Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended September 30, 2017
Business Overview: SFL owns and operates a fleet of 70 vessels and rigs, including tankers, offshore support vessels, drilling rigs, container vessels, car carriers, and dry bulkers. The company focuses on long-term charters with strong counterparties.
Key Financial Metrics
| Metric | Q3 2017 | Q2 2017 |
|---|---|---|
| Total Charter Revenues (Non-GAAP) | $150 million | $150 million |
| GAAP Operating Revenues | $93.7 million | $94.2 million |
| Adjusted EBITDA (Non-GAAP) | $115 million | $118 million |
| Net Income | $28.7 million | $20.1 million |
| Earnings Per Share (Basic) | $0.31 | $0.22 |
| Net Cash from Operating Activities | $32.0 million | $55.6 million |
| Liquidity (Cash + Undrawn Facilities) | $254 million | N/A |
| Cash and Cash Equivalents | $245.8 million | $249.0 million |
Dividend: Declared $0.35 per share (55th consecutive quarterly dividend).
Material Changes vs. Prior Period
- Profitability: Net income increased 43% to $28.7 million from $20.1 million in Q2, driven by a $7.3 million gain on non-designated derivatives and improved spot market rates for dry bulk vessels.
- Revenue Composition: Total charter revenues remained flat at $150 million. Long-term charter revenues decreased slightly to $133 million (from $138 million), while short-term charter revenues increased to $17 million (from $12 million).
- Asset Portfolio:
- Acquisitions: Took delivery of two new LR2 product tankers chartered to Phillips 66.
- Disposals: Sold the Suezmax tanker Front Ardenne for approximately $12 million net proceeds.
- Balance Sheet: Total assets increased to $3.16 billion. Long-term debt increased to $1.24 billion (net of deferred charges) due to new bond issuances and refinancing activities.
Outlook, Risks, and Management Commentary
Management Commentary
CEO Ole B. Hjertaker highlighted the company's commitment to fleet renewal and balance sheet strengthening. The company has made aggregate dividend payments exceeding $23 per share since 2004 and remains profitable every quarter. Management emphasized proactive measures to enhance the financial profile, including the early conversion of convertible notes.
Guidance and Outlook
- Market Conditions: The crude oil tanker market remains soft, with vessels chartered to Frontline not generating profit shares above the base rate in Q3. Recovery is expected but may not be sufficient for profit shares in Q4. Conversely, the dry bulk and container markets have strengthened.
- Seadrill Restructuring: Following Seadrill's Chapter 11 filing, SFL agreed to reduce charter hire for three rigs by approximately 29% for five years starting January 2018, with amounts added back later. Lease terms for two rigs were extended by 13 months.
- Strategy: Focus remains on the tanker, bulker, and container markets with significant investment capacity for accretive deals.
Risks and Contingencies
- Counterparty Risk: Seadrill's bankruptcy proceedings and subsequent restructuring impact charter revenue stability for three drilling rigs.
- Market Volatility: Fluctuations in charter hire rates, vessel values, and bunker prices pose ongoing risks.
- Accounting Treatment: Three subsidiaries (owning drilling rigs) are accounted for as "Investment in associates" under U.S. GAAP, meaning their operating revenues and expenses are not consolidated, potentially obscuring full operational visibility in GAAP figures.
Investor Verification Checklist
- Seadrill Restructuring Impact: Verify the long-term cash flow implications of the 29% charter hire reduction and the 13-month lease extensions for the three rigs.
- Convertible Note Conversion: Confirm the dilution impact of the $121 million in convertible notes converted to common shares (approx. 102.9 million shares outstanding post-conversion).
- Non-GAAP Reconciliation: Review the reconciliation of Net Income to Adjusted EBITDA, noting the significant inclusion of "Investment in associates" charter revenues ($48 million) which are excluded from GAAP operating revenues.
- Liquidity Position: Assess the sustainability of the $254 million liquidity position against upcoming debt maturities and capital expenditure plans.
- Profit Share Thresholds: Monitor dry bulk and tanker market rates to determine if profit share agreements with Golden Ocean and Frontline will trigger in Q4 2017.