SFL

SFL Corporation Ltd. Form 6-K Summary

Business Context and Reporting Period

This Form 6-K reports the unaudited condensed interim financial results for SFL Corporation Ltd. ("SFL") for the six months ended June 30, 2023. SFL is a Bermuda-based international ship owning and chartering company with a diverse asset base including dry bulk carriers, container vessels, tankers, car carriers, and offshore drilling rigs. The company operates primarily through medium to long-term bareboat or time charters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 10.5% to $337.8 million, driven by a 11% increase in time charter revenues and the addition of drilling contract revenues ($37.9 million) from the rig Linus. However, bareboat charter revenues dropped to zero as rigs were redelivered from Seadrill.
• Profit Decline: Net income decreased significantly by $81.2 million (78%) to $23.3 million. This was primarily due to a $33.8 million decrease in net operating income and a $32.5 million increase in interest expense.
• Operating Expenses: Total operating expenses rose to $252.5 million from $183.3 million. Increases were driven by rig operating expenses ($41.0 million vs. $0 in 2022) and depreciation ($102.2 million vs. $91.3 million). A $7.4 million vessel impairment charge was recorded on two chemical tankers prior to their sale.
• Interest Expense: Interest expense surged to $82.6 million from $50.1 million due to new loans for vessel acquisitions and higher LIBOR/SOFR rates (average 3-month LIBOR was 5.15% in 2023 vs. 1.02% in 2022).
• Asset Disposals: The company sold two Suezmax tankers and two chemical tankers, recording a net gain of $16.5 million. Proceeds totaled approximately $104.3 million.

Guidance, Outlook, and Risks

• Capital Allocation: The company authorized a $100 million share repurchase program in May 2023. During the period, it repurchased 527,417 shares for $4.8 million. Subsequent to the period end, an additional 566,378 shares were repurchased for $5.3 million.
• Dividends: Dividends of $0.24 per share were declared in February and May 2023. A subsequent dividend of $0.24 per share was declared on August 17, 2023.
• Debt Management: The company issued $150 million in 8.875% sustainability-linked bonds due 2027 and refinanced various facilities. It fully redeemed the 4.875% convertible bonds due 2023 in May 2023.
• Project Pipeline: Four dual-fuel car carriers are under construction, with two expected delivery in late 2023 (chartered to Volkswagen) and two in 2024 (chartered to K Line). The drilling rig Hercules completed upgrades and commenced drilling operations in Canada in July 2023.
• Risks: Key risks include global inflationary pressures, the impact of the Russian-Ukrainian conflict on supply chains and sanctions, volatility in charter rates and vessel values, and the transition from LIBOR to SOFR. Management notes that while current contracts are not materially affected by the conflict, future impacts remain uncertain.

Investor Verification Checklist

• Debt Servicing Capacity: Verify the company's ability to service $2.1 billion in debt principal given the sharp increase in interest rates and the 78% drop in net income.
• Asset Valuation: Review the $7.4 million impairment charge on chemical tankers and assess potential further impairments given market volatility.
• Drilling Rig Utilization: Confirm the operational status and revenue generation of the Hercules and Linus rigs, which are critical to offsetting the loss of bareboat charter revenue.
• Related Party Exposure: Note that 31% of operating revenue comes from Maersk and 16% of net income is derived from the associated company River Box.
• Liquidity Position: Monitor cash flow from operations ($231 million) against capital commitments for newbuildings ($194.2 million total commitment) and efficiency upgrades ($57 million).