SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended June 30, 2013
Business Overview: SFL is a Bermuda-based shipping and offshore finance company. The company owns and operates a fleet of vessels and drilling rigs, primarily chartered on long-term, fixed-rate contracts. The filing includes preliminary results and a press release dated August 28, 2013.

Key Financial Metrics

Note: Charter revenues and EBITDA include assets classified as "Investment in associate" and are non-GAAP measures. GAAP operating revenues were $66.0 million for Q2 2013.

Material Changes and Operational Updates

• Net Income Decline: Net income decreased from $32.4 million in Q1 to $25.1 million in Q2, primarily due to a $6.6 million mark-to-market gain on derivatives in Q2 compared to a $2.0 million loss in Q1, and the absence of a $18.0 million gain on sale of assets recorded in Q1.
• Major Acquisitions:
  • Contracted four 8,700 TEU container newbuildings (total price ~$340 million) for delivery in 2014-2015.
  • Acquired the harsh-environment jack-up drilling rig West Linus for $600 million, with a 15-year bareboat charter back to North Atlantic Drilling Limited (NADL).
• Capital Markets Activity: Raised $129 million in a public equity offering in June 2013. Secured $475 million in bank financing for the West Linus acquisition. Refinanced the West Hercules rig with a $375 million six-year loan.
• Charter Backlog: As of June 30, 2013, the fixed-rate charter backlog was approximately $5.8 billion with an average remaining term of 6.6 years.

Outlook, Risks, and Management Commentary

• Management Commentary: CEO Ole B. Hjertaker emphasized the strategy of investing in assets with long-term charter potential to build distribution capacity. The company views access to capital as a key differentiator.
• Market Risks:
  • Tanker Market: The crude oil tanker market remains at low levels. The company does not expect cash sweep contributions from vessels chartered to Frontline for 2013. Management is monitoring the situation to minimize potential negative impacts.
  • Short-Term Markets: Handysize drybulk and feeder container markets remain weak. The company intends to keep these vessels in the short-term market until long-term rates recover.
• Accounting Structure: Six subsidiaries (including drilling rigs and container vessels) are accounted for as "Investment in associate" under U.S. GAAP. Consequently, their operating revenues and expenses are not consolidated; instead, net contributions are recognized as "Results in associate" and "Interest income."
• Forward-Looking Statements: Risks include fluctuations in charter rates, vessel values, interest rates, and geopolitical events affecting shipping routes.

Investor Verification Checklist

• Dividend Sustainability: Verify the company's ability to maintain the $0.39 quarterly dividend given the decline in GAAP net income and the heavy capital expenditure schedule.
• Frontline Exposure: Assess the credit risk associated with the Frontline charterers, specifically regarding the lack of cash sweep income and the potential for asset value impairment in the weak tanker market.
• Capital Expenditure Funding: Confirm the drawdown of committed financing for the $405 million balance due on the West Linus delivery and the funding of remaining yard installments for newbuildings.
• Non-GAAP Reconciliation: Review the reconciliation of Net Income to EBITDA to understand the impact of the "Investment in associate" accounting treatment on reported profitability.
• Derivative Valuation: Monitor the volatility of the "Mark to Market of Derivatives" line item, which significantly impacted Q2 net income.