Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2013 (Preliminary Results)
Business Overview: SFL is a shipping and offshore finance company owning a fleet of vessels and drilling rigs. The company focuses on long-term, fixed-rate charters to provide stable cash flows. As of March 31, 2013, the fleet consisted of 69 vessels and rigs with a fixed-rate charter backlog of approximately $5.1 billion.
Key Financial Metrics
| Metric | Q1 2013 | Q4 2012 |
|---|---|---|
| Charter Revenues (Non-GAAP) | $153.0 million | $168.0 million |
| Total Operating Revenues (GAAP) | $65.1 million | $77.7 million |
| EBITDA (Non-GAAP) | $121.6 million | $134.4 million |
| Net Income (GAAP) | $32.4 million | $51.1 million |
| Earnings Per Share (Basic) | $0.38 | $0.60 |
| Dividend Declared | $0.39 per share | $0.39 per share |
| Cash and Cash Equivalents | $64.8 million | $60.5 million |
| Available Credit Facilities | $235.0 million | N/A |
| Total Interest-Bearing Debt | $1.70 billion | $1.83 billion |
Note: GAAP operating revenues exclude $14.0 million classified as repayment of investments in finance leases and $74.9 million of charter revenues from assets classified as 'investment in associate'.
Material Changes vs. Prior Period
- Revenue Decline: Charter revenues decreased by approximately 9% compared to Q4 2012, primarily due to the absence of cash sweep income from Frontline vessels in Q1 2013. In Q4 2012, $12.1 million of cash sweep income was recognized; in Q1 2013, spot rates were too low to trigger profit sharing.
- Net Income Drop: Net income fell from $51.1 million in Q4 2012 to $32.4 million in Q1 2013. This decline reflects the loss of cash sweep income and higher amortization of deferred charges, partially offset by an $18.0 million gain on the sale of three older vessels.
- Fleet Renewal: The company disposed of three older vessels (a combination carrier, a Suezmax tanker, and a non-double hull VLCC), resulting in a book gain of $18.0 million and net proceeds of $52.2 million. The final Handysize drybulk newbuilding was delivered and commenced a three-year timecharter.
- Debt Reduction: Total interest-bearing debt decreased by approximately $130 million quarter-over-quarter, driven by debt repayments and refinancing activities.
Guidance, Outlook, and Risks
Management Commentary and Strategy
Management highlighted the renewal of the fleet at historically low prices, specifically the contracting of four 8,700 TEU eco-design container newbuildings with delivery in 2014 and 2015. The company aims to build additional distribution capacity and expects to invest more capital in the near term. SFL maintains a strong position in capital markets, having raised over $1.4 billion since October 2012.
Outlook
- Cash Sweep: The company does not expect material cash sweep contributions for the remainder of 2013 unless there is a significant upturn in spot charter rates for VLCCs and Suezmax tankers.
- Short-Term Market: Four handysize drybulk carriers and seven feeder-size container vessels are currently employed in the short-term market due to low long-term charter rates. Management intends to keep them in the short-term market until rates recover.
- Financing: A $375 million facility was secured to refinance the ultra-deepwater rig West Hercules. The company expects to secure financing for remaining newbuildings well before delivery.
Risks and Contingencies
- Market Volatility: Soft spot market earnings in shipping segments may impact asset pricing and cash sweep income.
- Counterparty Risk: The company monitors the performance of charterers, particularly Frontline, to minimize negative impacts from low spot rates.
- Forward-Looking Uncertainties: Risks include fluctuations in currencies, interest rates, bunker prices, and geopolitical events affecting shipping routes.
Investor Verification Checklist
- Cash Sweep Dependency: Verify the sensitivity of future earnings to spot rate fluctuations for the 22 vessels chartered to Frontline, as no cash sweep was generated in Q1 2013.
- Accounting Treatment: Confirm the impact of the "Investment in Associate" accounting method on consolidated revenues, noting that $74.9 million of charter revenue is excluded from GAAP operating revenue.
- Debt Maturity Profile: Review the staggered debt maturity schedule, specifically the refinancing of the $375 million West Hercules debt and the $350 million convertible notes due 2018.
- Newbuilding Execution: Monitor the delivery schedule and financing arrangements for the four 8,700 TEU container vessels contracted post-quarter-end.
- Liquidity Position: Assess the $300 million total available liquidity (cash plus undrawn credit lines) against upcoming capital expenditures for newbuildings.