SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: Second Quarter ended June 30, 2010 (Preliminary Results)
Business Overview: SFL operates a diversified fleet of vessels and offshore drilling units, primarily chartered on long-term fixed-rate contracts to provide stable cash flows. The company focuses on modern assets in shipping and offshore segments.

Key Financial Metrics

Note: Net cash provided by operating activities for Q2 2010 was negative $29.2 million, compared to positive $9.3 million in Q2 2009, largely due to changes in operating assets and liabilities.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 8.4% year-over-year in Q2 2010 ($80.8M vs $88.2M), primarily due to a reduction in finance lease charter revenues as vessels are sold or reclassified.
• Profit Share Increase: Profit share income rose 42.6% to $11.4 million, driven by strong tanker sector revenues in Q2 2010.
• Net Income Reduction: Net income fell 18.5% to $43.6 million, impacted by the revenue decline and the absence of a $22.6 million gain on bond repurchases recorded in Q2 2009.
• Debt Reduction: Total interest-bearing debt decreased significantly from $2.36 billion in Q2 2009 to $1.95 billion in Q2 2010, reflecting active debt repayment and asset sales.
• Asset Sales: The single-hull VLCC Golden River was sold for a net price of $12.6 million, resulting in a minor book impairment.

Guidance, Outlook, and Management Commentary

• Dividend Increase: The Board declared an increased quarterly dividend of $0.35 per share, the second increase in 2010. The company has paid dividends for 26 consecutive quarters.
• Strategic Acquisitions: SFL agreed to acquire three 57,000dwt Supramax dry bulk carriers for $100.7 million. These vessels are chartered to an Asia-based logistics company at ~$17,000/day, adding ~$160 million to the fixed-rate charter backlog.
• Charter Backlog: As of June 30, 2010, the fixed-rate charter backlog stood at approximately $6.8 billion with an average remaining term of 8.2 years (12.1 years weighted by revenue).
• Capital Commitments: Gross estimated capital commitments total $255 million, including $102 million expected in the second half of 2010. $69 million has already been paid to shipyards from available cash.
• Market Outlook: Management notes that tanker charter rates softened in Q3 2010 compared to Q1 and Q2, which is expected to reduce profit share contributions in the third quarter. However, the majority of assets remain on long-term fixed-rate contracts, insulating the company from short-term market volatility.
• Accounting Changes: Remaining single-hull tankers are being reclassified from finance leases to operating leases, which will record full charter hire in revenue but also introduce ordinary depreciation.

Investor Verification Checklist

• Financing for Newbuildings: Verify the finalization of financing for the $100.7 million Supramax acquisition and the $69 million already paid to yards, as the company expects to secure bank financing to reduce cash requirements.
• Profit Share Volatility: Monitor Q3 profit share contributions, as management explicitly warned of a decline due to softening spot tanker rates.
• Operating Cash Flow: Review the negative operating cash flow of $29.2 million in Q2 2010 to understand the sustainability of the dividend payout relative to cash generation.
• Asset Reclassification Impact: Confirm the financial impact of reclassifying single-hull tankers to operating leases on future revenue recognition and depreciation expenses.
• Director Departure: Note the resignation of Director Craig H. Stevenson, Jr., who is building a competing tanker owning company.