SFL Corp 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), a Bermuda-based international ship owning and chartering company, for the nine months ended September 30, 2021. The company operates a diverse fleet including crude oil tankers, dry bulk carriers, container vessels, car carriers, and offshore drilling rigs. The reporting period reflects significant asset restructuring, including the consolidation of certain subsidiaries previously accounted for under the equity method and the sale of various vessels.
Key Financial Metrics
| Metric (in thousands, except per share) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 |
|---|---|---|
| Total Operating Revenues | $361,335 | $356,135 |
| Net Operating Income | $139,992 | $68,138 |
| Net Income (Loss) | $84,223 | $(59,200) |
| Diluted EPS | $0.69 | $(0.55) |
| Cash from Operating Activities | $202,097 | $194,402 |
| Cash from Investing Activities | $(340,688) | $74,020 |
| Cash from Financing Activities | $170,466 | $(256,996) |
| Total Debt Principal | $2,014,025 | $1,663,394 |
| Cash and Cash Equivalents | $250,703 | $205,814 |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $84.2 million in 2021, a significant improvement from a net loss of $59.2 million in the prior year. This reversal is primarily attributed to the absence of the $80.5 million vessel impairment charge recorded in 2020 due to COVID-19 related demand uncertainty.
- Revenue Composition: Total operating revenues increased slightly by 1.5%. However, sales-type and direct financing lease interest income decreased by 68% due to the sale of vessels to MSC and the reclassification of the West Linus rig from a direct financing lease to an operating lease. Conversely, bareboat charter revenues increased by 154% following the reclassification of West Linus and the consolidation of West Hercules.
- Asset Consolidation: SFL consolidated SFL Hercules (owner of West Hercules) in August 2021 and had previously consolidated SFL Linus and SFL Deepwater in late 2020. These changes shifted revenue recognition from "equity in earnings" to direct operating revenue.
- Debt Structure: Total debt principal increased to $2.0 billion from $1.7 billion. This includes the issuance of $150 million in 7.25% sustainability-linked bonds and $130 million in lease debt financing, partially offset by the repayment of $67.6 million in convertible notes.
Outlook, Risks, and Management Commentary
- Seadrill Bankruptcy: A significant portion of SFL's income is derived from drilling rigs chartered to Seadrill, which filed for Chapter 11 bankruptcy in February 2021. SFL has entered into court-approved interim agreements allowing Seadrill to pay reduced charter hire (65-75% of contractual rates) while sub-chartering to oil majors. Seadrill's reorganization plan was confirmed in October 2021, with an expected exit from Chapter 11 within 60 days.
- Asset Sales and Acquisitions: SFL sold 18 feeder container vessels to MSC and the West Taurus rig for recycling. Simultaneously, the company acquired five container vessels and entered into agreements for three Suezmax tankers and four newbuild dual-fuel car carriers.
- Dividends: The company declared a quarterly dividend of $0.15 per share in Q1, Q2, and Q3 2021. A subsequent dividend of $0.18 per share was declared in November 2021.
- Risks: Key risks include the failure of charterers (specifically Seadrill) to meet obligations, volatility in charter rates and vessel values, the impact of the COVID-19 pandemic on global trade, and the transition from LIBOR to alternative reference rates.
Investor Verification Checklist
- Seadrill Exposure: Verify the status of the West Linus and West Hercules charters post-Seadrill emergence from Chapter 11 and the potential for future charter rate adjustments.
- Debt Covenants: Confirm continued compliance with financial covenants, particularly regarding the $83 million corporate guarantee on SFL Hercules debt.
- Asset Valuation: Review the carrying value of the newly acquired vessels and the impact of the $1.9 million impairment charge on the West Taurus rig.
- Liquidity Position: Assess the sufficiency of the $250.7 million cash balance against upcoming capital commitments, including $254.2 million for newbuild car carriers and $165.0 million for Suezmax tankers.
- Related Party Transactions: Monitor the $45 million loan to River Box and the profit-sharing arrangements with Golden Ocean and Frontline.