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: Preliminary results for the quarter ended September 30, 2010, filed November 23, 2010.
Business Overview: SFL owns and operates a diversified fleet of 72 vessels and drilling rigs across seven sectors. The company focuses on long-term fixed-rate charters to provide stable cash flows, with a significant portion of assets chartered to high-quality counterparties like Frontline Ltd., Seadrill Limited, and Glovis Co. Ltd.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | YTD 9 Months 2010 |
|---|---|---|---|
| Total Operating Revenues | $73.5 million | $80.2 million | $236.9 million |
| Net Operating Income | $44.2 million | $46.1 million | $173.1 million |
| Net Income (GAAP) | $34.6 million ($0.44/share) | $34.0 million ($0.44/share) | $135.2 million ($1.71/share) |
| Adjusted Net Income | $36.7 million ($0.46/share) | N/A | N/A |
| Profit Share Income | $5.8 million | $4.8 million | $28.6 million |
| Cash and Equivalents | $66.8 million | $92.9 million | $66.8 million |
| Total Debt (Short + Long Term) | $1.94 billion | $2.19 billion | $1.94 billion |
| Stockholders' Equity | $790.6 million | $676.1 million | $790.6 million |
Note: Adjusted Net Income excludes a $0.4 million gain on sale of assets and a $2.5 million non-cash mark-to-market loss on derivatives.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 8.3% year-over-year to $73.5 million, primarily due to a reduction in finance lease revenues and a softer tanker spot market impacting profit share income.
- Profit Share Reduction: Accrued profit share dropped to $5.8 million in Q3 2010 from $11.4 million in Q2 2010, attributed to lower spot market rates for tankers.
- Debt Reduction: Total interest-bearing debt decreased by approximately $250 million compared to September 2009, driven by repayments and refinancing activities.
- Asset Sales: The company recognized a $0.4 million gain on the sale of the vessel Front Sabang following the termination of a hire-purchase agreement.
Guidance, Outlook, and Management Commentary
- Dividend Increase: The Board declared a quarterly dividend of $0.36 per share, marking the third consecutive increase in 2010. Payment is scheduled for December 30, 2010.
- Capital Expenditures: Gross remaining capital commitments stood at $232 million at quarter-end, rising to $293 million including post-quarter acquisitions. Expected net capital expenditures for Q4 2010 were reduced to approximately $55 million following new bank financing.
- Strategic Acquisitions:
- Agreed to acquire five 57,000 dwt Supramax dry bulk carriers for ~$161 million, chartered to Glovis Co. Ltd. at an average rate of $16,800/day.
- Chartered four newbuilding Handysize dry bulk carriers to a Chinese industrial conglomerate at ~$14,000/day.
- Delivered and chartered the 1,700 teu container vessel SFL Avon at ~$8,100/day.
- Charter Backlog: The fixed-rate charter backlog is approximately $6.8 billion with an average remaining term of 8.4 years (11.7 years weighted by revenue).
- Debt Market Activity: Completed an $84.6 million senior note offering in October 2010. A planned $400 million offering of senior notes due 2020 was suspended due to weakening market conditions.
- Risks: Management cites risks including fluctuations in charter rates, vessel values, currency exchange rates, and the performance of counterparties. The company maintains a conservative profile with most assets on long-term fixed-rate contracts to mitigate short-term market volatility.
Investor Verification Checklist
- Dividend Sustainability: Verify the company's ability to maintain the increased dividend of $0.36/share given the decline in profit share income from the tanker segment.
- Capital Commitment Funding: Confirm the status of financing for the $293 million in remaining capital commitments, specifically the $54 million loan for Supramax acquisitions and funding for 2011/2012 newbuildings.
- Counterparty Concentration: Assess the risk exposure to major charterers, particularly Frontline Ltd. (31 double-hull vessels) and Seadrill Limited (four drilling units).
- Debt Refinancing: Monitor the status of the suspended $400 million bond offering and the company's strategy for refinancing existing 8.5% Senior Notes due in 2013.
- Asset Valuation: Review the impact of the sale of Front Sabang and the potential book gain/loss on the sale of Golden Shadow (expected December 2010).