Business Context and Reporting Period
SFL Corporation Ltd. (SFL), a Bermuda-based shipping company, filed a Form 6-K on November 16, 2021, to disclose preliminary financial results for the quarter ended September 30, 2021. The company operates a diversified fleet of container vessels, dry bulk carriers, tankers, and offshore drilling rigs, primarily employed on long-term charters.
Key Financial Metrics
| Metric | Q3 2021 | Q2 2021 |
|---|---|---|
| Operating Revenue | $135.4 million | $116.8 million |
| Net Income | $33.2 million | $19.5 million |
| Earnings Per Share (Basic) | $0.26 | $0.16 |
| Adjusted EBITDA (Consolidated) | $100.7 million | Not explicitly stated |
| Adjusted EBITDA (Associates) | $11.5 million | Not explicitly stated |
| Charter Hire Received | $155.9 million | Not explicitly stated |
| Cash and Cash Equivalents | $250.7 million | $371.9 million |
| Total Debt (Short & Long Term) | $2.0 billion | $1.68 billion |
Note: Total debt calculated as sum of short-term interest-bearing debt ($448.2M), long-term interest-bearing debt ($1.55B), and finance lease liabilities ($536.6M).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 15.9% quarter-over-quarter, driven by the delivery of new vessels and strong spot market rates in dry bulk and containers.
- Profitability: Net income rose 70% compared to Q2 2021, aided by a $2.6 million positive mark-to-market gain on derivatives and equity investments, and a reduction in credit loss provisions.
- Asset Portfolio: The company delivered five new container vessels (chartered to Evergreen and Maersk) and agreed to acquire three Suezmax tankers. Conversely, it sold seven Handysize dry bulk vessels for a net price of $98 million.
- Liquidity: Cash and cash equivalents decreased by approximately $121 million due to significant capital expenditures ($380.7 million for vessel purchases and improvements) partially offset by debt proceeds ($264 million).
Guidance, Outlook, and Risks
Dividend: The Board declared a 71st consecutive quarterly cash dividend of $0.18 per share, payable December 29, 2021.
Outlook: Management expects to capitalize on improving freight markets and attractive asset prices. The company is focusing on assets with lower carbon footprints, including dual-fuel car carriers and eco-friendly tankers. The fixed-rate charter backlog stands at approximately $2.7 billion with an average remaining term of 4.6 years.
Risks and Contingencies:
- Seadrill Bankruptcy: Two drilling rigs (West Linus and West Hercules) are chartered to Seadrill subsidiaries, which are in Chapter 11 bankruptcy. SFL has interim agreements to ensure uninterrupted performance, but future terms for West Linus post-emergence remain undetermined.
- Market Volatility: The company faces risks related to cyclical shipping markets, fluctuations in charter rates, bunker prices, and geopolitical instability.
- Capital Expenditures: Approximately $420 million in committed capital expenditures remains for newbuildings and vessel acquisitions.
Investor Verification Checklist
- Verify the impact of the Seadrill Chapter 11 proceedings on the long-term charter revenue of the West Linus and West Hercules rigs.
- Confirm the timing and financing structure for the $420 million in remaining committed capital expenditures.
- Review the reconciliation of Adjusted EBITDA to Net Income to understand non-GAAP adjustments.
- Assess the sustainability of spot market rates for the 10 dry bulk vessels currently trading in the short-term market.
- Monitor the execution of the sale of seven dry bulk vessels and the receipt of the projected $98 million in net proceeds.