Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended March 31, 2015
Business Overview: SFL operates a diversified fleet of vessels and offshore drilling rigs, primarily chartered on long-term fixed-rate contracts to reputable operators. The company focuses on building distribution capacity across shipping and offshore markets.
Key Financial Metrics
| Metric | Q1 2015 | Q4 2014 |
|---|---|---|
| Total Operating Revenues (GAAP) | $90.1 million | $88.7 million |
| Charter Revenues (Non-GAAP) | $153 million | $179 million |
| EBITDA (Non-GAAP) | $127 million | $149 million |
| Net Income | $33.1 million | $25.1 million |
| Earnings Per Share (Basic) | $0.35 | $0.27 |
| Net Operating Income | $42.2 million | $29.3 million |
| Liquidity Position | $182 million | N/A |
| Cash and Cash Equivalents | $49.7 million | $50.8 million |
| Available Credit Facilities | $132 million | N/A |
| Dividend Per Share | $0.43 | N/A |
Note: Charter revenues and EBITDA include assets classified as 'Investment in associates' and cash sweep/profit share income, which are excluded from GAAP operating revenues.
Material Changes vs. Prior Period
- Net Income Growth: Net income increased 32% to $33.1 million from $25.1 million in Q4 2014, driven by higher operating income and a cash sweep agreement with Frontline.
- Revenue Composition: GAAP operating revenues rose slightly to $90.1 million. However, total charter revenues (non-GAAP) declined to $153 million from $179 million, reflecting the timing of vessel deliveries and charters.
- Non-Cash Charges: Net income was reduced by approximately $9.5 million in negative non-cash charges, including a $6.6 million mark-to-market loss on interest rate hedging instruments and $2.9 million in amortization of deferred charges.
- Dividend Increase: The Board declared an increased quarterly dividend of $0.43 per share, marking the 45th consecutive quarterly dividend.
- Asset Base Expansion: Two 8,700 TEU container vessels were delivered in January 2015, and an agreement was reached to acquire eight Capesize dry-bulk carriers.
Guidance, Outlook, and Management Commentary
Management Commentary
CEO Ole B. Hjertaker highlighted the expansion of the asset base and charter backlog, noting benefits from a strong tanker market. The revised agreement with Frontline is expected to provide a more robust earnings structure with an increased profit split and a 27.7% ownership stake in Frontline.
Outlook and Strategy
- Charter Backlog: As of March 31, 2015, the fixed-rate charter backlog stood at approximately $4.1 billion with an average remaining term of 5.7 years (9.1 years revenue-weighted).
- Market Conditions: The crude oil tanker market strengthened in Q1 2015 and is expected to remain strong in Q2. Container feeder rates are improving, with better net contributions expected from Q3 onwards.
- Capital Allocation: The company has significant capital available for new accretive acquisitions. It plans to refinance Frontline-related vessels to add investment capacity.
Risks and Contingencies
- Market Fluctuations: Risks include fluctuations in charter hire rates, vessel values, interest rates, and currency exchange rates.
- Counterparty Performance: Dependence on the performance of charterers and counterparties, though current counterparties are performing well.
- Regulatory and Political: Potential disruptions from political events, changes in OPEC production levels, and regulatory actions.
- Horizon Lines Merger: The company holds notes and warrants in Horizon Lines, Inc., which is merging with Matson, Inc. The notes are conservatively valued at 40% of nominal value pending regulatory approval.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the cash flow coverage of the increased $0.43 per share dividend against future capital expenditure commitments.
- Frontline Deal Impact: Assess the long-term financial impact of the revised Frontline charter agreement, including the 27.7% equity stake and reduced base rates versus increased profit share.
- Capital Expenditure Funding: Confirm the status of the $177 million syndicated financing for the eight Capesize dry-bulk carriers and the remaining $95 million funded from liquidity.
- Accounting Treatment: Review the "Investment in associate" accounting for three drilling subsidiaries (West Hercules, West Taurus, West Linus), which excludes their operating revenues and expenses from the consolidated income statement.
- Horizon Lines Exposure: Monitor the regulatory approval status of the Horizon Lines/Matson merger and the potential valuation of the $62 million in notes and warrants held by SFL.