SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended December 31, 2014
Business Overview: SFL operates a diversified portfolio of vessels and offshore drilling rigs, primarily chartered on long-term, fixed-rate contracts. The company focuses on fleet renewal and maintaining high-quality counterparties.

Key Financial Metrics

Note: Charter revenues and EBITDA include assets classified as "Investment in associates" and cash sweep income, which are excluded from GAAP operating revenues.

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased from $34.6 million in Q3 2014 to $25.1 million in Q4 2014. This was primarily driven by approximately $22.6 million in negative non-cash charges.
• Impairment Charges: A non-cash impairment of $11.8 million was recorded related to the divestment of five feeder-size container vessels.
• Derivative Losses: A negative mark-to-market adjustment of $6.3 million was recorded on interest rate hedging instruments.
• Asset Sales: The company sold three older VLCCs (book loss of $1.4 million) and the ultra-deepwater drillship West Polaris (book gain of $6.1 million).
• Revenue Growth: GAAP operating revenues increased 6.6% quarter-over-quarter to $88.7 million, aided by a $11.3 million cash sweep from Frontline (up from $7.9 million in Q3).

Outlook, Management Commentary, and Risks

Management Commentary

• Dividend: The Board declared an increased quarterly dividend of $0.42 per share, marking the 44th consecutive quarterly dividend.
• Fleet Updates: Two 8,700 TEU container vessels were delivered in January 2015 and chartered to Hamburg Süd for 7 years. These are expected to contribute approximately $46 million in annual EBITDA.
• Market Conditions: The crude oil tanker market strengthened in Q4 2014 and Q1 2015. Average charter rates for Suezmax tankers rose to $32,400/day from $20,900/day in Q3.
• Strategy: The company continues to reduce financial leverage on crude oil tankers and aims to grow its asset base using available capital for accretive investments.

Risks and Contingencies

• Horizon Lines Investment: SFL holds $59 million in second-lien notes and warrants in Horizon Lines, Inc. These are conservatively valued at 40% of nominal value pending regulatory approval of a merger with Matson, Inc.
• Feeder Market: The container feeder market remains weak, with rates marginally above operating expenses. SFL intends to keep two 1,700 TEU vessels in the short-term market until rates improve.
• Forward-Looking Risks: Potential impacts include fluctuations in global economies, currency/interest rates, charter hire rates, vessel values, and geopolitical disruptions to shipping routes.

Investor Verification Checklist

• Dividend Sustainability: Verify the cash flow coverage of the increased $0.42 dividend against the $25.1 million net income and $36.6 million operating cash flow.
• Impairment Finality: Confirm the final accounting treatment and cash impact of the $11.8 million impairment on feeder vessels and the subsequent transfer to new owners.
• Horizon Lines Valuation: Monitor the status of the Horizon Lines/Matson merger and the potential recovery value of the $59 million note investment.
• Newbuild Financing: Review the terms of the long-term bank financing secured for the two new 8,700 TEU vessels and the resulting $43 million positive cash effect.
• Derivative Exposure: Assess the ongoing impact of interest rate hedging instruments following the $6.3 million mark-to-market loss in Q4.