SFL Corporation Ltd. Q2 2020 Preliminary Results Summary
Business Context and Reporting Period
This Form 6-K filing, dated August 18, 2020, presents the preliminary unaudited financial results for SFL Corporation Ltd. for the quarter ended June 30, 2020. SFL is a Bermuda-based shipping company operating a diversified fleet of container vessels, tankers, dry bulk carriers, and offshore drilling rigs. The report highlights the company's resilience during the COVID-19 pandemic, noting that operations were not materially impacted and customers continued to pay charter hire on time.
Key Financial Metrics
- Operating Revenue: $118.5 million (U.S. GAAP consolidated).
- Net Income: $11.9 million ($0.11 per share).
- Charter Hire Received: Approximately $158 million from vessels and rigs, including $5.2 million in profit share.
- Adjusted EBITDA: $95.9 million from consolidated subsidiaries plus $25.1 million from wholly owned non-consolidated subsidiaries (Total: $121.0 million).
- Cash and Equivalents: $152.1 million (excluding cash in non-consolidated subsidiaries).
- Marketable Securities: $35.3 million.
- Dividend: Declared $0.25 per share (66th consecutive quarterly dividend).
- Debt: Short-term and current portion of long-term interest-bearing debt totaled $298.3 million; long-term interest-bearing debt was $1.29 billion.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenue decreased to $118.5 million from $121.9 million in Q1 2020. This decrease is partially due to $14.0 million of charter hire classified as repayment of investment in sales-type leases, which is excluded from GAAP revenue.
- Profitability Turnaround: The company returned to profitability with $11.9 million net income, compared to a net loss of $87.1 million in Q1 2020. The Q1 loss was heavily influenced by a $60.1 million vessel impairment charge and significant losses on investments.
- Non-Recurring Items: Q2 included approximately $15.8 million in non-recurring/non-cash negative adjustments, including $7.3 million related to interest rate hedges, currency swaps, and equity investments, and $4.5 million for interest rate swap settlements.
- Market Conditions: The crude oil tanker market softened in Q2 due to supply cuts and inventory drawdowns, reducing net contribution from Suezmax tankers compared to Q1. Conversely, the dry bulk market showed signs of improvement toward the end of the quarter as China reopened its economy.
Guidance, Outlook, and Risks
- Outlook: Management expects increased transaction volume following a post-pandemic global economic rebound. The company remains well-positioned to invest in new opportunities and access capital at historically low interest rates.
- Backlog: Fixed rate charter backlog stands at approximately $3.4 billion with an average remaining term of 4.2 years (7.3 years revenue-weighted). The backlog increased by $95 million in Q2, including extensions for seven container vessels.
- Counterparty Risk: Seadrill Limited, the charterer for SFL's three offshore drilling rigs, has appointed advisors to evaluate restructuring alternatives to reduce debt. SFL is engaging with Seadrill and its lenders to ensure a sustainable path forward.
- Accounting Contingencies: Under ASU 2016-13, the company recorded a cumulative credit loss provision of $36.1 million, with a $1.4 million increase in Q2 primarily related to subsidiaries accounted for as associates.
- Unusual Items: The company redelivered two VLCCs to Hunter Group on August 18, 2020, following the exercise of purchase options, increasing cash by approximately $23 million.
Investor Verification Checklist
- Verify the reconciliation of Adjusted EBITDA ($121.0 million total) against GAAP Net Income ($11.9 million) to understand the impact of non-cash items and interest expenses.
- Confirm the status of the Seadrill restructuring and its potential impact on the $25.1 million quarterly charter hire from offshore rigs.
- Review the composition of the $3.4 billion charter backlog, specifically the concentration risk with Maersk and MSC (84% of liner backlog).
- Assess the liquidity position given the $152 million cash balance against the $298 million short-term debt obligation.
- Monitor the credit loss provision trends under the new ASU 2016-13 standard, which currently stands at $36.1 million.