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") for the nine months ended September 30, 2020. 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, and offshore drilling units. The company operates primarily through medium to long-term bareboat or time charters.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 |
|---|---|---|
| Total Operating Revenues | $356.1 million | $339.0 million |
| Net Operating Income | $68.1 million | $117.6 million |
| Net (Loss)/Income | $(59.2) million | $65.5 million |
| Basic EPS | $(0.55) | $0.61 |
| Operating Cash Flow | $194.4 million | $191.3 million |
| Total Debt Principal | $1,498.9 million | $1,627.2 million |
| Cash and Cash Equivalents | $205.8 million | $199.5 million (Dec 31, 2019) |
Margin Analysis: Net operating margin decreased significantly due to a $80.5 million vessel impairment charge. Net income turned negative primarily due to this impairment and a $40.7 million loss in other non-operating items (driven by mark-to-market losses on derivatives and securities).
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 5% year-over-year, driven by a 134% increase in voyage charter revenues and higher profit-sharing income ($17.2 million vs $1.7 million), partially offset by a 60% drop in bareboat charter revenues due to asset sales.
- Impairment Charges: A significant non-cash impairment charge of $80.5 million was recorded against seven Handysize bulk carriers and one offshore support vessel due to revised cash flow estimates following the COVID-19 pandemic. This compares to $25.9 million in the prior year.
- Asset Disposals: The company generated $152.5 million in proceeds from the sale of vessels (including VLCCs and offshore support vessels) and termination of charters, compared to zero in the prior period.
- Non-Operating Losses: Other non-operating items swung from a $28.1 million gain in 2019 to a $40.7 million loss in 2020. This was caused by a $20.9 million loss on investments in debt/equity securities and a $23.8 million mark-to-market loss on non-designated derivatives.
- Debt Reduction: Total debt principal decreased by approximately $128 million due to asset sales proceeds being used to repay debt and the redemption of NOK500 million bonds.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook: Management notes that the results are not necessarily indicative of full-year results due to the volatility of the COVID-19 pandemic. The company continues to focus on generating stable cash flows through long-term charters. A dividend of $0.15 per share was declared on November 12, 2020.
Key Risks and Contingencies:
- Seadrill Restructuring: A significant portion of SFL's income is derived from three drilling rigs leased to subsidiaries of Seadrill Limited. Seadrill is undergoing a comprehensive restructuring and has technically defaulted on lease payments for Q4 2020. SFL is negotiating a forbearance agreement. Failure to reach an agreement could result in redelivery of rigs and enforcement of debt guarantees.
- Credit Losses: The company adopted ASU 2016-13 (Credit Losses) in 2020, resulting in a $32.6 million cumulative adjustment to retained earnings and ongoing provisions for expected credit losses, particularly related to Seadrill.
- Derivatives: Significant mark-to-market losses on interest rate and currency swaps impacted net income, though these are largely non-cash items recognized in other comprehensive income or net income depending on hedge designation.
Unusual Items: The $80.5 million impairment charge and the $20.9 million loss on equity securities (Frontline shares) are considered unusual or non-recurring items impacting the bottom line.
Investor Verification Checklist
- Seadrill Forbearance Status: Verify the final terms of the forbearance agreement with Seadrill and the likelihood of continued charter hire payments for the three drilling rigs.
- Debt Covenant Compliance: Confirm that the company remains in compliance with all financial covenants given the technical defaults at the subsidiary level and the restructuring environment.
- Derivative Exposure: Assess the impact of future interest rate and currency fluctuations on the company's $1.2 billion notional swap portfolio.
- Asset Valuation: Review the methodology used for the $80.5 million impairment charge to ensure it accurately reflects current market conditions for Handysize bulk carriers.
- Liquidity Position: Monitor cash burn rates and the ability to service $1.5 billion in debt principal amidst potential revenue disruptions from key charterers.