SFL Corporation Ltd. — FY2023 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; quarterly Q4 figures are not separately presented in the provided text. Financial statements are prepared under U.S. GAAP and audited by Ernst & Young AS.
Business context
SFL is a Bermuda-based maritime asset-owning and chartering company listed on the NYSE under “SFL.” It owns and leases vessels and offshore drilling assets under primarily medium- and long-term time or bareboat charters. At year-end, the fleet included seven crude oil tankers, six product tankers, 15 dry bulk carriers, 32 container vessels, five car carriers, one jack-up rig and one ultra-deepwater rig, plus two dual-fuel car carriers under construction.
The company’s strategy is to expand and diversify its asset base, customers and charter portfolio while generating stable distributable cash flow through contracted revenues. Major customers include Maersk, Evergreen, Trafigura, Golden Ocean, ConocoPhillips, MSC, Volkswagen, Hapag-Lloyd, K Line, Galp Energia and Equinor.
Key financial metrics
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total operating revenue | $752.3 million | $670.4 million | +12.2% |
| Net operating income | $240.2 million | $275.5 million | Decrease |
| Net income | $83.9 million | $202.8 million | -$118.8 million |
| Basic EPS | $0.67 | $1.60 | Decrease |
| Diluted EPS | $0.66 | $1.53 | Decrease |
| Cash provided by operating activities | $343.1 million | $355.1 million | Decrease |
| Cash and cash equivalents | $165.5 million | $188.4 million | Decrease |
| Total assets | $3.73 billion | $3.86 billion | Decrease |
| Stockholders’ equity | $1.04 billion | $1.09 billion | Decrease |
Revenue mix: Time charter revenue was $544.4 million, drilling contract revenue was $146.9 million, voyage charter revenue was $33.6 million, profit-sharing revenue was $13.2 million and lease interest income was $6.2 million. Bareboat revenue declined to zero because both drilling rigs had been redelivered from Seadrill and were operated directly by SFL.
Margins: Net operating margin was approximately 31.9% in 2023 versus 41.1% in 2022. Net margin was approximately 11.2% versus 30.2%. The filing does not provide a company-defined adjusted EBITDA or distributable cash flow measure in the supplied text.
Operating costs: Total operating expenses increased to $530.8 million from $408.1 million. Rig operating expenses rose to $112.8 million from $16.7 million as SFL operated both rigs directly for much of the year. Depreciation increased to $214.1 million from $187.8 million, and SFL recorded a $7.4 million impairment charge on two chemical tankers.
Debt, liquidity and cash flow
- Total debt principal was $2.16 billion at December 31, 2023, compared with $2.21 billion at year-end 2022.
- Finance lease liabilities were $419.3 million; SFL’s share of finance lease liabilities in associated companies was $197.1 million.
- Aggregate borrowings and lease liabilities, including associated-company obligations, were approximately $2.78 billion.
- Approximately $1.1 billion of debt was floating rate. Interest-rate and cross-currency swaps effectively fixed approximately $0.4 billion, leaving estimated net exposure of approximately $0.7 billion. A one-percentage-point rate change was estimated to affect annual interest exposure by approximately $7.1 million.
- Cash flow from operations was $343.1 million. Investing activities used $103.9 million, while financing activities used $262.1 million.
- Capital expenditures and vessel-related additions totaled $264.4 million, including $117.8 million for the Hercules special periodic survey and upgrades and $158.4 million for two newbuilding car carriers.
- Debt repayments totaled $781.1 million, partly offset by $944.6 million of new debt proceeds. SFL also repurchased $205.8 million of bonds and paid $123.0 million of cash dividends.
- Management stated that it expects charter cash flows to meet short- and medium-term debt service and working-capital needs, but refinancing remains necessary for facilities maturing in 2024 and early 2025.
Material changes versus FY2022
- Revenue increased 12.2%, primarily from direct drilling contract revenue and additional car carriers.
- Net income fell 58.6%, driven by lower net operating income, a $49.7 million increase in interest expense, weaker derivative and investment mark-to-market results, and $3.3 million of tax expense related to rig operations.
- Drilling contract revenue increased to $146.9 million from $18.8 million as Linus operated under its ConocoPhillips contract and Hercules completed upgrades and commenced contracts with ExxonMobil and Galp Energia.
- Profit-sharing revenue fell to $13.2 million from $27.8 million. Golden Ocean dry bulk profit share was zero versus $3.0 million, while scrubber-related fuel-saving revenue declined to $13.2 million from $24.8 million.
- Voyage charter revenue decreased to $33.6 million from $72.4 million following the sale of two Suezmax tankers and two chemical tankers.
- SFL sold two Suezmax tankers, two chemical tankers and the VLCC Landbridge Wisdom, recording a net gain of $18.7 million and an impairment charge of $7.4 million on the chemical tankers.
- SFL issued $150.0 million of 8.875% senior unsecured sustainability-linked bonds due 2027 and repaid or bought back several maturing instruments, including the remaining $84.9 million of convertible bonds due 2023 and the remaining NOK407 million of bonds due 2023.
- The company repurchased 1,095,095 common shares for $10.2 million at an average price of approximately $9.27 per share. The remaining authorization was approximately $89.8 million at year-end.
- Quarterly dividends increased from $0.24 per share in the first three quarters to $0.25 in the fourth quarter. A $0.26 per-share dividend was declared for payment in March 2024.
Outlook, commentary and unusual items
- Management described tanker and car-carrier markets as relatively strong, while dry bulk and containership markets remained volatile. The company expects industry conditions to remain sensitive to fleet supply, charter rates, trade patterns and global economic growth.
- Hercules was contracted with Galp Energia in Namibia and was expected to mobilize to Canada for an Equinor contract in the first half of 2024. Linus was scheduled for its second special periodic survey in the second quarter of 2024, with expected cost of approximately $30 million.
- One newbuilding car carrier, Odin Highway, was delivered in January 2024 and began a 10-year charter to K Line. The remaining newbuilding was expected to be delivered during the first half of 2024 and also enter a 10-year K Line charter.
- As of March 14, 2024, management stated that the Russia-Ukraine conflict and Middle East and Red Sea disruptions had not materially affected SFL’s vessels or charter contracts, but warned that rerouting, security costs, sanctions, supply-chain disruption and uninsured losses could materially affect liquidity and results.
- Environmental requirements, including IMO emissions rules, EU ETS obligations, ballast-water requirements, EEXI/CII standards and future decarbonization rules, may require significant operating costs and capital expenditures and may affect asset values and access to financing.
- SFL filed a claim against Seadrill in the Oslo District Court relating to the condition of Hercules at redelivery. The case was scheduled to commence in August 2024; the filing does not provide a quantified potential recovery.
- Management reported compliance with all financial covenants at December 31, 2023. Covenants include minimum liquidity of $25 million, positive working capital, minimum equity ratios and vessel-value requirements. Cross-default provisions could accelerate other debt if a material default occurs.
- The company reported no material cybersecurity incident through the filing date and concluded that disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Refinancing progress and final terms for the $432.9 million of debt scheduled within one year of year-end, including the $419.3 million finance lease liability due in 2024.
- Liquidity after debt maturities, dividends, the approximately $30 million Linus survey and the remaining $77.5 million of shipbuilding commitments.
- Utilization, day rates and contract coverage for Hercules after its Galp Energia contract and during mobilization to Equinor.
- Exposure to floating interest rates, swap collateral requirements and the impact of SOFR/NIBOR movements on cash interest expense.
- Customer concentration, particularly Maersk at approximately 28% of 2023 revenue, Evergreen at 13%, ConocoPhillips at 10%, Trafigura at 8% and Golden Ocean at 7%.
- The durability of contracted cash flows, charterer purchase options and potential early charter terminations.
- Vessel market values relative to book values, especially assets where carrying values exceeded estimated charter-free market values.
- Potential costs from emissions, ballast-water, ship-recycling and climate-related regulations, as well as the effect on financing access and residual asset values.
- Outcome and financial implications of the Hercules redelivery litigation against Seadrill.
- Dividend sustainability, given 2023 dividends of $123.0 million versus net income of $83.9 million and the company’s reliance on subsidiary distributions and covenant compliance.