SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2009 (Preliminary Results)
Business Overview: SFL operates a diversified fleet of vessels and offshore drilling units, primarily chartered on long-term fixed-rate contracts to reputable operators. The company maintains a conservative capital structure with significant charter backlog coverage.

Key Financial Metrics

Note: Adjusted Net Income excludes a $2.3 million non-cash mark-to-market loss on derivatives and includes a $0.02 million gain on asset sale.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased 30% year-over-year to $80.2 million, driven by lower profit share income ($4.8 million vs. $28.5 million in Q3 2008) due to spot market pressures, despite stable fixed charter revenues.
• Net Income Reduction: Net income fell 28% to $34.0 million, primarily due to the drop in profit share income and higher administrative expenses ($4.1 million vs. $1.7 million).
• Asset Sales and Debt Repayment:
  • West Ceres (Drilling Rig): Charterer exercised purchase option in July 2009; net cash effect was ~$40 million after debt repayment.
  • Front Duchess (VLCC): Sold in September 2009; net cash effect was ~$2.5 million after debt repayment and cancellation fees.
  • Front Vanadis (VLCC): Charterer exercised purchase option in November 2009; expected net cash effect of ~$1.2 million in Q4.
• Derivatives: Recorded a $2.3 million non-cash mark-to-market loss on derivatives in Q3 2009, compared to a $10.4 million loss in Q3 2008.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Dividend: Declared a quarterly dividend of $0.30 per share, payable January 27, 2010. Shareholders may elect to receive shares instead of cash.
• Strategy: Management remains committed to a conservative profile, focusing on long-term charters to reputable operators. The company holds a gross fixed-rate charter backlog of approximately $7.2 billion with an average remaining term of 9.8 years (12.9 years revenue-weighted).
• Newbuildings:
  • First Suezmax tanker (MV Glorycrown) delivered in November 2009 and chartered for 5 years with a purchase obligation.
  • Second Suezmax expected Q1 2010.
  • Five feeder-size container vessels (charter-free) under construction with deliveries ranging from late 2010 to 2012; management is investigating conversion options.
• Liquidity: No short-term refinancing needs; compliant with all bank covenants. $92.9 million cash on hand as of Sept 30, 2009.

Risks and Contingencies

• Market Conditions: Spot tanker market earnings remain under pressure, though SFL has limited direct exposure due to fixed base rates on Frontline charters.
• Counterparty Risk: Reliance on major charterers (e.g., Seadrill, Frontline, North China Shipping) for long-term fixed contracts.
• Forward-Looking Statements: Results may differ due to global economic strength, currency fluctuations, interest rates, OPEC production levels, and regulatory changes.

Key Facts for Investor Verification

• Profit Share Volatility: Verify the sustainability of profit share income from Frontline charters, which dropped significantly in Q3 2009 ($4.8M) compared to Q3 2008 ($28.5M) due to spot market conditions.
• Capital Commitments: Confirm the status and potential conversion plans for the five charter-free feeder container vessels ($147 million commitment) scheduled for delivery 2010-2012.
• Debt Structure: Review the maturity profile of the $2.18 billion total debt and the impact of recent asset sales on leverage ratios.
• Dividend Election: Note that major shareholders (Farahead and Hemen, owning 42.6%) elected to receive dividends in shares, which may impact share count and dilution.
• Accounting Treatment: Understand that four drilling units and one dry bulk vessel are accounted for as "Investment in Associate," meaning only net income from these subsidiaries is consolidated, not gross revenues.