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, 2021. SFL is a Bermuda-based international ship owning and chartering company with a diverse asset base including crude oil tankers, dry bulk carriers, container vessels, car carriers, and offshore drilling units. The company operates primarily through medium to long-term bareboat or time charters.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|
| Total Operating Revenues | $225.9 million | $240.4 million |
| Net Operating Income | $85.2 million | $22.0 million |
| Net Income | $51.0 million | ($75.2 million) Loss |
| Diluted EPS | $0.43 | ($0.70) |
| Operating Cash Flow | $125.0 million | $122.4 million |
| Total Assets | $3.19 billion | $3.09 billion (Dec 31, 2020) |
| Total Debt (Principal) | $1.70 billion | $1.66 billion (Dec 31, 2020) |
| Cash and Cash Equivalents | $371.9 million | $215.4 million (Dec 31, 2020) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $51.0 million in 2021, a significant improvement from a net loss of $75.2 million in the same period in 2020. This $126.2 million swing was primarily driven by the absence of the $80.5 million vessel impairment charge recorded in 2020 due to COVID-19 impacts.
- Revenue Composition: Total operating revenues decreased 6.0% to $225.9 million. This decline was largely due to a 62% drop in sales-type and direct financing lease interest income, resulting from the sale of the River Box subsidiary (50.1% stake) in late 2020 and the sale of several VLCCs in 2020. Conversely, time charter revenues increased 6% due to higher charter rates and fewer off-hire days.
- Expense Reduction: Total operating expenses decreased significantly to $140.6 million from $220.6 million in 2020, excluding the one-time impairment charge. Vessel operating expenses fell $6.9 million due to reduced drydocking costs.
- Interest Expense: Interest expense decreased to $48.1 million from $71.3 million, attributed to lower LIBOR rates and refinancing of vessels at lower margins.
Guidance, Outlook, Risks, and Unusual Items
- Seadrill Bankruptcy Proceedings: A significant risk factor involves Seadrill Limited, a major charterer for SFL's drilling rigs (West Linus and West Hercules), which filed for Chapter 11 bankruptcy in February 2021. SFL has entered into court-approved interim agreements allowing Seadrill to pay reduced charter hire (approx. 65-75% of contractual rates) while sub-charters to oil majors continue. An amendment for the West Hercules rig was signed in August 2021, subject to bankruptcy court approval by September 2, 2021.
- Asset Reclassifications: The drilling unit West Linus was reclassified from a direct financing lease to an operating lease in March 2021 following a modification of the charter agreement with Seadrill. The rig West Taurus was redelivered and is held for sale/recycling.
- Dividends: The company declared dividends of $0.15 per share in both March and June 2021. A subsequent dividend of $0.15 per share was declared in August 2021.
- Capital Markets: In May 2021, SFL issued $150 million in 7.25% senior unsecured sustainability-linked bonds due 2026. The company also issued 10.2 million shares via ATM and DRIP programs, raising net proceeds of $85.4 million.
- Forward-Looking Risks: Risks include the outcome of Seadrill's Chapter 11 process, potential failure of charterers to meet obligations, fluctuations in charter rates, and the ongoing impact of the COVID-19 pandemic on global trade.
Investor Verification Checklist
- Seadrill Exposure: Verify the status of the bankruptcy court approval for the West Hercules amendment agreement and the stability of cash flows from the West Linus and West Hercules rigs.
- Asset Sales: Confirm the timing and proceeds from the sale of 18 feeder container vessels to MSC (purchase options exercised) and the recycling of the West Taurus rig.
- Debt Covenants: Review compliance with financial covenants, particularly regarding the $83 million guarantee on SFL Hercules debt and the impact of reduced charter hire on leverage ratios.
- Newbuild Commitments: Assess the capital requirements for the two newbuild dual-fuel car carriers (delivery 2023) and two additional car carriers (delivery 2024) chartered to Volkswagen Group.
- Related Party Transactions: Monitor the volume and terms of transactions with related parties, including Frontline, Golden Ocean, and Hemen Holding, which represent a significant portion of revenue and receivables.