Money and Investing Thoughts

Ship Finance International Ltd..

Ship Finance International Ltd. (SFL: 12.11 +0.41 +3.50%) has declared a 60¢ dividend for shareholders of record as of December 23. This marks the 19th straight quarter that Ship Finance has maintained or increased their dividend. Based on Wednesday’s closing price the stock carries a hefty 22.6% yield. I am expecting a nice pop in the share price today.

When looking at the numbers for Ship Finance, first ignore the 65¢ per share net income. The structures of their ship leases do not include the profit built into the leases into net income. What they call the operating revenues of $114 million, or $1.57 per share is the free cash flow the company has to pay the dividend, pay down debt or invest in more ships. Ship Finance has a business model unique in the shipping industry. They lease their ships on long term (15 years is not uncommon) contracts with low debt to value financing and accretive earnings from the 1st day. Their profit sharing agreement with Frontline Ltd. (FRO: 4.92 +0.02 +0.41%) allows them to profit in the volatile spot market without the volatility. See my article on FRO from earlier today.

In my opinion Ship Finance has been seriously misjudged by the market worried over dry bulk indexes and daily charter rates. SFL management has built an earning machine that spits out steady, increasing free cash flow and dividends. This stock should be $30 and yield 8%.

Note: SFL is a personal holding and a component of this site’s hypothetical Income Portfolio.

After paying dividends of $2.75 and $3.00 for the first two quarters of 2008, Frontline Ltd. (FRO: 4.92 +0.02 +0.41%) has elected to pay only 50¢ for the 3rd quarter to shareholders of record on Dec. 9. As the largest publicly traded oil tanker company, Frontline has been popular with investors due to their generous dividend policy. Since 2001 FRO has paid out over $53 per share in dividends. As I have cautioned many times when discussing tanker companies, these companies pay out dividend on the amount earned in the quarter by leasing their ships on the spot market. These dividend will vary wildly and the patient investor will be rewarded, but there will be some bumps along the way.

Looking at Frontline’s 3rd quarter numbers the daily charter rates for their VLCC, Suezmax tankers, and Suezmax bulk carriers were not much below the 2nd quarter numbers. The net income is a little hard to decipher with shares issued, ships bought and sold and some one-time gains and losses in the quarter. My bottom line analysis is that the company is conserving cash rather than continuing the generous payouts. Tanker daily charter rates have started to fall significantly in November and FRO has an aggressive new building program that will require over $1 billion in additional cash or borrowing in the next 3 years.

My interest in Frontline mainly comes as a shareholder of Ship Finance International Ltd. (SFL: 12.11 +0.41 +3.50%). Frontline leases the majority of their tankers from Ship Finance (FRO spun off SFL about 5 years ago) and Ship Finance participates in the per ship profits of the leased vessels. I was happy to see the profit sharing paid to SFL in the 3rd quarter was $28.5 million compared to $33 million in the 2nd quarter.

Ship Finance will report earnings later today and I am very interested in their results. The stock has been knocked down by 2/3 recently. A final note on tanker company and stocks. Frontline is the big gorilla in the tanker market and their long term fleet growth plans will eventually reward shareholders with piles of dividends. However, FRO has a daily break-even of $24,800 for their Suezmax tankers. Nordic American Tanker (NAT: 14.14 +0.07 +0.50%) with their small, all Suezmax fleet has a break even of less than $10,000.

Note: SFL and NAT are components of this site’s hypothetical Income Portfolio.

Each week I recap the results of the WilderHill New Energy Global Innovation Index, symbol NEX, and published by New Energy Finance Ltd. The index consists of approximately 90 stocks from 22 countries. The NEX is the tracking index for the PowerShares Global Clean Energy Portfolio ETF (PBD: 9.73 +0.259 +2.73%). For reference, the NEX has a 52 week high of 461.56.

For the week that ended Monday, 11/24, the NEX fell 6.2% to 150.49. The low for the week was 133 on Thursday. The NASDAQ declined just 0.7% and the S&P 500 gaind 0.1% for the time period. AMEX Oil, carrying the proxy for conventional energy, gained 4.0%.

Hydrogen and fuel cells was the only postive sector in the NEX, gaining 5.4%. The sector with the biggest loss was energy storage, shedding 9.6%. Solar energy and ‘renewable-other’ (think geothermal and water) both fell 9.1%. Loss leader for the week, Suntech Power Holdings forecast a zero gross margin for the near future. Biofuels and biomass fell 6.3%.

Here are the top and bottom stocks from the NEX for the week:

NEX top gainers since 18 Nov 08
Plug Power PLUG + 28.0%
JA Solar Holdings JASO + 18.7%
Johnson Controls JCI + 17.9%
Sao Martinho SMTO3 + 16.4%
American Superconductor AMSC + 14.0%

NEX top losers since 18 Nov 08
Suntech Power Holdings STP - 41.3%
Aventine Renewable Energy AVR - 39.8%
Theolia TEO - 37.2%
Verenium VRNM - 33.5%
Evergreen Solar ESLR - 25.2%

Natural gas transport and processing company Atlas Pipeline Partners (APL: 37.07 -0.31 -0.83%) has been hit hard by falling oil prices. Or at least its stock price has. At the time I write this APL stock is trading at 2 times the annual dividend. It is apparent that there is a strong belief that APL will be unable to continue distributions at the current rate. Atlas Pipeline Partners is dependent for a majority of its revenues on the processing and sale of natural gas liquids (NGL’s). NGL’s are used in the chemical and petroleum industries and their prices are strongly correlated with the price of oil. Those who provide analysis of APL stock believe that the company needs oil prices to be in the $70 to $80 range to be able to maintain their distribution levels. As oil prices have fallen the market has hammered the value of APL stock. Last week, Jim Cramer added APL to is “Sell Block” when oil dropped below $50 per barrel.

First, we have to remember that oil prices dropped below $70 all of oh…3 weeks ago. Three months ago oil was in the $115 range. Six months ago everyone thought oil was headed for $200. Who really can forecast where oil prices will be in the next 3 to 6 months. I am not uncomfortable with the idea of oil recovering to over $70 in the very near future. Last weekI wrote an article on how Mexico has hedged its entire 2009 oil production to earn at least $70. How many other state owned or controlled oil agencies “need” oil to sell for more than $70 and have taken hedge positions to insure they get the required revenues? How many traders are out their trying to skin these agencies of the premiums they have paid for their hedges? This is entirely conjecture on my part, but I think a not unlikely scenario.

My point is that if oil does rebound above $70 in the next few months, APL is a $25 stock. Owing the stock gives you an open call option on $70+ oil. In the meantime you may (even probably) collect some level of distribution in February. The last distribution was 96¢. When oil was $70ish in 2006-2007 they were paying 75¢ to 85¢ per share. I think the distribution could be cut to 40¢ for the 4th quarter if oil does not rally rapidly. But 40¢ is 5% of the current share price!

I have written several articles recently about the Atlas family of companies. APL and Atlas Pipeline Holdings (AHD: 0.00 N/A N/A) have become the most speculative of the bunch. If you believe that oil prices will rally above current levels I believe I have made a case for these stocks.

Note: APL is a component of this site’s hypothetical Income Portfolio.

Sacramento County median home price falls to $195,000 – Sacramento Business, Housing Market News | Sacramento Bee.

There is a lot of interesting data in the above linked Sacramento Bee article in spite of the scary headline. From my point of view, the continuing strong sales numbers are still the top bullet point. Sales in the Sacramento region made their 7th consecutive month of strong year-over-year sales gains with sales 68% higher than in October 2007 and only 4% below very strong September numbers.

There are 7 counties in the Sacramento region and Sacramento county has been the heart of foreclosure activity pushing the median sales price down 35% in the last year. 2/3 of all sales in Sacramento county were foreclosed properties. The other counties in the region saw sales prices decrease from ony 7% to 34%.

The strong sales numbers are approaching the levels of activity in early 2006. Available inventory is now down to less than 3 months supply, but the amount of bank owned property is the unknown variable. If government and lender programs to reduce the amount of foreclosures are successful, this market will turn around in a hurry. I think this quote sums up why sales activiity is so strong:

The bad news is there’s a lot of foreclosures in the market. The good news is they’re selling,” said Pat Shea, Sacramento regional manager for Prudential California Realty. “Teachers, policemen, nurses – they can all buy houses now”.