'm confident that the transition will be smooth for you as stakeholders in the company. If you have any follow-up questions there are contact details in the press release or you can get in touch with us through the contact pages on our webpage www.shipfinance.bm. Thank you.

[Operator]

Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.