Can Ship Finance International Combine the Best of Seadrill and DryShips?

Ship Finance International (SFL -0.88%) will release its quarterly report on Wednesday, and the company has made investors happy during the second half of the year with a strong run higher. Given the difficulties that DryShips (DRYS) has faced in its dry-bulk shipping business lately, Ship Finance's pursuit of the same high-growth strategy that Seadrill (SDRL) has executed flawlessly in the ultra-deepwater industry seems like a smart move.

When you look at Ship Finance International's assets, you'll find a well-diversified company with both traditional shipping vessels and drilling equipment. With a roughly even split between tanker ships and other vessels such as dry-bulk carriers and container ships, Ship Finance is fairly well balanced in the shipping industry. But its true diversification comes from its drilling rigs and drillship, helping it tap ultra-deepwater opportunities and compete with Seadrill and other deepwater specialists. Let's take an early look at what's been happening with Ship Finance International over the past quarter and what we're likely to see in its report.

Stats on Ship Finance International

Source: Yahoo! Finance.

Will Ship Finance International earnings float or sink?
Analysts have gotten a bit less optimistic about Ship Finance International earnings in recent months, trimming a penny per share from their third-quarter estimates as well as their full-year 2014 projections. The stock has continued its run higher, posting gains of 6% since late August.

Ship Finance's second-quarter results reflected the sluggish conditions in the industry, with the company reporting a very modest uptick in charter revenues of about 1% from the first quarter to the second quarter. Net income dropped sequentially by more than 20%, but that didn't keep the company from continuing its $0.39 per share dividend. Ship Finance also noted that it had acquired a new jack-up drilling rig for use in harsh environments, securing financing through a combination of bank capital and a secondary stock offering.

What Ship Finance and DryShips have both found is that exposure to the drilling industry has been instrumental in bulking up profits. For DryShips, its Ocean Rig UDW (ORIG) subsidiary has provided a steady stream of cash for the shipping company, as DryShips has steadily sold off shares of Ocean Rig to raise capital. With half of Ship Finance's charter revenue coming from its drilling equipment, Ship Finance isn't nearly as vulnerable to adverse shipping conditions -- although it might not benefit as much from a recovery in shipping as more focused players in the industry will.

At least for now, the ultra-deepwater opportunity continues to be lucrative. Seadrill's most recent earnings report sported a 17% rise in revenue, attesting to the strong demand for its equipment to develop promising undersea finds in some of the harshest drilling conditions on the planet. Although higher expenses held Seadrill back somewhat, high dayrates for its equipment are good news -- not only for it, but for Ship Finance as well.

In the Ship Finance International earnings report, watch to see whether conditions in the company's tanker and dry-shipping segments verify what we've seen from other players in the shipping industry. If that part of Ship Finance's business rebounds, it could lead to a bigger move upward for the stock after having been becalmed for years.

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