SFL Corporation Ltd. Q2 2023 Preliminary Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated August 17, 2023, presents the preliminary unaudited financial results for SFL Corporation Ltd. for the quarter ended June 30, 2023. SFL operates as a maritime infrastructure company owning and managing a diversified fleet of vessels and offshore drilling rigs, primarily under long-term time charters to end users.
Key Financial Metrics
- Revenue: Total U.S. GAAP operating revenues were $164.6 million. Total charter hire received was $173.8 million, including $2.2 million in profit share.
- Profitability: Net income was $16.9 million ($0.13 per share). Adjusted EBITDA was $100.9 million from consolidated subsidiaries and $7.8 million from associated companies.
- Cash Flow: Net cash provided by operating activities was $149.9 million. Cash and cash equivalents totaled $201.5 million at quarter-end.
- Dividends: The Board declared a quarterly cash dividend of $0.24 per share, marking the 78th consecutive quarterly dividend.
- Debt and Liquidity: The company secured over $1 billion in new financing in 2023. Unencumbered vessel value was approximately $51 million. Total assets were $3.8 billion.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased to $164.6 million from $173.3 million in Q1 2023. This decrease is partially due to the exclusion of $11.6 million in charter hire classified as lease repayments or associate income under U.S. GAAP.
- Profit Increase: Net income rose significantly to $16.9 million from $6.3 million in Q1 2023, driven by a $6.4 million gain on the sale of the Suezmax tanker Everbright and positive mark-to-market effects on swaps.
- Fleet Composition: The company sold the chemical tankers SFL Weser and SFL Elbe, exiting the short-term tanker market. The dry bulk spot market earnings increased to $7.2 million from $4.6 million in the prior quarter.
Outlook, Management Commentary, and Risks
Management highlighted a strategic shift from financial leasing to owning and operating assets on long-term charters, resulting in a fixed-rate backlog of approximately $3.6 billion with a weighted average remaining term of six years. Key developments include:
- New Contracts: A new contract with Equinor for the drilling rig Hercules secures employment until Q4 2024, adding approximately $100 million to the backlog. Volkswagen charters for two car carriers were extended, increasing EBITDA contribution fivefold.
- Offshore Recovery: The ultra-deepwater drilling market is recovering, with Hercules expected to generate significant cash flow from Q3 2023 onwards.
- Capital Expenditure: Remaining commitments for four car carriers under construction are approximately $194 million, fully financed by JOLCO arrangements.
- Risks: Forward-looking statements are subject to risks including global economic strength, currency fluctuations, cyclical market conditions, bunker prices, and geopolitical instability affecting shipping routes.
Investor Verification Checklist
- Verify the reconciliation of Adjusted EBITDA ($108.7 million total) against U.S. GAAP net income ($16.9 million) to understand non-cash adjustments and interest impacts.
- Confirm the timing and accounting treatment of the Hercules drilling revenue, which will shift to ASC 606 recognition starting Q3 2023.
- Monitor the execution of the $100 million share repurchase program, of which approximately $90 million remains available.
- Track the delivery and purchase option exercise of the VLCC Landbridge Wisdom in Q3 2023, expected to yield a $10 million positive cash effect.
- Review the credit loss provision of $3.2 million held against direct financing lease receivables and associates.