Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended December 31, 2018
Business Overview: SFL is a global ship finance company owning and operating a fleet of container vessels, tankers, dry bulk carriers, and offshore drilling rigs. The company generates revenue through time charters, bareboat charters, and spot market operations.
Key Financial Metrics
| Metric | Q4 2018 (Consolidated) | Q3 2018 (Consolidated) |
|---|---|---|
| Total Operating Revenue (GAAP) | $118.6 million | $111.0 million |
| Total Charter Hire (Non-GAAP) | $160.0 million | Not explicitly stated |
| Adjusted EBITDA (Non-GAAP) | $92.1 million | Not explicitly stated |
| Net Income (GAAP) | $3.5 million ($0.03/share) | $29.7 million ($0.28/share) |
| Operating Income (GAAP) | $22.0 million | $43.1 million |
| Cash and Cash Equivalents | $211.4 million | $144.0 million |
| Marketable Securities | $87.2 million | $127.1 million |
| Total Debt (Short & Long Term) | $1.44 billion | $1.95 billion |
| Dividend Declared | $0.35 per share | $0.35 per share |
Material Changes vs. Prior Period
- Net Income Decline: Net income dropped significantly from $29.7 million in Q3 to $3.5 million in Q4. This was primarily driven by a $35.7 million impairment charge on five offshore support vessels and a $1.8 million loss on the sale of two VLCCs.
- Revenue Composition: While GAAP operating revenue increased slightly to $118.6 million, total charter hire (including non-consolidated associates) reached $160 million. Approximately 65% of hire came from time charters and 35% from bareboat charters.
- Asset Portfolio Changes:
- Additions: Delivered the third 10,600 TEU container vessel to Maersk Line and acquired two 19,400 TEU vessels chartered to MSC, adding approximately $730 million to the fixed-rate charter backlog.
- Disposals: Sold a jack-up drilling rig (Soehanah) for net proceeds of ~$84 million (gain of $7.6 million) and two older VLCCs (loss of $1.8 million).
- Debt Reduction: Total interest-bearing debt decreased from ~$1.95 billion in Q3 to ~$1.44 billion in Q4, aided by $840 million in new lease financings used to repay intermediary loans.
Outlook, Risks, and Management Commentary
- Management Commentary: CEO Ole B. Hjertaker highlighted the strength of the business model, evidenced by 60 consecutive quarters of profitability and dividends. The company has transformed from a single-related-party lessor to a diversified organization with $3.8 billion in contracted future revenues.
- Charter Backlog: As of Dec 31, 2018, the fixed-rate charter backlog was $3.8 billion with an average remaining term of over 5 years (8.5 years revenue-weighted).
- Market Conditions:
- Tankers: VLCC spot rates softened in early 2019 after a strong Q4. Suezmax rates averaged $17,500/day in Q4.
- Dry Bulk: Market strength in Q4 declined in November and January due to trade uncertainty and the Brazil iron ore incident.
- Offshore: The market remains challenging. Five offshore support vessels are in layup, and the charterer (Solstad) is undergoing balance sheet restructuring.
- Risks and Contingencies:
- Impairments: $35.7 million impairment recorded on offshore support vessels due to Solstad's restructuring and market conditions.
- Accounting Changes: Voyage revenue recognition changed from discharge-to-discharge to load-to-discharge in 2018, which may delay revenue recognition in rising markets.
- Counterparty Risk: Exposure to Seadrill (drilling rigs) and Solstad (offshore support vessels), though Seadrill charters are fully guaranteed.
Investor Verification Checklist
- Impairment Validity: Verify the $35.7 million impairment charge on offshore support vessels against current broker estimates and Solstad's restructuring progress.
- Charter Backlog Quality: Confirm the $3.8 billion backlog figure, specifically noting the exclusion of the impaired offshore support vessel charters and the impact of potential purchase options.
- Debt Structure: Review the terms of the $840 million in new Asian lease financings, specifically the purchase options and interest rates, to assess future refinancing risks.
- Offshore Exposure: Monitor the status of the three drilling rigs chartered to Seadrill affiliates and the five support vessels chartered to Solstad, given the ongoing restructuring of these counterparties.
- Non-GAAP Reconciliation: Review the reconciliation of Adjusted EBITDA ($92.1 million) to Net Income ($3.5 million) to understand the impact of non-cash items and financing costs.