Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended March 31, 2019
Business Overview: SFL is a Bermuda-based shipping company owning a diversified fleet of 86 vessels and rigs, including container ships, tankers, dry bulk carriers, and offshore drilling rigs. The company primarily generates revenue through long-term fixed-rate charters.
Key Financial Metrics
| Metric | Q1 2019 | Q4 2018 |
|---|---|---|
| Total Operating Revenue (GAAP) | $116.5 million | $118.6 million |
| Total Charter Hire (Non-GAAP) | $160.0 million | N/A |
| Net Income (GAAP) | $33.6 million ($0.31/share) | $3.5 million ($0.03/share) |
| Operating Income (GAAP) | $51.3 million | $22.0 million |
| Adjusted EBITDA (Non-GAAP) | $124.4 million | N/A |
| Cash and Cash Equivalents | $154.1 million | $211.4 million |
| Marketable Securities | $95.8 million | $87.2 million |
| Total Debt (Short & Long Term) | $1.41 billion | $1.44 billion |
Note: Adjusted EBITDA combines Company operations ($91.8M) and 100% owned associates ($32.7M). Total Charter Hire includes $127M from the Company and $33M from associates.
Material Changes vs. Prior Period
- Profitability Surge: Net income increased significantly to $33.6 million from $3.5 million in Q4 2018. This was driven by a $10.5 million gain on mark-to-market of equity securities and the absence of the $35.7 million vessel impairment charge recorded in the prior quarter.
- Revenue Composition: GAAP operating revenue decreased slightly to $116.5 million from $118.6 million. However, total billable charter hire was $160 million, reflecting $9.9 million of lease hire excluded from GAAP revenue as "repayment of investment in finance leases."
- Debt Reduction: The company settled a NOK-denominated bond loan of approximately $124 million in March 2019 using available liquidity. Additionally, $3.4 million of convertible notes were repurchased at a discount.
- Market Rates: Dry bulk spot rates declined (Handysize average $5,900/day vs. $8,500/day prior quarter) due to the Vale tailings dam collapse and trade uncertainties. Conversely, Suezmax tanker rates improved to $25,700/day from $17,500/day.
Guidance, Outlook, and Risks
- Dividend: The Board declared a quarterly cash dividend of $0.35 per share, marking the 61st consecutive quarterly dividend. Payment is scheduled for June 28, 2019.
- Backlog Growth: Fixed-rate charter backlog stands at approximately $3.8 billion with an average remaining term of over 5 years. Recent charter extensions added over $170 million to the backlog.
- IMO 2020 Compliance: The company plans to install scrubbers on 25 vessels to utilize lower-cost high-sulphur fuel. Capital commitments are currently limited to $26 million, with potential for customer-funded upgrades or profit-sharing models.
- Offshore Sector Risks: Five offshore support vessels remain in layup due to a challenging market. The charterer, Solstad Offshore ASA, is undergoing balance sheet restructuring. Three drilling rigs are chartered to Seadrill affiliates; one rig (West Taurus) is currently in layup in Spain.
- Outlook: Management expects new investment projects to materialize later in 2019, supported by strong liquidity and a diversified charterer base.
Investor Verification Checklist
- Non-GAAP Reconciliation: Verify the calculation of Adjusted EBITDA ($124.4M total) against GAAP Net Income ($33.6M) to understand the impact of non-cash items and finance lease accounting.
- Equity Securities Gain: Confirm the sustainability of the $10.5 million mark-to-market gain on equity securities (specifically Frontline Ltd. holdings) as a driver of Q1 net income.
- Offshore Exposure: Monitor the restructuring progress of Solstad Offshore ASA and the operational status of the West Taurus rig, as these assets are currently not generating full potential revenue.
- Debt Maturities: Review the schedule of remaining debt maturities, noting that the company has addressed most maturities until mid-2020 but maintains significant leverage ($1.41B total debt).
- IMO 2020 Costs: Track the final capital expenditure required for scrubber installations beyond the current $26 million commitment and the success of profit-sharing negotiations with charterers.