Business Context and Reporting Period
Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: Fourth Quarter and Full Year ended December 31, 2006.
Business Overview: The Company operates a fleet of vessels and offshore drilling rigs, primarily under long-term fixed-rate charters. As of December 31, 2006, the fleet consisted of 60 vessels, including seven under construction. The Company is actively restructuring its fleet by selling single-hull vessels and acquiring newbuilding assets in the drilling and dry bulk sectors.
Key Financial Metrics
| Metric | Q4 2006 | Full Year 2006 | Full Year 2005 |
|---|---|---|---|
| Total Operating Revenue | $118.4 million | $415.2 million | $437.5 million |
| Operating Income | $80.7 million | $284.3 million | $300.7 million |
| Net Income | $57.8 million | $180.8 million | $209.5 million |
| Earnings Per Share (Basic) | $0.79 | $2.48 | $2.84 |
| Cash from Operating Activities | $35.8 million | $193.6 million | $280.8 million |
| Cash and Cash Equivalents (Year-End) | $56.6 million | ||
| Restricted Cash (Year-End) | $12.9 million | ||
| Undrawn Credit Lines (Year-End) | $146.7 million | ||
| Long-Term Debt (Year-End) | $1.64 billion | ||
| Short-Term Debt (Year-End) | $119.6 million |
Dividends: Declared $0.54 per share for Q4 2006 (up from $0.53 in Q3). Total dividends for 2006 were $2.09 per share, a 4.5% increase over 2005.
Material Changes vs. Prior Period
- Revenue Decline: Full-year operating revenue decreased by approximately 5.1% to $415.2 million from $437.5 million in 2005. Q4 revenue was $118.4 million compared to $143.2 million in Q4 2005.
- Profitability: Net income for the full year 2006 was $180.8 million, down from $209.5 million in 2005. Q4 net income was $57.8 million versus $83.1 million in Q4 2005.
- Profit Share Recognition: Q4 operating revenue included $35.9 million in profit share from Frontline Ltd. regarding vessels under long-term charters. Of this, $15 million accrued in Q4, while $20.9 million accrued in the first nine months but was recognized in Q4 under US GAAP. Total profit share for 2006 was $78.9 million.
- Asset Restructuring: The Company sold the single-hull VLCC "Front Tobago" in December 2006 and agreed to sell six additional single-hull vessels in January 2007. This reduces the single-hull fleet from 18 to 11 vessels.
Guidance, Outlook, and Risks
Management Commentary and Strategy
Management intends to increase the asset portfolio through medium-to-long-term contracts while diversifying into different sectors (drilling, dry bulk) to reduce risk. The Company has committed to over $1.1 billion in new investments over the last 12 months.
New Acquisitions and Projects
- Jack-Up Drilling Rig: Acquired "West Prospero" for $210 million with a 15-year charter to Seadrill Limited. Delivery scheduled for July 2007. Financing includes a $170 million term loan and $40 million equity.
- Dry Bulk Vessels: Agreed to acquire two 170,000 dwt vessels for $160 million with 15-year charters to Golden Ocean Group. Deliveries scheduled for late 2008 and early 2009.
- Container Ships: Took delivery of the first of five 2,824 TEU containerships chartered to Horizon Lines, LLC for 12 years.
Liquidity and Capital Deployment
The sale of six single-hull tankers is expected to generate approximately $130 million in net cash. Combined with the $78.9 million profit share due from Frontline, the Company has significant capital available for new projects. Management states it has the capacity to invest in new projects with a gross cost price exceeding $1.0 billion without raising additional equity.
Risks and Contingencies
- Charter Termination: The charter for the vessel "Sea Beta" was terminated due to the charterer (Pan Logistics) entering voluntary receivership. The Company is claiming against a $2.7 million bank guarantee and has re-chartered the vessel at $12,500/day until June 2007.
- Market Risks: Forward-looking statements are subject to risks including fluctuations in charter hire rates, vessel values, bunker prices, OPEC production levels, and geopolitical disruptions.
- Accounting Changes: The Company is analyzing the consolidation presentation of 100% owned subsidiaries under US GAAP, though no material impact on net income or cash flow is expected.
Investor Verification Checklist
- Profit Share Timing: Verify the recognition timing of the $78.9 million profit share from Frontline, as a significant portion ($20.9 million) accrued in prior quarters but was recognized in Q4.
- Single-Hull Sales Proceeds: Confirm the net cash proceeds of approximately $130 million from the sale of six single-hull tankers after debt repayments and termination payments.
- Debt Structure: Review the terms of the $56.5 million Senior Notes held under Bond Swap Agreements, which have an effective interest rate of Libor + 1.00%.
- Contingent Claims: Monitor the outcome of the claim against the $2.7 million bank guarantee related to the "Sea Beta" charter termination.
- Consolidation Policy: Watch for updates on the consolidation of subsidiaries (e.g., Rig Finance, Front Shadow) and any potential impact on reported equity or debt ratios.