SFL Corporation Ltd. Q1 2020 Preliminary Results Summary
Business Context and Reporting Period
This Form 6-K, filed on May 27, 2020, reports preliminary financial results for SFL Corporation Ltd. for the quarter ended March 31, 2020. SFL is a Bermuda-based shipping and offshore company operating a fleet of container vessels, tankers, dry bulk carriers, and drilling rigs. The reporting period coincides with the onset of the global COVID-19 pandemic and significant volatility in oil and shipping markets.
Key Financial Metrics
- Operating Revenue: $121.9 million (U.S. GAAP), compared to $119.9 million in Q4 2019.
- Net Loss: $87.1 million ($0.81 per share), compared to a net income of $23.6 million in Q4 2019.
- Charter Hire Received: Approximately $161 million, including $6.4 million in profit share.
- Adjusted EBITDA: $93.7 million from consolidated subsidiaries and $26.2 million from non-consolidated subsidiaries (Total: ~$120 million).
- Cash Flow: Net cash provided by operating activities was $74.5 million.
- Liquidity: Cash and cash equivalents totaled $206.5 million, plus $60.2 million in marketable securities.
- Debt: Total interest-bearing debt (short and long term) was approximately $1.59 billion ($257.6 million short-term + $1.34 billion long-term).
Material Changes vs. Prior Period
The shift from net income to a significant net loss was driven primarily by non-cash charges totaling approximately $113.5 million. Key components included:
- Impairment Charges: $80.5 million related to seven Handysize bulk carriers due to market conditions.
- Derivatives and Investments: A $23.2 million non-cash loss on non-designated hedging derivatives and a $13.6 million unrealized loss on marketable securities.
- Revenue Composition: While GAAP revenue increased slightly, the company noted that $12 million of charter hire was classified as repayment of investment in finance leases and excluded from revenue.
- Dividend Adjustment: The quarterly dividend was reduced to $0.25 per share (from previous levels) to maintain a conservative profile amidst market volatility.
Outlook, Management Commentary, and Risks
Management stated that the company experienced no material business interruptions from COVID-19, with all counterparties current on payments. The fixed-rate charter backlog stands at approximately $3.6 billion with an average remaining term of 4.5 years, providing high cash flow visibility.
- Strategy: The company continues to focus on long-term charters to insulate from spot market volatility. Recent actions include extending charters for ten container vessels and acquiring a new VLCC for $65 million.
- Market Risks: Dry bulk and short-term liner markets face pressure from reduced global trade demand. The offshore sector faces uncertainty regarding the financial stability of charterer Seadrill Limited, specifically regarding the laid-up rig West Taurus.
- Contingencies: The company is engaged in discussions with Seadrill and its lenders to ensure operational flexibility. Management expects less revenue from dry bulk and liner fleets trading in the spot market in the near term.
Investor Verification Checklist
- Verify the recoverability of the $80.5 million impairment charge on Handysize bulk carriers and the timeline for potential divestment.
- Assess the credit risk and payment status of Seadrill Limited regarding the three drilling rigs, particularly the idle West Taurus.
- Confirm the impact of the $23.2 million derivative loss on future cash flows and the company's hedging strategy.
- Review the details of the $65 million acquisition of the Landbridge Wisdom VLCC and the terms of the seven-year charter back.
- Monitor the company's ability to maintain the $0.25 dividend given the reduced cash flow from spot market segments.