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 six months ended June 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 results are significantly impacted by the global COVID-19 pandemic and the financial restructuring of key charterer Seadrill Limited.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total Operating Revenues | $240,361 | $227,445 |
| Net Operating Income | $21,993 | $97,380 |
| Net (Loss)/Income | $(75,156) | $61,713 |
| Diluted EPS | $(0.70) | $0.56 |
| Net Cash Provided by Operating Activities | $122,426 | $113,977 |
| Total Debt Principal Outstanding | $1,609,317 | $1,627,177 |
| Cash and Cash Equivalents | $152,124 | $199,521 |
Margin Analysis: Net operating margin declined significantly from 42.8% in 2019 to 9.2% in 2020, primarily due to a one-time impairment charge. Operating expenses increased to $220.6 million from $130.1 million.
Material Changes vs. Prior Period
- Net Loss vs. Profit: The Company reported a net loss of $75.2 million compared to a net income of $61.7 million in the prior year. This $136.9 million swing was driven by non-operating losses and asset impairments.
- Asset Impairment: A non-cash impairment charge of $80.5 million was recorded against seven Handysize bulk carriers and one offshore support vessel due to revised future cash flow estimates following the COVID-19 outbreak.
- Non-Operating Losses: "Other non-operating items" resulted in a net loss of $40.4 million, compared to a gain of $17.2 million in 2019. This included an $18.2 million loss on investments in debt and equity securities (primarily mark-to-market losses on Frontline shares) and a $25.9 million mark-to-market loss on non-designated derivatives.
- Revenue Growth: Total operating revenues increased 6% to $240.4 million, driven by a 152% increase in voyage charter revenues and higher profit-sharing income from Frontline Shipping ($10.4 million vs. $1.5 million).
- Accounting Standard Adoption: The Company adopted ASU 2016-13 (Credit Losses) on January 1, 2020, resulting in a cumulative adjustment of $32.6 million to retained earnings and the establishment of allowances for expected credit losses.
Guidance, Outlook, Risks, and Unusual Items
- Seadrill Restructuring Risk: A significant portion of SFL's income is derived from three drilling units leased to subsidiaries of Seadrill Limited. Seadrill has appointed advisors to evaluate restructuring alternatives and has initiated discussions to renegotiate lease terms. There is a risk that Seadrill may file for Chapter 11 bankruptcy and reject these leases, which could materially adversely affect SFL's revenue and cash flows.
- COVID-19 Impact: Management notes that the pandemic has caused restrictions on trade and supply chains, affecting demand for seaborne transportation. The duration and severity of the impact remain uncertain.
- Dividends: The Board declared a dividend of $0.25 per share in May 2020 (paid June 30) and another $0.25 per share in August 2020 (payable September 30).
- Capital Markets: SFL entered into an At-the-Market (ATM) sales agreement to sell up to $100 million of shares and renewed its Dividend Reinvestment Plan (DRIP). In the first half of 2020, the Company issued approximately 1.2 million shares under these arrangements.
- Unusual Items: The Company recorded a $4.4 million gain on the settlement of related party loan notes from Frontline and a $2.3 million gain on the sale of various vessels (including the VLCC Front Hakata).
Investor Verification Checklist
- Seadrill Lease Negotiations: Verify the status of ongoing lease renegotiations with Seadrill and the potential impact of a Chapter 11 filing on the $842 million contracted backlog from drilling units.
- Impairment Validity: Review the assumptions used for the $80.5 million impairment charge on Handysize bulk carriers to assess if further write-downs are necessary given market volatility.
- Derivative Exposure: Analyze the $25.9 million mark-to-market loss on non-designated derivatives and the Company's hedging strategy against interest rate and currency fluctuations.
- Liquidity Position: Confirm the sufficiency of the $152.1 million cash balance and $122.4 million operating cash flow to service the $1.6 billion debt principal and upcoming dividend payments.
- Credit Loss Allowances: Assess the adequacy of the newly established allowances for expected credit losses under ASU 2016-13, particularly regarding receivables from related parties and associated companies.