SFL Corp. Ltd. — Fiscal 2014 Form 20-F Summary
Reporting period: Year ended December 31, 2014. The filing was signed April 9, 2015 and presents U.S. GAAP financial statements. SFL is a Bermuda-based owner and charterer of vessels, drilling rigs and offshore assets, with revenues primarily secured through medium- and long-term time and bareboat charters.
Business context
At December 31, 2014, the company’s active fleet comprised 67 assets, including oil tankers, drybulk carriers, container vessels, car carriers, jack-up rigs, ultra-deepwater drilling units and offshore supply vessels. The company expanded its container and drybulk fleets and delivered the West Linus jack-up rig during 2014. Several drilling assets are held through wholly owned subsidiaries accounted for under the equity method.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total operating revenues | $327.5 million | $270.9 million | +21% |
| Net operating income | $145.1 million | $117.4 million | +24% |
| Net income | $122.8 million | $89.2 million | +38% |
| Basic diluted EPS | $1.32 / $1.24 | $1.00 / $0.99 | Improved |
| Operating margin | 44.3% | 43.3% | Improved |
| Net margin | 37.5% | 32.9% | Improved |
| Cash from operating activities | $132.4 million | $140.1 million | -5% |
| Cash and cash equivalents | $50.8 million | $58.6 million | -$7.8 million |
| Stockholders’ equity | $1.15 billion | $1.19 billion | -3% |
Revenue growth reflected higher profit-sharing revenue, additional time- and bareboat-chartered assets, and voyage revenue from two Suezmax tankers. Profit-sharing revenue increased to $33.8 million from $0.8 million, including $32.7 million of Frontline cash-sweep revenue and $1.1 million from drybulk vessels chartered to UFC.
Operating expenses rose to $206.3 million from $171.5 million, driven by higher vessel operating costs, depreciation and an $11.8 million impairment charge on five container vessels. Interest expense was broadly stable at $86.1 million versus $87.2 million.
Dividends declared increased to $1.63 per share, or $152.2 million, from $1.17 per share, or $109.1 million. Dividends exceeded reported net income in 2014. The board subsequently declared a $0.42 per-share dividend paid in March 2015.
Balance sheet, debt and liquidity
- Consolidated short- and long-term debt was $1.73 billion, essentially unchanged from 2013.
- Total borrowings including equity-accounted subsidiaries were $2.77 billion, comprising $1.04 billion at equity-accounted subsidiaries.
- Available borrowing capacity was approximately $162 million, including $112 million at consolidated entities and $50 million at equity-accounted subsidiaries.
- Substantially all vessels and rigs were pledged as collateral; pledged assets had a book value of approximately $2.06 billion.
- Operating cash flow was $132.4 million, while investing activities used $21.9 million and financing activities used $118.3 million, including $152.1 million of cash dividends.
- Management stated that charter cash flows were expected to fund anticipated short- and medium-term debt service and working capital needs, but additional borrowing or equity issuance would be required over the longer term.
- The company reported compliance with all loan covenants at December 31, 2014.
Material changes versus 2013
- Fleet size increased from 59 to 67 active assets, primarily through 11 additional container vessels, two drybulk carriers and one jack-up rig; three VLCCs and one ultra-deepwater drillship were disposed of.
- Operating revenues increased 21%, while net income increased 38%, aided by stronger tanker markets and Frontline cash-sweep revenue.
- Equity in earnings of associated companies increased to $33.5 million from $28.2 million, including earnings from West Linus.
- The company recorded a $25.3 million gain from the settlement and termination of charters on four Handysize drybulk carriers.
- Net gains on asset sales and charter terminations were $23.9 million, compared with $18.0 million in 2013. This included a $6.1 million gain on the sale of the West Polaris investment and a $1.4 million loss on three VLCC disposals.
- Other financial items changed from a $2.0 million gain in 2013 to a $16.2 million loss in 2014, primarily because of adverse derivative fair-value movements and cash payments on non-designated swaps.
- Five container vessels were impaired by $11.8 million in the fourth quarter and were transferred to unrelated parties in February 2015 after an indirect performance guarantee was exhausted.
Outlook, management commentary and risks
Management described 2014 tanker markets as materially stronger, while drybulk and container markets remained weak and offshore drilling fundamentals deteriorated following the sharp decline in oil prices. Most drilling units were protected by long-term fixed-rate charters, limiting near-term direct exposure to spot day rates. The company expected tanker markets could improve in 2015, but anticipated continued weakness in drybulk and container markets and pressure on offshore drilling day rates.
- Frontline accounted for approximately 37% of 2014 operating revenues. Frontline charter rates are temporarily reduced by $6,500 per day per vessel through December 31, 2015, after which base rates are scheduled to revert to prior levels.
- Revenue and dividend capacity depend substantially on charterer performance, particularly Frontline, Seadrill-related entities, NADL and other affiliated counterparties.
- Charter-free vessel values were below carrying value for significant portions of the fleet. The filing identifies approximately $438 million of aggregate carrying value exceeding estimated charter-free market value across tanker, drybulk, liner and offshore assets, although management expected contracted cash flows to support carrying values.
- Debt agreements impose minimum asset-value, liquidity, working-capital and leverage covenants and may restrict dividends, additional debt and charter amendments.
- Interest-rate exposure was substantially hedged. Approximately $1.3 billion of floating-rate debt was effectively fixed, and estimated net exposure to interest-rate changes was $86 million; a one-percentage-point rate change was estimated to affect annual interest expense by approximately $0.9 million.
- Material risks include cyclical freight rates, vessel oversupply, weak drybulk and container markets, lower oil prices and offshore drilling demand, counterparty defaults, environmental liabilities, piracy, sanctions, regulatory costs, refinancing risk, related-party conflicts and potential PFIC or U.S. tax issues.
Important facts for investors to verify
- Reconcile consolidated debt of $1.73 billion with total borrowings of $2.77 billion including equity-accounted subsidiaries and review all related guarantees.
- Assess the sustainability of $1.63 per-share dividends against $1.32 basic EPS and available cash after debt service and capital requirements.
- Review Frontline’s financial condition, the temporary charter-rate reduction, cash-sweep mechanics and the concentration of revenue with related parties.
- Evaluate the $11.8 million container-vessel impairment, February 2015 vessel transfers and the company’s remaining exposure under related financing facilities.
- Compare vessel carrying values with current charter-free market values and test compliance with minimum-value covenants under stressed market assumptions.
- Review the $85 million newbuilding commitments outstanding at December 31, 2014, noting that the related two container vessels were delivered in January 2015.
- Confirm the status and enforceability of guarantees totaling $260 million for equity-accounted subsidiaries and the additional $94 million West Polaris guarantee, which was indemnified by Seadrill.
- Review related-party transactions, management fees, charter arrangements and potential conflicts involving Frontline, Seadrill, Golden Ocean, Deep Sea and other affiliated companies.