SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Earnings Release)
Reporting Period: Quarter ended June 30, 2019
Business Overview: SFL operates a diversified portfolio of 89 vessels and rigs across Liners, Tankers, Dry Bulk, and Offshore segments. The company focuses on long-term charters to reputable operators to support dividend capacity.

Key Financial Metrics

Note: Charter hire of $152 million includes $10.4 million classified as repayment of investment in finance leases and $30.1 million from unconsolidated subsidiaries, which are excluded from GAAP operating revenue.

Material Changes vs. Prior Period

• Revenue Decline: GAAP operating revenue decreased 4.8% to $110.9 million from $116.5 million in Q1 2019, primarily due to accounting treatment of finance leases and lower rates in certain sectors.
• Net Income Decrease: Net income fell to $28.1 million ($0.26/share) from $33.6 million ($0.31/share) in Q1 2019.
• Non-Cash Items: The quarter included a $16.8 million gain on mark-to-market equity securities, offset by a $4.4 million loss on hedging derivatives and an $8.2 million impairment charge on a note issued by a Solstad Offshore subsidiary.
• Segment Performance:
  • Liners: Generated $80.5 million in charter hire; rates strengthened due to demand for larger vessels.
  • Tankers: Generated $15.2 million; crude oil tanker rates declined compared to Q1, though the market is expected to strengthen later in 2019.
  • Dry Bulk: Generated $26.4 million; market remained soft with low activity, though rates improved slightly late in the quarter.
  • Offshore: Generated $30.1 million; markets experienced low utilization, with some vessels in lay-up.

Guidance, Outlook, and Risks

• Dividend: The Board declared a 62nd consecutive quarterly cash dividend of $0.35 per share, payable September 23, 2019.
• Capital Markets: Issued NOK 800 million (~$90 million) in senior unsecured bonds in June 2019. Subsequently raised an additional NOK 100 million via a tap issue.
• Backlog Growth: Added approximately $200 million to the charter backlog, including $160 million from liner vessel extensions and new acquisitions of three container vessels.
• IMO 2020 Compliance: Committed approximately $50 million toward scrubber installations for 29 vessels; some costs will be borne by customers.
• Risks and Contingencies:
  • Solstad Offshore Restructuring: Ongoing uncertainty regarding Solstad Offshore's balance sheet restructuring led to an $8.2 million impairment charge. A standstill agreement with lenders is in place until October 2019.
  • Market Volatility: Risks include global trade tensions, fluctuations in charter rates, and currency/interest rate movements.

Investor Verification Checklist

• Impairment Details: Verify the status of the Solstad Offshore restructuring and the likelihood of further write-downs on the $8.2 million impaired note.
• GAAP vs. Non-GAAP Reconciliation: Confirm the impact of the $10.4 million finance lease repayment and $30.1 million unconsolidated associate income on cash flow versus reported revenue.
• Debt Structure: Review the terms of the new NOK 800 million bond issuance and the swap arrangements fixing interest rates at approximately 6.9% and 5.9%.
• IMO 2020 Costs: Assess the total capital expenditure required for scrubber installations and the extent to which customers are covering these costs.
• Offshore Asset Utilization: Monitor the employment status of the West Taurus rig (currently in lay-up) and the five offshore support vessels.