Business Context and Reporting Period
This Form 6-K filing by Ship Finance International Limited (SFL Corp Ltd.) covers the month of July 2013. The report primarily discloses a material acquisition announced on July 1, 2013, regarding the purchase of the harsh-environment jack-up drilling rig "West Linus" from a subsidiary of North Atlantic Drilling Limited (NADL). The Company is a major ship owning company listed on the NYSE with a fleet of 70 vessels, including tankers, drybulk carriers, container vessels, and offshore drilling units.
Key Financial Metrics and Transaction Details
- Acquisition Cost: Total purchase price of $600 million for the West Linus rig.
- Payment Schedule: $195 million paid in June 2013; remaining $405 million due upon delivery in December 2013.
- Financing Structure: Total financing package of $475 million ($70 million funded immediately, $405 million at delivery). Equity investment of $125 million funded from a recent equity offering.
- Charter Terms: Bareboat charter back to NADL for over 15 years. NADL has sub-chartered the rig to ConocoPhillips for five years with two two-year extension options.
- Charter Rates: Approximately $220,000 per day for the first five years (excluding mobilization); average of $115,000 per day for the remaining 10 years.
- Projected Cash Flow: Estimated average yearly net cash flow of approximately $19 million ($0.20 per share) during the first five years, after interest and loan amortization.
- Backlog Impact: Transaction adds more than $800 million to the Company's charter backlog.
Material Changes and Strategic Outlook
The acquisition represents a significant expansion of SFL's exposure to the offshore industry, specifically in the North Atlantic basin. Management views this as a firm commitment to a continued growth strategy, noting that nearly $1 billion has been invested in new assets in recent months. The transaction is expected to be accounted for as an "Investment in associate" under US GAAP, similar to existing deepwater drilling rigs chartered to Seadrill. The contract includes an interest compensation clause to mitigate interest rate volatility.
Risks and Contingencies
The filing includes a cautionary statement regarding forward-looking statements. Key risks identified include:
- Strength of world economies and currency fluctuations.
- General market conditions, including fluctuations in charter hire rates and vessel values.
- Changes in demand in the tanker market due to OPEC production levels and global oil consumption.
- Operating expense volatility, including bunker prices, dry-docking, and insurance costs.
- Regulatory changes, political conditions, and potential disruption of shipping routes.
- Potential liability from pending or future litigation.
Investor Verification Checklist
- Verify the scheduled delivery date of the West Linus rig (December 2013) and the commencement of the sub-charter to ConocoPhillips (April 2014).
- Confirm the funding status of the $125 million equity portion and the $70 million initial debt tranche.
- Review the specific terms of the interest compensation clause within the bareboat charter agreement.
- Assess the creditworthiness of NADL and ConocoPhillips as counterparties for the long-term charter obligations.
- Monitor the Company's ability to execute the remaining $405 million payment and financing tranche upon delivery.