SFL

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: Six months ended June 30, 2009 (Unaudited)
Business Overview: A Bermuda-based international ship-owning company with a diversified fleet including oil tankers, OBOs, container vessels, drybulk carriers, chemical tankers, jack-up drilling rigs, offshore supply vessels, and ultra-deepwater drilling units. The company operates through subsidiaries and partnerships globally. A significant portion of revenue is derived from long-term charters and profit-sharing arrangements with related parties, primarily Frontline Ltd.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased by $57.6 million (23.7%) to $184.9 million. The primary driver was a $44.3 million reduction in profit-sharing revenues due to lower charter rates achieved by Frontline Charterers. Time charter revenues also dropped significantly as vessels were re-chartered on bareboat terms.
• Impairment Charges: The company recognized a $26.8 million vessel impairment expense related to the statutory phase-out of single-hulled tankers and a $7.1 million asset impairment charge on an investment in a container vessel operator. No such impairments were recorded in the prior period.
• Debt Reduction: Total debt decreased by approximately $240 million to $2.36 billion. This reduction was driven by the repurchase of $148 million in 8.5% senior notes and repayments of floating-rate facilities.
• Equity in Earnings: Equity in earnings of associated companies surged to $39.4 million from $0.5 million, driven by the inclusion of three ultra-deepwater drilling units acquired in late 2008.
• Extraordinary Gain: The company recorded a $22.6 million extraordinary gain from the repurchase of its own senior notes below par value.

Guidance, Outlook, and Risks

• Management Commentary: Management highlighted the stability of long-term charters (4 to 18 years remaining) which provide base cash flows. However, they noted the impact of declining market rates on profit-sharing arrangements and the ongoing statutory phase-out of single-hulled tankers.
• Subsequent Events:
  • Sold a jack-up drilling rig (West Ceres) to Seadrill for a net cash proceeds of ~$40 million.
  • Agreed to sell a single-hull VLCC (Front Duchess) for a net amount of ~$16 million.
  • Cancelled the "Share Programme" for issuing shares.
  • Declared a dividend of $0.30 per share payable in October 2009.
• Risks and Contingencies:
  • Concentration Risk: Frontline accounted for 72% of operating revenues in the first half of 2009.
  • Regulatory Risk: Statutory phase-out of single-hulled tankers continues to impact asset valuations.
  • Market Risk: Exposure to fluctuations in charter rates, vessel values, and interest rates (though hedged via swaps).
  • Counterparty Risk: Reliance on the financial performance of charterers, particularly Frontline, for profit-sharing revenues.

Investor Verification Checklist

• Profit Sharing Volatility: Verify the sensitivity of future earnings to Frontline's charter rates, as profit-sharing revenue dropped significantly year-over-year.
• Single-Hull Fleet Valuation: Confirm the remaining carrying value and residual life of the single-hulled tanker fleet given the $26.8 million impairment already recognized.
• Debt Maturity Profile: Review the debt repayment schedule, noting $213.7 million due in the remainder of 2009 and $297.8 million in 2010.
• Related Party Transactions: Assess the terms and sustainability of the finance leases and management fees with Frontline and Seadrill, which constitute the majority of the business.
• Dividend Policy: Monitor the election of shareholders to receive dividends in shares versus cash, which impacts share count and dilution.