Business Context and Reporting Period
SFL Corporation Ltd. (SFL), a Bermuda-based shipping company, reported preliminary financial results for the quarter ended March 31, 2022. The company operates a diversified fleet including container vessels, tankers, dry bulk carriers, and offshore drilling rigs. The filing highlights a strategic shift toward long-term charters with top-tier counterparties and the divestiture of older assets.
Key Financial Metrics
- Operating Revenue: $152.4 million (U.S. GAAP).
- Net Income: $47.0 million ($0.37 per share).
- Charter Hire: Approximately $165.9 million received, including $4.5 million in profit share.
- Adjusted EBITDA: $111.3 million from consolidated subsidiaries plus $7.7 million from associated companies.
- Cash and Equivalents: $149.3 million as of March 31, 2022.
- Debt: Total interest-bearing debt (short and long term) was approximately $2.03 billion ($298.2 million short-term + $1.73 billion long-term).
- Dividend: Declared a quarterly cash dividend of $0.22 per share (73rd consecutive).
Material Changes vs. Prior Period
- Revenue Stability: Operating revenue increased slightly to $152.4 million from $152.1 million in Q4 2021.
- Profitability Decline: Net income decreased significantly to $47.0 million from $80.1 million in Q4 2021, primarily due to the absence of a $39.3 million gain on asset sales recorded in the prior quarter.
- Market Conditions: The tanker market remained soft, while the container market remained elevated. Dry bulk freight rates softened seasonally.
- Backlog Growth: The fixed-rate charter backlog increased by over $1 billion during the quarter to approximately $3.6 billion.
Outlook, Management Commentary, and Risks
Management emphasized a strategy of acquiring assets with long-term charters while maintaining a conservative profile. CEO Ole B. Hjertaker noted the successful diversification of the fleet away from reliance on a single customer (Frontline) and the addition of six container vessels to Hapag-Lloyd AG, adding $540 million to the backlog.
- Strategic Moves: SFL sold two VLCCs and one container vessel post-quarter end for approximately $83 million total. The company also assigned the West Linus drilling contract from Seadrill to an SFL subsidiary.
- Capital Expenditures: Remaining committed capital expenditures for newbuildings (four dual fuel car carriers) were approximately $247 million.
- Risks: Key risks include the cyclical nature of the shipping industry, geopolitical instability (specifically the conflict in Ukraine), fluctuations in charter rates and vessel values, and potential disruptions from the ongoing coronavirus outbreak.
Investor Verification Checklist
- Verify the impact of the $39.3 million gain on asset sales in Q4 2021 on year-over-year profitability comparisons.
- Confirm the status of the West Linus drilling contract assignment and regulatory approvals in Norway.
- Monitor the execution of the $247 million in remaining capital expenditures for newbuildings.
- Assess the credit risk associated with the $4.4 million credit loss provision on finance lease receivables.
- Review the performance of the two Suezmax tankers trading in the spot market given the soft tanker market conditions.