SFL Corporation Ltd. — FY2020 Form 20-F Summary
Business context and reporting period
SFL is a Bermuda-based maritime and offshore asset-owning and chartering company reporting under U.S. GAAP. Its diversified fleet includes crude and product tankers, dry bulk carriers, container vessels, car carriers, chemical tankers, and offshore drilling units. The filing is an annual report for the fiscal year ended December 31, 2020, rather than a standalone fourth-quarter filing.
At December 31, 2020, SFL reported 84 active vessels and drilling units, compared with 92 at December 31, 2019. The strategy remains focused on acquiring and chartering assets primarily under medium- and long-term bareboat or time charters to generate stable distributable cash flow.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total operating revenues | $471.0 million | $458.8 million | +2.7% |
| Net operating income/(loss) | $(138.2) million | $137.8 million | Turned negative |
| Net income/(loss) | $(224.4) million | $89.2 million | $(313.6) million |
| Basic EPS | $(2.06) | $0.83 | Declined |
| Operating margin | (29.3%) | 30.0% | Down 59.3 percentage points |
| Net margin | (47.6%) | 19.4% | Down 67.0 percentage points |
| Cash provided by operating activities | $276.5 million | $249.7 million | +10.7% |
| Cash and cash equivalents | $215.4 million | $199.5 million | +$15.9 million |
| Stockholders’ equity | $795.7 million | $1.106 billion | Down $310.7 million |
Operating expenses increased to $611.5 million from $321.1 million, principally because vessel impairment charges rose to $333.1 million from $60.1 million. Vessel operating expenses were $155.6 million, depreciation was $111.3 million, and administrative expenses were $11.4 million.
Revenue mix included $320.6 million of time charter revenue, $71.2 million of interest income from sales-type, direct-financing and leaseback assets, $37.3 million of voyage charter revenue, $22.6 million of profit-sharing revenue, and $7.9 million of bareboat charter revenue. Profit-sharing revenue increased materially from $5.6 million, while time charter and bareboat revenue declined.
Cash flow from investing activities was $176.3 million, primarily reflecting $210.9 million of vessel-sale proceeds and $14.7 million from the sale of 50.1% of River Box, partly offset by $65.0 million of additions to leaseback assets and $55.0 million of capital improvements. Financing activities used $431.4 million, including $624.6 million of debt repayments, $109.4 million of dividends, and $66.6 million of bond repurchases.
At year-end, consolidated debt principal was $1.663 billion, total consolidated finance lease liabilities were $573.1 million, and total borrowings including debt of equity-accounted subsidiaries were approximately $1.849 billion. Including finance lease liabilities and associated-company finance lease liabilities, total borrowings and lease liabilities were approximately $2.654 billion. Current liabilities of $576.5 million exceeded current assets of $356.4 million, although management stated that charter cash flows, cash balances, short-term investments, and available financing were expected to support near- and medium-term requirements.
Material changes versus the prior comparable period
- Revenue increased modestly, but profitability reversed sharply because of COVID-19-related asset impairments, lower charter income in selected businesses, derivative losses, and losses on equity investments.
- SFL recorded a $252.6 million impairment charge against the West Taurus drilling unit and an $80.3 million impairment charge against seven Handysize bulk carriers.
- SFL repurchased $176.1 million of West Taurus-related debt for $110.0 million, recognizing a $66.1 million gain on debt extinguishment. West Taurus became debt-free.
- Two Seadrill-related subsidiaries, SFL Deepwater and SFL Linus, were consolidated from October 2020 after Seadrill defaults and changes to financing arrangements. SFL Hercules remained equity-accounted.
- SFL sold or redelivered several assets, including one VLCC, five offshore support vessels, and three VLCC leaseback assets. The company no longer owned offshore support vessels at year-end.
- SFL sold 50.1% of River Box to a Hemen affiliate, receiving $17.5 million and recognizing a $1.9 million gain. The remaining 49.9% was accounted for under the equity method.
- The quarterly dividend was reduced from $0.35 per share in March 2020 to $0.25 in June and September and $0.15 in December. Total dividends declared and paid were $1.00 per share, or $109.4 million, versus $1.40 per share and $150.7 million in 2019.
- SFL issued 8.4 million shares through its dividend reinvestment plan and at-the-market program, generating $61.5 million of net proceeds.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide quantitative earnings guidance. Management expects to continue expanding and diversifying the fleet, with future results dependent on charter renewals, asset acquisitions and disposals, spot-market exposure, profit-sharing arrangements, vessel values, financing conditions, and counterparty performance.
COVID-19 reduced charter rates in certain markets, disrupted crew rotations and vessel operations, increased operating costs, and contributed to lower dry bulk rates and significant impairment charges. Management stated that the full effect remained uncertain.
Seadrill’s February 2021 Chapter 11 filing is a major subsequent event. Under court-approved interim arrangements, SFL expects to receive approximately 65% to 75% of existing lease hire for West Linus and West Hercules while sub-charters to oil majors continue. The West Taurus lease was rejected and the rig was expected to be redelivered to SFL within approximately three months; strategic alternatives included recycling.
Key financial risks include substantial leverage, debt maturities, minimum-value and liquidity covenants, reliance on charterers and related parties, volatile tanker, dry bulk, container and offshore drilling markets, vessel impairments, interest-rate and foreign-exchange exposure, the transition away from LIBOR, and environmental compliance costs. SFL had $484.956 million of debt principal scheduled for repayment in 2021, including $212.2 million of 5.75% convertible bonds due October 2021.
Environmental expenditures remained material. At December 31, 2020, SFL had committed $5.8 million for scrubbers and approximately $7.0 million for ballast-water treatment systems. The company also disclosed exposure to IMO sulfur limits, greenhouse-gas regulation, potential EU emissions-market costs, and future regulatory requirements.
The company reported compliance with all debt covenants at December 31, 2020, effective disclosure controls and internal control over financial reporting, and no material unresolved legal proceedings or uncured defaults.
Most important facts for investors to verify
- How Seadrill’s Chapter 11 process affects collections, guarantees, lease terms, collateral, and the future value or disposition of West Taurus.
- The refinancing or repayment plan for the $212.2 million convertible bonds due in 2021 and other near-term debt maturities.
- Current charter coverage, renewal rates, purchase options, and counterparty concentration, particularly involving Maersk, MSC, Evergreen, Golden Ocean, Frontline and Seadrill.
- Whether additional impairments will be required for vessels, rigs, lease investments, or receivables as market values and charter assumptions change.
- The sustainability of the reduced $0.15 quarterly dividend and compliance with dividend restrictions in financing agreements.
- The effect of COVID-19, energy-transition trends, environmental regulations, IMO 2020 compliance costs, and the LIBOR-to-alternative-rate transition.
- The distinction between consolidated debt, finance lease liabilities, and obligations of equity-accounted subsidiaries when assessing leverage and liquidity.
- The terms and potential dilution associated with the outstanding convertible bonds, share-lending arrangements, ATM program, and future equity issuance.