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, 2019. SFL is a Bermuda-based international ship owning and chartering company engaged in the ownership and operation of vessels and offshore assets, including crude oil tankers, dry bulk carriers, container vessels, and drilling units. The company operates primarily through long-term bareboat and time charters.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Operating Revenues | $227.4 million | $189.1 million |
| Net Operating Income | $97.4 million | $52.6 million |
| Net Income | $61.7 million | $40.4 million |
| Diluted Earnings Per Share | $0.56 | $0.39 |
| Net Cash Provided by Operating Activities | $93.6 million | $94.1 million |
| Cash and Cash Equivalents (End of Period) | $212.4 million | $144.8 million |
| Total Debt Principal Outstanding | $1.48 billion | $1.90 billion (June 30, 2018) |
| Weighted Average Interest Rate (Floating) | 4.19% | 4.22% (Dec 31, 2018) |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 20% to $227.4 million, driven primarily by the addition of container vessels acquired in 2018 (four 13,800 TEU and three 10,600 TEU vessels) and increased direct financing lease interest income.
- Profitability: Net income rose 53% to $61.7 million. This was fueled by a significant increase in net operating income ($97.4 million vs. $52.6 million) and a $27.3 million unrealized gain on equity securities, partially offset by higher interest expenses ($72.2 million vs. $48.8 million).
- Impairments: Unlike the prior year, which included a $21.8 million vessel impairment charge, no vessel impairment charges were recorded in the first half of 2019. However, an $8.2 million impairment was recorded on a loan note receivable from Solstad Offshore ASA.
- Debt Reduction: Total debt principal decreased to $1.48 billion from $1.90 billion in the prior year, largely due to the full redemption of NOK900 million senior unsecured bonds in March 2019.
Outlook, Risks, and Unusual Items
- Related Party Exposure: Significant revenue concentration exists with related parties. Frontline Shipping accounted for ~4% of revenues, while Maersk accounted for ~31%. Income from associated companies (Seadrill subsidiaries) represented 26% of consolidated net income.
- Charter Deferrals: A Standstill Agreement with Solstad Offshore ASA resulted in the deferral of 100% of charter hire for vessels on charter to Solship until October 31, 2019, impacting cash flow timing.
- Investment Gains: Net income included a non-cash unrealized gain of $27.3 million on equity securities (primarily Frontline shares), which significantly boosted reported earnings.
- Subsequent Events: In September 2019, the company announced the acquisition of three VLCCs and the issuance of an additional NOK100 million in bonds. A dividend of $0.35 per share was declared and paid in September 2019.
- Risks: Key risks include the ability of charterers (particularly Solstad and Seadrill) to meet obligations, fluctuations in charter rates and vessel values, and interest rate volatility despite hedging activities.
Investor Verification Checklist
- Verify the recoverability of the $319 million in loans granted to associated companies (SFL Deepwater, Hercules, and Linus) and the status of the Solstad Offshore charter deferrals.
- Assess the sustainability of net income given the $27.3 million unrealized gain on equity securities, which is non-cash and subject to market volatility.
- Review the debt maturity schedule, noting $76.1 million due in the remainder of 2019 and $198.6 million due in 2020.
- Confirm the impact of the Seadrill Restructuring Plan on future cash flows from the three drilling units accounted for under the equity method.
- Monitor the execution of the September 2019 VLCC acquisition and the associated financing requirements.