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Ship Finance International LTD (NYSE:SFL)
Q1 2020 Earnings Call
May 20, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 [Phonetic] SFL Corporation Earnings Conference Call. [Operator Instructions].

And I would now like to hand the conference over to your speaker today, Ole Hjertaker. Thank you. Please go ahead.

Ole B. Hjertaker -- Chief Executive Officer

Thank you, and welcome all to SFL's First Quarter Conference Call. I will start the call by briefly going through the highlights of the quarter, and following that our CFO, Aksel Olesen, will take us through the financials, and the call will be concluded by opening up for questions.

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. And for further information, please refer to SFL's reports and filings with the Securities and Exchange Commission.

While our business has so far not been materially impacted by the general market disruption caused by COVID-19 pandemic, the Board believes it is appropriate to review the dividend payout level for SFL, with a focus on maintaining a strong balance sheet and investment capacity over the next few quarters in a setting with more expected market volatility.

The announced dividend of $0.25 per share represents a dividend yield of around 10% based on closing price yesterday, and this is our 65th quarter with dividends. The reported income was negative, but this was after some large non-cash accounting impairments on assets and swaps. The underlying business was robust, and these impairments did not have any impact on distributable cash flow from our assets. Over the years, we have paid nearly $27 per share in dividends or $2.3 billion in total, and we have a significant fixed rate charter backlog supporting continued dividend capacity going forward. The total charter revenues increased to $161 million in the first quarter, with nearly 90% of this from vessels on long-term charters, and only around 10% from vessels employed in -- on short-term charters and in the spot market. And all customers are current on their charter payments, so we have good cash flow visibility into the second quarter.

The EBITDA equivalent cash flow in the quarter was approximately $120 million, and last 12 months, the EBITDA equivalent has been approximately $481 million. With a very large proportion of long-term charters and the fact that all customers are current with charter payments, the underlying business remained robust and cash position was $217 million, which was up from the previous quarter. And we have added to the charter backlog recently, as a combination of asset acquisitions and charter extensions, and our fixed rate backlog stands at approximately $3.6 billion. This is in line with the previous quarter after adding $230 million recently through charter extensions and asset acquisition.

We have been active in the [Technical Issues] over the last few months and have addressed most of the financing maturities this year already. Terms are being attractive, and we have seen lower all-in interest cost than ever before, despite the general market volatility. We believe part of the reason for this is the consistent performance of SFL over the last 16 years and our ability to source capital from a much wider market than most other maritime companies.

In February, we sold the 2002-built VLCC Front Hakata, which was the last vessel remaining from the initial fleet of 47 vessels acquired from Frontline in 2004. Net proceeds was approximately $30 million, with neutral book effect. We now only have two scrubber-fitted VLCCs remaining on charters to a subsidiary Frontline, and profit share in the first quarter was $5.9 million. Frontline has sub-chartered the vessels for most of the year at very strong levels, and we expect similar profit share contributions each over the next two to three quarters as well. And we have 1.4 million Frontline shares remaining. So the announced cash dividend of $0.70 per share is adding another $1 million to our cash position in the second quarter.

During the first quarter, we sold all the vessels previously on charter to a subsidiary of Solstad Offshore, and after the delivery of the final vessel this week, we will have no offshore support vessels in the fleet. Solstad is in the final stages of a comprehensive restructuring, and when completed, we expect to receive approximately $1 million in cash and 5% to 6% of the restructured company. If this dose materialize, it will be a book gain as we have zero value on this in our books today.

And finally, today we announced the acquisition of a new built VLCC with long-term charter. The vessel is expected to be delivered from the shipyard in China later this month and will have full cash flow effect from the third quarter. The net purchase price will be $65 million, which is significantly below current broker estimates for VLCC resales, effectively providing us with a very attractive risk profile. For chartering counterparty, the Landbridge Group has secured a three-year sub-charter to an oil major providing good cash flow visibility from the asset, and there will be purchase options for the charter during the charter period first time after three years.

SFL will fund the acquisition with a $50 million non-recourse debt facility at very attractive terms, and that contribution after debt service, interest and instalments during the first three years is estimated to more than $4 million per year on average. The COVID-19 pandemic has scored [Phonetic] massive disruption in most transportation markets and for offshore assets. Many of our vessels trade regularly to Chinese ports, and we implemented, already in January, a robust emergency management plan with the goal of ensuring the health and safety of our crew on board the vessels and onshore, while maintaining our business operations as efficiently as possible.

All crewing managers are following the guidance issued by the World Health Organization and the International Chamber of Shipping to ensure that the proper protocols are in place on board the vessels. We also host regular meetings with all crewing managers in all our segments to discuss and handle any issues in particular, challenging facing our crew and safe operations as they may arise. To date issues have primarily related to crew transfers and also some delays at shipyards in connection with drydocking and scrubber retrofitting of vessels.

The spot trading dry bulk market has been impacted due to the sudden reduction in demand for transportation services, impacting earnings in the quarter. With the revised expectations for world trade coming down for the remainder of the year at least, we estimate the net impact on SFL of approximately $0.02 per share per quarter compared to pre-corona performance, if you can call it that, until that it improves again. Also subsequent to quarter-end, one car carrier and the feeder containership on short-term employment has been really redelivered to us and are currently idle looking for employment. Another car carrier and a feeder container vessel will come off charters toward the end of the summer. In case, all these four vessels have to be laid up in a worst-case scenario, the net impact for SFL is estimated to approximately $0.02 per share per quarter -- compared to pre-corona performance from these vessels. The car carriers seem to be more affected with the market virtually coming to a halt right now, while there is more market activity for feeder container vessels, and we hope, of course, that net result will be better.

After all, the vessels are more exposed to near-term market developments represent only 10% of our charter revenues, and the 90% fixed rate revenues are more insulated to short-term market movements out there. And despite the impact of COVID-19 on global trade, all point our counterparties are current on charter hire payments with good visibility for the second quarter, as mentioned before. We will, of course, continue to closely monitor developments in our customers' end markets in order to be able to react quickly to any potential business disruption. At the same time, we also look for new business opportunities, as illustrated by the acquisition announced earlier today.

Following the recent charter extensions, our charter backlog stands at approximately $3.6 billion, and of this, more than $550 million has been added in the last 12 months. Over the years, we have changed both fleet composition and structure, and we now have 87 vessels and rigs, and no vessels remaining from the initial fleet in 2004. We've gotten from a single asset class charter company to multiple customers. And over time, the mix of the charter backlog has varied from 100% tankers at the start to nearly 60% offshore at one stage, to containing -- container being the largest segment right now, with more than 50% of the backlog.

We do not have a set mix in the portfolio. Focus is on evaluating deal opportunities across the segments and try to do the right transactions from a risk reward perspective. Over time, we believe this will balance itself out, but we try to be careful and conservative in investments and not just invest, because [Technical Issues] in our pocket. Our strategy has also been to maintain a strong technical and commercial operational platform in cooperation with our sister companies in the Seatankers Group. This gives us the ability to offer a wide range of services to our customers from structured financing to full service time charters. But more importantly, we also believe it gives us unique access to deal flow in our core segments. And unlike most of the companies with a financing -- financial profile in the maritime world, 65% of our cash flow comes from vessels on time charter and only 35% from bareboat chartered vessels.

We believe in diversification as a methodology to mitigate risk in the maritime markets, as indicated just before here, and particularly, in light of volatility, we have seen over many years in the maritime world. This diversification is not only with respect to asset types and counterparties, but equally important is the way we structure risk on our balance sheet. Unlike most maritime companies, where the ultimate parent or Topco, you can call it, guarantees all that in all subsidiaries. We have focused on managing risk being careful with guaranteeing debt in our asset owning subsidiaries. This is illustrated by this overview, where you can see all asset level financing in SFL. Some are single asset and some are for several similar vessels. We call this our Black Swan insurance, as it better insulates us from unusual events in single markets or for situations like -- as been caused by the current COVID-19 situation for that matter.

Our preference would always be not to guarantee anything, as that creates better optionality for us. But we do not mind guaranteeing in structures, but we have very low risk like financing below recycling value of assets, where there are other features giving us a clear benefit. And in many cases, we only provide a partial guarantee. We have seen that this structure from time to time has given us significant leverage in negotiations. And a good example of this is in connection with the restructuring of Seadrill in 2017, where we believe we were able to renegotiate vastly better deal for us then if we had guaranteed everything, and everyone would have pointed at SFL corporate to sort out the structure for everyone who has involved with the financing. Of our asset-level financing, only around 60% is guaranteed by our parent company SFL Corporation, and we also have five vessels without any financing attached.

There has been some questions relating to the offshore segment and the rigs we have on charter to Seadrill recently. Up until 2017, the offshore segment was our largest segment for a long period, but just now down to around 25% of our charter backlog, and we now only owned three rigs after divesting five offshore support vessels. The charter hire from the drilling rigs were $26 million in the first quarter. Two of the rigs are harsh environment units, working in the North Sea, with West Linus sub-chartered to ConocoPhillips until the end of 2028 and West Hercules is sub-chartered to Equinor until next year. The third rig West Taurus is at [Phonetic] idle and laid up in Norway. Seadrill is paying their agreed charter hire in all three rigs, and we continued to reduce the debt on the rigs as per schedule.

Given the high attention to the offshore segment, currently, I would like to highlight the significant delevering that has happened the last two years, as illustrated on this slide, where we compare what we called pre-chapter 11 for Seadrill levels on the financing, and what it looks like at the end of March this year. We have reduced debt relating to these assets by more than 30% in this period, but more importantly, we have continued to have a cash flow coming out from these assets on an ongoing basis. There is currently $0.07 per quarter aggregates free cash flow contribution from the rig reached after debt service. But importantly, the contribution is individual per rig and the idle rig West Taurus only represent $0.02 per share per quarter. And we have Limited guarantee obligations as discussed earlier here, with less than 50% currently guaranteed by SFL.

Seadrill has disclosed that they are engaged in discussions with our secured lenders to provide operational flexibility and additional near-term liquidity. We believe it will be an all stakeholders interest to have a financially stronger counterparty, and we are in a constructive dialog with Seadrill to find a sustainable path going forward, particularly for the rigs that are idle, including the West Taurus. But for now, Seadrill keeps paying the hire on schedule and they had more than $1 billion in cash at the end of the last quarter. And any adjustment would, of course, in any case, be subject to approval by the banks in the respective syndicate.

With that, I'd give the word over to our CFO, Mr. Olesen, who will take us through the financial highlights for the quarter.

Aksel C. Olesen -- Chief Financial Officer

Thank you, Mr. Hjertaker. On this slide. We've shown our pro forma illustration of cash flows for the first quarter. Please note, that this is on a guideline to assess the Company's performance, and it's not in accordance with US GAAP, and also net of extraordinary and non-cash Items. The Company generated gross charter hire for approximately $161 million in the first quarter, with close to 90% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.6 billion, which provides us with strong visibility on our cash flow going forward.

The liner fleet generated gross charter hire of approximately $78 million. This amount, approximately 96% was derived from our vessels on long-term charters. At the end of the quarter, SFL's liner [Technical Issues] backlog was approximately $1.9 billion, with an average remaining charter term of five years or eight years in weighted or charter revenue. Approximately, 84% of the loan and backlog is the world's largest liner operators, Maersk Line and MSC. And during the quarter, SFL extended the charter party for three 10,000 TEU class container vessels to April, July and November 2024, respectively. And subsequent to quarter end, we also extended the charters for seven 4,000 TEU clause container vessels with MSC until the third quarter of 2025. So in aggregate, these extensions add more than $170 million SFL's fixed charter rate backlog.

Our tanker fleet generated approximately $30 million in gross charter hire in the quarter, including $5.9 million in profit split from our charters to Frontline on the back of a firm tanker market. Of this amount, 84% was derived from time or voyage chartered vessels, a 16% derived from bareboat charters. It has also been a firm quarter for our Suezmax tankers, despite one of the vessels entering the drydock for special survey and scrubber retrofitting in March. The daily average time charter rate was approximately $58,000, compared to $33,000 in the previous quarter.

During the quarter, SFL sold the 2002-built VLCC Front Hakata and terminated the charter agreement with Frontline for the vessel. Net proceeds to the Company was approximately $30 million, and the book effect was neutral. And subsequent to the quarter end, two of our two [Phonetic] VLCCs on charter to Frontline were fixed out on charters, stressing well into Q4, at an average rate of approximately $70,000 per day, which provides us with strong visibility on the amount of profit share we can expect to receive in 2020, as all vessel earnings about $20,000 per day per vessels are split 50-50 between Frontline and SFL.

And as announced previously, today, the Company has agreed to acquire the 2020-built Landbridge Wisdom against those seven-year charter back. In terms of capex, the net purchase price of the vessel was approximately $65 million, which will be financed by a mix of equity and the $50 million non-recourse bank debt facility, with an estimated all-in costs for three first years of below 3%.

During the fourth quarter, our dry bulk vessels generated approximately $26 million in gross charter hire. Of this amount, approximately 83% was derived from our vessels on long-term charters. SFL recorded a non-cash impairment charge of approximately $80 million, relating to seven Handysize bulkers in the first quarter, as the estimated future cash flows for each of these vessels, did not exceed their book value. With limited long-term charter opportunities for these vessels, the Company will look at opportunities to divest the vessels at a later stage when market conditions are right as part of our continued fleet optimization process.

At the end of the first quarter, SFL owned three drilling, with long-term charters to fully guaranteed affiliates of Seadrill. The rigs generated approximately $26 million in charter hire. The harsh environment jack-up rig West Linus is sub-chartered to ConocoPhillips until the end of 2028, while the harsh environment semisubmersible rig, West Hercules, is employed on consecutive shorter term subcharters to Equinor in the North Sea. The semisubmersible rig, West Taurus, is currently in lay-up in Norway.

During the quarter, SFL agreed to terminate the charter agreements for five offshore support vessels with Solstad. Four vessels were sold and delivered to unrelated third parties in the first quarter, while one vessel has been sold recycling in Norway at the green recycling facility, according to the European Ship Recycling Regulation. Following this, SFL has no offshore support vessels in the fleet, and the book effect of this was neutral. This summarizes to an adjusted EBITDA for approximately $120 million for the first quarter or $1.11 per share, compared to $123 million and $1.14 in the previous quarter.

We then move on to the profit and loss statements, as reported under U.S. GAAP. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a 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 and vessel loans, results in associates and long-term investments and interest income from associates.

So overall, for the quarter, we report total operating revenue according to U.S. GAAP, of approximately $122 million, which is a lower number than the $161 million of charter hire actually received for the above mentioned reasons. In the quarter, the Company recorded profit split income of $5.9 million from our tanker vessels on charter to Frontline, and $500,000 from fuel cost savings from scrubbers. And as previously mentioned, the Company recorded non-cash impairment charges of approximately $80 million related to seven Handysize vessels. Due to the extreme market volatility toward the end of the quarter, SFL recorded $13.6 million unrealized loss on this marketable securities investments and $23.4 million non-cash loss relating to hedging derivatives, including interest swaps and currency hedges. So overall and according to U.S. GAAP, the Company reported a net loss of $87 million, including $114 million in non-cash losses or $0.81 per share.

Moving on to the balance sheet. We had approximately $217 million of cash and cash equivalents at quarter-end, including $10 million freely available cash in our subsidiaries accounted for as investments in associates. Furthermore, [Technical Issues] multiple securities of approximately $60 million, with a net book value of $34 million. Subsequent to quarter end, the Company reduced its shareholding in Frontline to 1.4 million shares. The average sales price of the 9.6 million shares divested since October 2019 was approximately $11 per share.

Short-term debt includes among other things, the $37 million purchase obligation on Frontline shares, $108 million of senior bank financing on vessels where SFL has secured time charter extensions as attractive terms, as well as the 2020 NOK senior unsecured bond maturing in June, which we effectively have refinanced in January by the issuance of the new NOK bond in the Norwegian market. So based on the Q1 figures, the Company had a big equity ratio of approximately 25%.

And moving on to an update on our liquidity and capex. At quarter end, we had approximately $217 million in cash on the balance sheet, including cash held in wholly owned non-consolidated subsidiaries. In addition, the Company had marketable securities of $34 million net based on market prices at the end of the quarter. This includes our shares in Frontline and ADS Crude Carriers, as well as financial investments in secured bonds and other securities. Our capex is limited, and we accept projected investment in the Landbridge VLCC, which will have a net contribution of the debt service of more than $4 million on average per year. The remaining capex is primarily related to scrubber installation on the 10,000 TEU class vessels and long-term charters to Maersk.

Over the years, we are continuously expanded and diversified our lending group, which currently consists of approximately 30 international banks, with a growing number from Asia over the last few years. And while many companies in the maritime space find it challenging to secure attractive financing, SFL has strong access due to our size, track record and affiliation with the Seatankers Group of companies. This is evidenced by the recent financings we have secured in a turbulent market environment, which includes a non-recourse financing of $50 million for acquisition of the Landbridge Wisdom, with an all-in cost of less than 3% included [Technical Issues], as well as a fully guaranteed financing of $175 million for some Xcontainer vessels, with an all-in cost of approximately 1.9%, including LIBOR for a five-year facility. In the current environment, we believe that SFL's robust liquidity and unique access to capital is a true competitive advantage.

Then to summarize. The Board has declared a cash dividend of $0.25 per share for the quarter. This represents a dividend yield of approximately 10.2% based on the closing share price yesterday. This is the 65th consecutive quarterly dividend, and since inception of the Company in 2004, nearly $27 per share or $2.3 billion in aggregate has been returned to shareholders through dividends. And while we continue to collect revenue from a $3.6 billion fixed charter rate backlog, we have also upside from profit split arrangements from VLCCs and Capesize vessels, in addition to profit split arrangements related to fuel savings or some of a large container vessels.

Despite a relatively volatile market in 2020, we have already added approximately $230 million to our fixed charter rate backlog, and we continue to explore new business opportunities. And while risk premiums on energy and shipping investments have increased with the recent volatility in financial markets, SFL has at the same time raised new fleet financings at all-time low cost of debt and continued to expand its group of lending banks. The Company's objective has always been to create long-term shareholder value, and in the near term, adjusting the dividend is a way to achieve this by retaining cash in the Company and further strengthen both balance sheet and investment capacity. SFL's business model has been continuously tested through it's 16 years of existence, and has been previously highly successful in navigating periods of volatility.

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

Questions and Answers:

Operator

Yes, sir. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

And we have questions that came through, sir. We will now take our first question. And this comes from the line of Randy Giveans. Your line is now open. Please go ahead and ask your question.

Randy Giveans -- Jefferies -- Analyst

Gentlemen, how's it going?

Ole B. Hjertaker -- Chief Executive Officer

Very well. Thank you, and yourself?

Randy Giveans -- Jefferies -- Analyst

Alright. Doing well. So yeah, first looking at the newly announced VLCC acquisition, it seems like another kind of interest rate arbitrage deal, like the Hunter VLCCs. So is this the primary type of deals you're looking for in the current environment or do you prefer more, kind of, classical, longer-term charters with end users than owner operators?

And then secondly, is this acquisition part of your strategy to expand your crew tanker exposure, or is it just an attractive deal, regardless of asset class?

Ole B. Hjertaker -- Chief Executive Officer

Thanks. Well, I would say, we are deal and segment agnostics. We look at time charter deals, we look at bareboat deals, and we could even look at financing structures for that matter. It's all about risk adjusted return for shareholders. Of course, we have to add another vessel in the tanker segment, but we don't have a strategy or [Indecipherable] for how many vessels or how much capital should be deployed in each segment, it's all on a deal-by-deal basis.

And just to illustrate that, I mean, in last year 2019, I think we screened and did quite some work on deals aggregating around more than $20 billion. But we ended up just doing very few of those. Coincidence, you could say, why we don't do one deal -- why we do one deal and not the other, but we try to be careful when we do it. And here, we think it makes good sense. And I think, also our balance sheet and our, call it, standing in the market makes us, I think, able to act when others can't. So you can say that maybe also terms here are reflective of less competition in the market, where many, I think, are more or less paralyzed.

Randy Giveans -- Jefferies -- Analyst

Got it. Okay. That's fair. And then for my second question, more than half of your contracted revenue is on container ships. So how do you view this sector in light of the current COVID disruptions, and has there been any conversations around possible charter reductions and extensions?

Ole B. Hjertaker -- Chief Executive Officer

Well, if you look at our charter portfolio, I believe 85 -- more than 85% of the backlog is linked to the two largest liner companies. As we all know, in the liner industry, I would say, it's similar -- on the economic side, not on the market side, to the airline industry. It's all about economy of scale and filling up the units. And we've seen the way the liner companies have managed this is effectively by blanking, what they blank sailings, i.e. they fill up some vessels and then leave some other vessels not sailing, because that's economical for them.

We believe the larger companies and the bigger companies in this segment will come out as winners, because they have a better -- they have a bigger and better infrastructure around it, and will therefore hopefully be able to withstand volatility better than smaller marginal players, who don't have the flexibility to do just that.

What we have seen so far is that, the liner companies have been able to maintain margins and also relatively, I would say, smaller impact on volume than many have expected, as they have reported first quarter numbers. Going forward through the rest of the year, I believe most expect effective, call it, liftings of boxes to come down. But again, it's planned, and one of the mitigating factors that is for the liner companies here has been the fuel oil price drop, which means that, if they've been able to maintain box rates at relatively similar levels, the net profit per box is much higher because the vessels spend less fuel. So there are some balancing factors, but obviously, container market is a reflection of world trade. So in the long run, of course, you need world trade to recover and get back to the -- on the feet. But I think the smaller operator and more marginal operators will be more -- call it, at more risk than the larger and more integrated.

Randy Giveans -- Jefferies -- Analyst

Sure. Okay, and no conversations around negotiations at this point?

Ole B. Hjertaker -- Chief Executive Officer

No specific requests. You could always -- I mean, if you get a call where we -- where you're -- if you're asked if you would like to change the charter rate, we usually politely decline it.

Randy Giveans -- Jefferies -- Analyst

Yeah. I understand, Ole. Okay, that's it for me. Thanks so much.

Ole B. Hjertaker -- Chief Executive Officer

So, and what we have done -- I would say, so -- there hasn't been a topic for discussion what we have done, call it, in the past during, call it, market volatility, if you go back to the financial crisis 10, 12 years ago. What we did then, in some few instances, we -- if we -- some time if you have reduced your charter rate, you get it back with the effective interest later. It's -- I would say it's sort of a risk-reward type analysis we would make. But we have been very deliberate in the choice of our counterparties in the container space and also in terms of what kind of risk we are willing to take in this space. So if you look at where the most of our effective capital is invested, it's on modern eco sort of built after the financial crisis vessels in nine to 10 -- 9,000 to 11,000 range, where we have invested more, because we see that's a very flexible and versatile asset type.

And also in some instances for the very big vessels, we have structured those -- in structures, we have no financial liability, call it, outside our invested equity, no guarantee liabilities relating to those vessels, etc. So we have been deliberate in this, and we have declined a lot of, call it, chartering opportunities for what we believe have been relatively more risky counterparties, if you can call it that.

Randy Giveans -- Jefferies -- Analyst

Yeah. No, absolutely. Well, thank you for the color.

Ole B. Hjertaker -- Chief Executive Officer

Thank you.

Operator

Thank you. And we will now take our next question, and this comes from the line of Greg Lewis. Your line is now open. Please go ahead.

Gregory Lewis -- BTIG -- Analyst

Yes. Thank you, and good afternoon.

Ole B. Hjertaker -- Chief Executive Officer

Hi, Greg.

Gregory Lewis -- BTIG -- Analyst

Hi. Ole, could you talk a little bit about not only the decision to reduce the dividend, but how did we come up with that number? I would seem to remember the last time you -- the last time Seadrill entered a restructuring -- the dividend was lowered around that, and it ended up not really impacting the business at all. I guess, this is the second time it looks like that is happening. Just kind of curious, I mean, I think you guys mentioned, "Hey, now we're at a 10% yield." Just kind of wondering, any color around why $0.25, why not $0.20 like that -- like just kind of how you're thinking about that in terms of that as a go-forward run rate?

Ole B. Hjertaker -- Chief Executive Officer

Absolutely. Of course, adjusting the dividend down is a very -- is a difficult decision. And it's -- I can tell you, this was a -- long discussion on it with the Board. If you look at it and it wasn't -- and I can tell you it was not set because the share happen to trade there, and we sort of -- we tailored the dividend around -- after the share price. That was not the factor at all. We looked at it -- if you look at the three rigs to Seadrill, the one idle rig which you could argue potentially, because it's idle, it could be more exposed, is contributing $0.02 per share. So if you say, "Okay, $0.02 per share there." And as I mentioned earlier, because the dry bulk market and the expectations for the dry bulk market has changed, we believe compared to pre-corona type projections we had, the impact on all -- and this is all the short-term charter dry bulk vessels that in aggregate is around $0.02 per share.

In case, the two car carriers and the two, sort of, the feeder-size container ships that we have now either in the spot market or coming off charter in the near term, in case all of those are put in layout as a worst-case scenario, you know that could be another $0.02. So it's sort of a -- and also I think with the fuel price spread coming down also, call it, there is -- will be, at least in the near term, lower contribution from the profit split on some of the containerships, compared to what we saw earlier in the first quarter, maybe another $0.01 to $0.02.

So that is more of the reasoning, what has really changed in the business model, what's changed in the near-term outlook. And then of course, making sure that SFL is a really robust entity that we have investment capacity. And right now, I think having capacity to invest like we just did is a real strength, because as we think -- we think this is where you can find a really interesting investment opportunities. If you are active and if you are paralyzed for some reason, of course, it's not good. You can say, could you cut it to 20? Yeah, you can cut it to 10, you can cut it to zero. But that in the end, we have an underlying 90% of the cash flow from long-term charters. Our underlying cash flow was -- has not so far in the first quarter been materially affected. It's just been the spot traded vessels, which is a such a small proportion anyway, and everything else is going as clockwork. So we believe then a $0.10 is appropriate. It's, call it, factoring in several potential, call it, events, and hopefully, also ensuring that we have a very robust balance sheet and good investment capacity.

So it was a long answer, but I think it's certainly a lot more than just looking at what the share price happen to be and sort of navigating after that.

Gregory Lewis -- BTIG -- Analyst

Okay. Perfect. And then just, I mean, clearly that decision put a little bit more cash inside the Company. Clearly, these are -- here unprecedented often -- I don't know what these days are. But it would seem like given your business model, this should be an opportunity over the next six to 12 months to potentially deploy a fair amount of capital at attractive type returns. You mentioned dry bulk, you mentioned containerships earlier as some of these customers need. However, we want to refer to it increased liquidity, access to capital, realizing that it really has only been a couple of months has the pace or the sound [Phonetic], however you want to think about it, have offered -- have more opportunities Increased or just given all of the uncertainty, is the market really moving toward more of a standstill where we kind of need to see where the dust settles out before we could see opportunities? I mean, obviously, there is going to be these, like one-off tanker deals or transactions. But in terms of, kind of, larger type transactions, are those kind of been put on hold as a result of all this?

Ole B. Hjertaker -- Chief Executive Officer

I think, if you look at the market generally, as the COVID-19 pandemic really took hold, I would say there was almost like a bit of a vacuum from a deal. I think everybody almost throws in a way. But we see that -- we see it now, sort of -- we see more deal flow now last couple of weeks than we saw, say, if you go back two months, for sure. And I can tell you that, if you have a strong company, you're in need of effective liquidity. We think it's good risk-reward. We will be your best friend. You may have to pay a little more for it now than you've used to, but we're happy to deploy capital if the risk adjusted return is good. And if asset prices should come down, it means it's a more interesting entry point.

Gregory Lewis -- BTIG -- Analyst

Perfect. Okay. Hey, everybody, thanks for the time.

Ole B. Hjertaker -- Chief Executive Officer

Yes, thank you.

Operator

Thank you. And we'll now take our next question. And this comes from the line of Liam Burke. Your line is now open. Please go ahead.

Liam D. Burke -- B. Riley FBR -- Analyst

Yes. Thank you. The recent VLCC purchase, was that a fairly healthy discount to what the typical VLCC new builds are selling for? Could you give us a sense as to why you were able to acquire such attractive price?

Aksel C. Olesen -- Chief Financial Officer

It was basically a combination of the financing amount required by the Landbridge Group. And what we we were, kind of, believing is, kind of, a good risk-adjusted entry point for assets of that kind. Further, we had consideration that the vessel has a three-year charter to oil major for three first years. So for us, we get a good entry point as well as a very good visibility on the cash flow for the first three years taking down quarter residual significantly. And with the attractive financing, we have secured on the back of it, it's a good -- a very good investment for SFL.

Liam D. Burke -- B. Riley FBR -- Analyst

Yes it was. And on the asset, you managed your portfolio, your asset agnostic. We've talked about some opportunities on the acquisition side. What about on the divestiture side on the asset? So the areas that you see opportunities to sell at attractive prices?

Ole B. Hjertaker -- Chief Executive Officer

I would say, right now, I think that would be only opportunistic buyers there. So I think divesting in the portfolio right now is probably not the best time. And we have -- we are looking at -- we have the seven small Handysize bulkers in the fleet. We don't really see any really long-term chartering opportunities around those. So over time, it would be logical for us to find new homes, so to speak, for those assets. But again, we don't like to sell chicken on a rainy day. And we try to manage it to optimize value, obviously. So whether we happen -- whether we sell them later this quarter or later this year or late next year, that's sold down to what we think we can get for them.

Aksel C. Olesen -- Chief Financial Officer

Yeah. Absolutely [phonetic], I mean, a good example is that that we sold the Front Hakata, which was the last, call it, legacy vessel from the original SFL [Technical Issues] back in February at $30 million, and that was a 18-year old vessel. At now, call it, two months later, we're acquiring a brand new VLCC scrubber fitted for $65 million. So that's what the kind of way we like to look at that and take an exit on, kind of, older assets when the timing is right and acquiring new ones when -- in a good time of the cycle.

Liam D. Burke -- B. Riley FBR -- Analyst

Great. Thank you.

Ole B. Hjertaker -- Chief Executive Officer

Yes. Thank you very much.

Operator

Thank you. And we will now take our next question. And this comes from the line of Chris Wetherbee. Your line is now open. Please go ahead.

Christian Wetherbee -- Citi -- Analyst

Hey. Great. Thanks for taking the question. I wanted to come back to the dividend just for a moment and make sure I sort of understand some of the comments around it. So it sounds like there is about $0.07 of cash flow at risk around the offshore, the rigs. You also talked about $0.02 around the car carriers and the feeder containers, and that appears probably to be more of a temporary dynamic that maybe a longer-term issue, I guess, we'll see. Can you talk a little bit about, sort of, the total context there? Do you feel like you, sort of, insulated or ring-fenced that risk around those specific assets? Is that kind of the approach that we took? I just want to make sure I understand how you feel about the sustainability of $0.25 in the context of those collectively?

Ole B. Hjertaker -- Chief Executive Officer

Yeah. So when I discuss that, it was really more to, sort of, give some perspective on some of the reasoning, call it, with the Board on the dividend, capacity and, of course, the very difficult, call it, decision to actually reduce the dividend in a setting where the underlying cash flow is virtually unaffected in the first quarter. So it's a combination of that and for those three rigs. Yes, it's evident in aggregate. But there are three individual rigs with individual financing structures, and you could see in a scenario where we keep two rigs and we leave the other behind so to speak or -- so there is some flexibility around that.

Same thing. On the other effects, I totally agree, hopefully, it's short term and hopefully, it will pop back. But at least it's now there is more uncertainty, and in more uncertain times, call it, showing -- having a very strong balance sheet, having good investment capacity, we think we'll be better, give better long-term shareholder value than necessarily closing your eyes and paying out like we did last quarter.

Christian Wetherbee -- Citi -- Analyst

Sure. Now that's certainly makes sense to me. I appreciate that color. And then when we think about the debt guaranteed by SFL around those three specific rigs, can you give us some of the potential scenarios that you might see as that process kind of plays out? Or just, kind of, give a sense of what ultimately may happen there with those buckets, which I appreciate you guys were very clearly laid out in the deck, but just a sense of how that might play out?

Ole B. Hjertaker -- Chief Executive Officer

Absolutely. I mean, and there -- just wanted to highlight the fact that, two of the rigs are, what I would say, state-of-the-art harsh environment drilling rigs, and one with a charter all the way through 2028. So you can say many scenarios and you can have your opinion on Seadrill and Seadrill's financial strength, etc. But we know that this is cash flow. It's a very good performing rig, and of course, they are obligated to pay the charter hire, they're obligated to pay the charterer on all three rigs same.

Same thing, also for the West Hercules. It's been upgraded for several hundred million dollars working through the winter in the worst harsh environment in the world with very good uptime. So Equinor just extended the charter on that one in the midst of the, call it, COVID-19, call it, market here. So again in a setting, where we think that that will be a robust asset also going forward.

But -- and importantly, as we also try to illustrate in the presentation, what has happened since the last time Seadrill had -- were in trouble, so to speak, and -- at the end of 2016, it became clear to everyone in the market that they had to do -- had to go through a restructuring. We have delevered those assets more than 30%, and we have reduced our exposure along with that in the meantime. So and -- if something should happen, say, it was a complete meltdown and and, what we say, there was nothing left there and we took the asset back, our guarantee is unlimited to the amount we stated, but individually.

So at that point of time, in that -- call it, in the worst case scenario, we could elect to say, "Okay, West Taurus, which isn't working right now, we will leave that behind. We will leave it over to the banks and the banks would -- we would pay up on the guarantee, which is money we have. So it's not a problem for us, and they will deal with it." Of course, I wouldn't expect that to happen in any scenario, because I think we would be much better positioned to maximize the value of any asset in our portfolio than, sort of, a financing institution. But of course, it gives us better flexibility, and we could maybe negotiate mutually sensible terms, because we can -- we hopefully can manage it differently than a bank.

But, of course, the base case here is that Seadrill, it comes through this, call it, near term soft market that they continue to pay the charter rate as they should or maybe -- or one or some of the idle rigs maybe with some delayed charter payments, potentially. But in the long run, they should come back. They're one of the market leaders, particularly, on the harsh environment side and also in jack ups. So I don't think it's pitch dark, and they have more than $1 billion in debt at the end of [Speech Overlap] in cash.

Christian Wetherbee -- Citi -- Analyst

Cash. Okay. That's -- I appreciate, that's great color. Thank you for that. And then, I guess, the last question would just be, how do you think maybe about your optimal, sort of, leverage as you negotiate or, sort of, navigate through this challenging period in 2020? I don't know if there is the cash available for deleveraging this year, how you kind of think about that? But can you give us a sense of where you'd like to be, where you think optimal, sort of, balance sheet looks like at this point?

Aksel C. Olesen -- Chief Financial Officer

Yeah. Thanks. I mean, our philosophy is always to be long-term, and with that cause [Phonetic] kind of a constant deleveraging on all the acquisitions that we do. Of course, we've had some -- the equity ratio has gone down somewhat over the last few quarters. So, obviously, its focused to have robustness and a good buffer on that. So, obviously, our focus in the near term to kind of strengthen the balance sheet. And so again, we have a very good relationship with the banking group. Cost of capital has come down for us. I think we are in a good environment to have some excess cash -- to deleverage now over a period of time.

Christian Wetherbee -- Citi -- Analyst

Okay. Alright. That's very helpful. I appreciate the time. Thank you very much.

Ole B. Hjertaker -- Chief Executive Officer

Thank you.

Operator

Thank you. No further questions that came through, sir. You may continue.

Ole B. Hjertaker -- Chief Executive Officer

Thank you. Then I would like to thank everyone for participating in our first quarter conference call, and also thank the SFL team both on-board the vessels and onshore for their tremendous effort in a very challenging time and committed to continue building the business. If you have any quick follow-up questions, there are contact details in the press release, or you could get in touch with us through the contact pages on our webpage www.sflcorp.com. Thank you.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Ole B. Hjertaker -- Chief Executive Officer

Aksel C. Olesen -- Chief Financial Officer

Randy Giveans -- Jefferies -- Analyst

Gregory Lewis -- BTIG -- Analyst

Liam D. Burke -- B. Riley FBR -- Analyst

Christian Wetherbee -- Citi -- Analyst

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