Business Context and Reporting Period
Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2013
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership, operation, charter, purchase, and sale of vessels and offshore assets. The fleet includes tankers, drybulk carriers, container vessels, car carriers, and offshore drilling units. A significant portion of revenue is derived from related parties, primarily Frontline Ltd.
Key Financial Metrics
| Metric (in thousands, except per share) | Nine Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2012 |
|---|---|---|
| Total Operating Revenues | $199,161 | $242,038 |
| Net Operating Income | $93,968 | $149,739 |
| Net Income | $70,904 | $134,737 |
| Basic Earnings Per Share | $0.80 | $1.70 |
| Diluted Earnings Per Share | $0.74 | $1.65 |
| Cash Provided by Operating Activities | $115,978 | $68,251 |
| Cash Used in Investing Activities | ($115,935) | $54,641 |
| Cash Used in Financing Activities | ($1,554) | ($150,989) |
| Total Debt (Short & Long Term) | $1,768,377 | $1,831,200 |
| Cash and Cash Equivalents | $59,031 | $66,818 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by approximately 18% ($42.9 million) compared to the prior year. This was primarily driven by the absence of $40.1 million in profit-sharing revenues (cash sweep) from Frontline Charterers due to low tanker spot rates, and lower gains on asset disposals.
- Net Income Drop: Net income fell by $63.8 million (47%) to $70.9 million. Key drivers included the reduction in net operating income, a decrease in equity earnings from associated companies ($11.2 million drop), and higher non-operating losses.
- Operating Expenses: Increased by $5.1 million to $123.2 million, largely due to the addition of new drybulk carriers and car carriers, and the conversion of certain bareboat charters to time charters which shifted operating costs to the Company.
- Debt Reduction: Total debt decreased by $62.8 million. The Company fully redeemed its 8.5% Senior Notes due 2013 and repurchased portions of other bonds, offset by new issuances including $350 million in 3.25% convertible bonds.
- Cash Flow Improvement: Operating cash flow increased significantly to $116.0 million, aided by the receipt of $52.2 million in cash sweep payments accrued in 2012.
Guidance, Outlook, and Risks
- Asset Sales and Refinancing: In November 2013 (subsequent to the period end), the Company sold two older VLCCs and refinanced debt on the West Taurus drilling rig. CMA CGM notified the Company of its intent to exercise purchase options on two container vessels in January 2014.
- Newbuildings: The Company has four 4,800 TEU container vessels under construction with expected deliveries in late 2013 and 2014, though delays were noted. A harsh environment jack-up rig is scheduled for delivery in January 2014.
- Related Party Concentration: Frontline accounted for approximately 40% of consolidated operating revenues in the nine months ended September 30, 2013 (down from 57% in the prior year). This concentration remains a material risk.
- Market Risks: The Company faces risks related to fluctuations in charter rates, vessel values, bunker prices, and global economic conditions. Interest rate and foreign exchange risks are managed via swap agreements.
- Liquidity: As of September 30, 2013, the Company had $180.1 million available to draw under secured revolving credit facilities and $23.8 million under a securities financing facility.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of the Frontline relationship and the impact of the "cash sweep" mechanism on future revenue volatility.
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the requirement to maintain available cash of at least $25 million and a total liabilities to adjusted total assets ratio below 0.80.
- Asset Valuation: Review the fair value of the vessel portfolio and the impact of potential charter terminations or purchase option exercises by charterers (e.g., CMA CGM).
- Newbuilding Delays: Assess the financial impact of delays in the delivery of the 4,800 TEU container vessels and the status of discussions regarding contract termination or refunds.
- Equity Method Investments: Scrutinize the financial health of associated companies (SFL West Polaris, SFL Deepwater, SFL Hercules, SFL Linus) which hold significant drilling assets and debt.