Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2011 (Preliminary Results)
Filing Date: September 2, 2011
Business Overview: SFL is a shipping and offshore finance company that acquires vessels and rigs, chartering them on long-term fixed-rate contracts to reputable operators. The company maintains a conservative profile with a focus on stability in cash flow.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 |
|---|---|---|
| Total Operating Revenues | $73.8 million | $80.8 million |
| Net Operating Income | $44.6 million | $50.1 million |
| Net Income | $41.5 million | $43.6 million |
| Earnings Per Share (Basic) | $0.52 | $0.55 |
| Cash and Cash Equivalents | $88.5 million | $54.6 million |
| Total Available Liquidity | $113 million | Filing text does not provide a clear value |
| Dividend Declared | $0.39 per share | Filing text does not provide a clear value |
Note: Operating revenues exclude $25.0 million classified as repayment of investments in finance leases and $104.3 million of charter revenues from assets classified as 'investment in associate'.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by approximately $7.0 million compared to Q2 2010, primarily due to a significant drop in profit share income from tanker charters ($0.2 million in Q2 2011 vs. $11.4 million in Q2 2010) attributed to a weak tanker spot market.
- Asset Sales: The company recorded a gain on sale of assets of $9.9 million in Q2 2011, compared to a loss of $0.1 million in Q2 2010. This included the sale of two combination carriers and a jack-up drilling rig (West Prospero).
- Balance Sheet Growth: Total assets increased to $2.99 billion from $2.88 billion at the end of 2010, driven by new vessel acquisitions and deposits. Stockholders' equity rose to $857.9 million.
- Profit Share Volatility: Profit share income dropped significantly due to oversupply in the tanker market, though the company expects the annual profit split to remain insignificant for 2011.
Guidance, Outlook, and Management Commentary
- Strategic Outlook: Management remains committed to a conservative profile, targeting long-term charters with reputable operators. The company is well-positioned for selective growth and opportunistic acquisitions due to a healthy capital structure and low capital commitments.
- Fleet Expansion:
- Contracted four newbuilding 4,800 teu container vessels for delivery in 2013, already chartered for seven years.
- Took delivery of the second 13,800 teu container vessel (CMA CGM Corte Real) on a 15-year time charter.
- Financing: Bank financing has been arranged for all vessels under construction. The company secured $184 million for the new container vessels and refinanced a $167 million facility for five VLCCs. Management states there are no refinancing requirements in the short term.
- Risks and Contingencies:
- Market Conditions: Soft spot market earnings in shipping may impact asset pricing and profit share income.
- Accounting Treatment: Significant assets (drilling units and container vessels) are accounted for as "investments in associate" under US GAAP, meaning their operating revenues and expenses are not fully consolidated but recognized via equity method.
- Forward-Looking Risks: Includes fluctuations in charter rates, vessel values, currency/interest rates, and potential disruptions to shipping routes.
Investor Verification Checklist
- Profit Share Sustainability: Verify the impact of the weak tanker market on future profit share income from Frontline charters, which dropped from $11.4M to $0.2M in Q2.
- Capital Commitments: Confirm the net cash flow status of the remaining $344 million in capital commitments, specifically the timing of payments versus the $388 million in committed financing.
- Associate Accounting: Review the specific terms of the "investment in associate" subsidiaries to understand the exposure to non-consolidated revenue streams ($104.3M excluded from operating revenue).
- Dividend Coverage: Assess the sustainability of the $0.39 quarterly dividend given the reduction in profit share income and the company's cash flow from operations.
- Asset Valuation: Monitor the valuation of the newbuilding program and the potential for opportunistic acquisitions in soft markets as suggested by management.