SFL

SFL Corp Ltd. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K reports the unaudited condensed interim financial results for SFL Corporation Ltd. ("SFL") for the six months ended June 30, 2022. SFL is a Bermuda-based international ship owning and chartering company with a diverse asset base including dry bulk carriers, container vessels, tankers, car carriers, and offshore drilling rigs. The company operates primarily through medium to long-term bareboat or time charters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 35.3% to $305.7 million, driven by vessel acquisitions in 2021 and 2022 and a $13.2 million gain on the sale of assets and termination of charters.
• Profitability: Net income more than doubled to $104.4 million. Net operating income rose to $135.6 million, primarily due to higher revenues and a one-time gain on asset disposals.
• Asset Disposals: The company sold two VLCCs (Front Energy and Front Force) and one container vessel (MSC Alice) in April 2022, generating a net gain of $13.2 million and proceeds of $78.9 million.
• Acquisitions: SFL acquired two Suezmax tankers and two LR2 product tankers in early 2022 for $190 million. In August 2022, the company agreed to acquire four additional Suezmax tankers for $222.5 million.
• Interest Expense: Interest expense increased to $50.1 million from $48.1 million, attributed to new loans funding acquisitions and rising LIBOR rates (average 3-month LIBOR rose from 0.17% in 2021 to 1.02% in 2022).
• Accounting Changes: Adoption of ASU 2020-06 resulted in the reclassification of convertible notes entirely as liabilities, impacting equity and interest expense presentation.

Guidance, Outlook, and Risks

• Dividends: The Board declared a dividend of $0.23 per share payable in September 2022. Previous dividends of $0.20 and $0.22 per share were paid in March and June 2022.
• Seadrill Transition: Significant operational changes are underway regarding drilling rigs chartered to Seadrill. Seadrill emerged from Chapter 11 in February 2022 and is no longer a related party. SFL is transitioning the management of the West Linus rig to Odfjell and expects redelivery of the West Hercules rig in the second half of 2022.
• Capital Commitments: The company has commitments of approximately $239.7 million for four newbuilding dual-fuel car carriers expected in 2023 and 2024.
• Risks: Key risks include the cyclical nature of the shipping industry, volatility in oil and gas prices, potential vessel impairments, inflationary pressures on operating costs, and geopolitical instability (specifically the Russia-Ukraine conflict). The company notes that while charter contracts have not yet been affected by the conflict, future impacts are possible.
• Liquidity: As of June 30, 2022, the company held $223.8 million in cash and cash equivalents and was in compliance with all debt covenants.

Investor Verification Checklist

• Asset Sale Proceeds: Verify the realization of the $78.9 million in proceeds from the sale of the two VLCCs and one container vessel and the impact on the balance sheet.
• Seadrill Charter Transitions: Monitor the successful regulatory approval and execution of the management transfer for the West Linus rig and the redelivery of the West Hercules rig to ensure continuity of revenue.
• Interest Rate Exposure: Assess the impact of rising interest rates on the $1.3 billion of U.S. dollar-denominated floating rate debt, noting the weighted average rate increased to 3.61%.
• Newbuilding Deliveries: Track the delivery schedule and financing for the four new car carriers and four new Suezmax tankers agreed upon in August 2022.
• Dividend Sustainability: Evaluate the company's ability to maintain its dividend policy given the increased interest expense and capital expenditure commitments.