SFL Corporation Ltd. Q3 2020 Preliminary Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated November 12, 2020, presents the preliminary financial results for SFL Corporation Ltd. for the quarter ended September 30, 2020. SFL is a Bermuda-based shipping company operating a diversified fleet of 84 vessels and rigs across liner, tanker, dry bulk, and offshore sectors. The company declared its 67th consecutive quarterly dividend of $0.15 per share.
Key Financial Metrics
- Revenue: Total U.S. GAAP operating revenue was $115.8 million. Total charter hire received (including non-consolidated subsidiaries) was approximately $157 million, comprising $116 million from consolidated operations and $24.4 million from non-consolidated offshore subsidiaries.
- Profitability: Net income was $16.0 million ($0.15 per share). Adjusted EBITDA (non-GAAP) was $93.0 million from consolidated subsidiaries and $24.4 million from non-consolidated subsidiaries.
- Cash Flow: Net cash provided by operating activities was $72.0 million. Net cash provided by investing activities was $140.3 million, driven by proceeds from vessel sales.
- Liquidity: Cash and cash equivalents totaled approximately $206 million (excluding $22 million held in non-consolidated subsidiaries). Marketable securities were valued at approximately $33 million.
- Debt: Short-term and current portion of long-term interest-bearing debt was $299.7 million. Long-term interest-bearing debt was $1.18 billion. Finance lease liabilities totaled $1.06 billion ($72.1 million current, $984.7 million long-term).
Material Changes vs. Prior Period
- Revenue Decline: Operating revenue decreased to $115.8 million from $118.5 million in Q2 2020. This decrease is partially due to $16.4 million of charter hire classified as repayment of investment in sales-type leases, which is excluded from GAAP revenue.
- Profit Increase: Net income increased to $16.0 million from $11.9 million in Q2 2020, despite a $6.2 million increase in credit loss provisions under ASU 2016-13.
- Asset Sales: The company redelivered a VLCC to Hunter Group in November 2020, increasing cash by approximately $10.7 million after debt repayment.
- Offshore Default: While Seadrill paid full charter hire in Q3, no payments were received in Q4, constituting an event of default under lease and financing agreements.
Outlook, Risks, and Management Commentary
- Dividend Adjustment: The Board reduced the dividend to $0.15 per share to exclude cash flow from offshore assets pending the resolution of Seadrill's restructuring.
- Seadrill Restructuring: SFL owns three drilling rigs leased to Seadrill subsidiaries. Seadrill is in discussions regarding a comprehensive balance sheet restructuring. Two rigs (West Linus, West Hercules) are sub-chartered to oil majors, but funds are pledged to banks. The third rig (West Taurus) has been in layup for over five years. SFL purchased the bank facility for West Taurus at 62% of nominal value, making it debt-free.
- Market Conditions: Liner markets improved with record freight rates; two car carriers previously idle will commence new charters in Q4. The crude oil tanker market softened due to lower demand, though SFL's VLCCs remain on profitable sub-charters. Dry bulk markets saw slight improvements driven by Chinese imports.
- Charter Backlog: Estimated fixed-rate charter backlog is $3.2 billion with an average remaining term of 4 years (7 years revenue-weighted). Approximately $800 million relates to offshore rigs impacted by Seadrill.
- Sustainability: SFL is implementing a new digital platform for vessel performance monitoring to meet future emissions reduction targets.
Investor Verification Checklist
- Verify the status of Seadrill's restructuring and the likelihood of recovering charter hire payments for Q4 and beyond.
- Confirm the impact of the $6.2 million credit loss provision on future earnings and the cumulative $42.3 million provision balance.
- Review the terms of the amended financing agreements for the West Linus and West Hercules rigs following the default event.
- Assess the sustainability of the $0.15 dividend given the exclusion of offshore cash flows and the current market environment.
- Monitor the deployment of the two car carriers and the performance of the dry bulk fleet in the spot market.