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, 2012 (4Q 2012) and Full Year 2012.
Business Overview: SFL is a Bermuda-based shipping and offshore finance company owning a fleet of 65 vessels and rigs. The company focuses on long-term, fixed-rate charters to reputable operators. Key segments include offshore drilling, tankers, drybulk, container, and car carriers.
Key Financial Metrics
| Metric | 4Q 2012 | 4Q 2011 | Full Year 2012 | Full Year 2011 |
|---|---|---|---|---|
| Charter Revenues (Non-GAAP) | $168 million | $179 million | $716 million | $784 million |
| Total Operating Revenues (GAAP) | $77.7 million | $74.3 million | $319.7 million | $295.1 million |
| EBITDA (Non-GAAP) | $134 million | $145 million | $585 million | $674 million |
| Net Income | $51.1 million | $34.6 million | $185.8 million | $131.2 million |
| Earnings Per Share (Basic) | $0.60 | $0.44 | $2.31 | $1.66 |
| Dividend Per Share | $0.39 | $0.39 | $1.56 | $1.47 |
| Cash and Equivalents | $60.5 million | $94.9 million (Dec 2011) | N/A | N/A |
| Available Credit Facilities | $57.5 million | N/A | N/A | N/A |
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
- Profitability Increase: Net income for 4Q 2012 rose 48% to $51.1 million from $34.6 million in 4Q 2011, driven by a $21.5 million gain on the sale of four older vessels and $12.1 million in cash sweep income from Frontline charters.
- Revenue Composition: GAAP operating revenues increased slightly to $77.7 million, but this excludes significant charter revenue from associates ($77.8 million) and finance lease repayments ($14.6 million).
- Dividend Acceleration: The Q4 2012 dividend of $0.39 per share was prepaid in December 2012 alongside the Q3 dividend due to U.S. tax uncertainties.
- Asset Disposal: The company sold four older vessels in Q4 2012 and expects to sell two more in Q1 2013, removing single-hull tankers and combination carriers from the fleet.
Guidance, Outlook, and Risks
Management Commentary and Strategy
- Capital Raising: Since October 2012, SFL raised over $1 billion in equity, bonds, and bank financing. This includes an $89 million equity offering, $105 million in NOK senior notes, and a $350 million convertible note issuance (post-quarter end).
- Refinancing: Successfully refinanced $420 million of bank debt related to the ultra-deepwater drillship West Polaris and $248 million of senior notes due in 2013.
- Investment Outlook: Management expects to pursue selective growth opportunities, citing low asset prices and a challenging banking environment for competitors. The company plans to continue selling older vessels to reduce counterparty exposure.
- Market Conditions: Spot market rates for tankers and drybulk remain soft. The company does not expect significant cash sweep contributions in 2013 unless spot rates for VLCCs and Suezmax tankers recover significantly.
Risks and Contingencies
- Frontline Exposure: SFL has 22 vessels chartered to Frontline. Frontline has warned of potential liquidity issues regarding a $225 million convertible bond due in 2015 if the market does not recover. SFL is monitoring this closely but notes the net debt on these vessels is near scrap value, providing a buffer.
- Short-Term Market Volatility: Seven feeder container vessels and four Handysize drybulk carriers are trading in the short-term market where rates are marginally above operating expenses, creating earnings volatility.
- Accounting Treatment: Significant assets (drilling units and container vessels) are accounted for as "Investment in associates" under U.S. GAAP, meaning their operating revenues and expenses are not consolidated, potentially obscuring full operational scale in GAAP figures.
Investor Verification Checklist
- Frontline Liquidity: Verify the status of Frontline's $225 million convertible bond maturity in April 2015 and any potential impact on SFL's 22 chartered vessels.
- GAAP vs. Non-GAAP Reconciliation: Review the reconciliation of Net Income to EBITDA to understand the impact of "Investment in associates" and cash sweep income on reported profitability.
- Convertible Note Terms: Confirm the terms of the $350 million convertible notes issued post-quarter end (3.25% coupon, $21.945 strike price) and the associated share lending agreement.
- Cash Sweep Sustainability: Assess the likelihood of future cash sweep income from Frontline given the soft tanker market outlook and termination of profitable sub-charters.
- Capital Expenditure Schedule: Monitor the $191 million in remaining capital commitments for newbuildings and the timing of cash outflows versus secured financing.