The shipping industry is in a terrible state at the moment, characterized by excess supply and low demand coupled with low spot rates. As the U.S. discovers more and more oil reserves, the need to export from the Middle East keeps decreasing, thus working against tankers such as Frontline
Ship Finance's profits plunged 21% in its third quarter, hit by lower spot rates for ship leases. Ship Finance also declared that it would continue to pay out its quarterly cash dividend of $0.39. Let's dig in to find out what happened.
Lower rates lead to...
Lower spot rates because of an oversupply of vessels also helped push down Ship Finance's revenue slightly to $73.3 million from $73.5 million last year. Although Ship Finance's exposure to the spot market was somewhat mitigated through its profit-sharing agreement with Frontline, it was hit in the quarter by a $1.6 million adjustment due to profit sharing in the preceding quarters.
The Bermuda-based company has a fleet of 69 ships, with 59 on the water and 10 in the works. The 10 include six dry bulk and four container vessels. Ship Finance plans to sell three of its non-double-hull very large crude carriers and expects to make $46.5 million from it. The company has been adding to its container and offshore businesses. With the tanker market struggling, it might be looking to reduce its dependency on tankers.
Ship Finance's two biggest counterparties are Seadrill
Some good news...
In the face of the weak spot tanker market, Ship Finance is looking to generate a major chunk of its cash flow from the offshore business. It currently has $6.7 billion of fixed-rate order backlog, of which 43% is from offshore and 33% from tankers. Going forward, the company expects to get more business out of containers as well. Ship Finance's board has previously declared a quarterly cash dividend of $0.39 a share (i.e., $1.56 annually) with a whopping dividend yield of 17%.
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Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.