Business Context and Reporting Period
Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2018
Business Overview: SFL is a Bermuda-based international ship owning and chartering company engaged in the ownership and operation of vessels and offshore assets. The fleet includes crude oil tankers, dry bulk carriers, container vessels, car carriers, and drilling rigs. The company primarily generates revenue through medium to long-term bareboat or time charters.
Key Financial Metrics
| Metric (in thousands, except per share) | Nine Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2017 |
|---|---|---|
| Total Operating Revenues | $300,141 | $284,776 |
| Net Operating Income | $95,637 | $115,985 |
| Net Income | $70,152 | $81,124 |
| Diluted Earnings Per Share | $0.63 | $0.83 |
| Net Cash Provided by Operating Activities | $145,815 | $133,104 |
| Total Debt Principal Outstanding | $1,982,341 | $1,522,900 |
| Cash and Cash Equivalents | $143,989 | $245,782 |
Margin Analysis: Net operating margin decreased from approximately 40.7% in the prior period to 31.9% in the current period, primarily driven by a significant vessel impairment charge.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 5.4% ($15.4 million) year-over-year. This was driven by a 16% increase in time charter revenues due to the addition of new container vessels and oil product tankers, and an 18% increase in voyage charter revenues.
- Impairment Charge: A non-cash vessel impairment charge of $28.6 million was recorded against four VLCCs in the current period, compared to none in the prior period. This significantly reduced net operating income.
- Profit Sharing: Profit sharing revenues dropped to $244,000 from $5.6 million in the prior year. The company recorded no profit share revenue from Frontline Shipping due to depressed tanker market conditions.
- Interest Expense: Total interest expense increased to $79.0 million from $68.4 million, driven by higher LIBOR rates and increased debt levels to fund vessel acquisitions.
- Equity Earnings: Equity in earnings of associated companies (drilling rigs leased to Seadrill) decreased to $10.9 million from $20.1 million, reflecting a 29% reduction in charter hire payments agreed upon during Seadrill's restructuring.
- Asset Base: The company acquired four 14,000 TEU container vessels and two 10,600 TEU container vessels during the period, increasing the fleet size and capital expenditures.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the decrease in net income was principally due to the vessel impairment charge and lower earnings from equity-accounted associated companies. The company continues to pursue accretive acquisitions to grow its diverse asset base.
Recent Developments & Subsequent Events:
- Dividend: On November 20, 2018, the Board declared a dividend of $0.35 per share, payable in late December 2018.
- Asset Sales: Agreements were reached to sell the VLCC Front Falcon (expected proceeds ~$30.7 million) and the subsidiary Rig Finance Limited (owner of jack-up rig Soehanah).
- Refinancing: Entered into lease financing agreements totaling $300 million to finance container vessels, utilizing proceeds to repay a $320 million unsecured loan facility.
Risks and Contingencies:
- Concentration Risk: Significant revenue concentration exists with Maersk (~25% of operating revenue), Golden Ocean (~13%), and Frontline Shipping (~9%).
- Counterparty Risk: A substantial portion of net income is derived from associated companies leasing rigs to Seadrill. Seadrill's recent restructuring and Chapter 11 emergence introduced risks regarding charter hire payments, though covenants are currently being met.
- Market Conditions: Depressed tanker markets pose a risk to Frontline Shipping's ability to pay charter hires, although management fees are guaranteed by Frontline.
- Debt Covenants: The company is subject to financial covenants on its long-term debt facilities. As of September 30, 2018, the company was in compliance with all covenants.
Investor Verification Checklist
- Impairment Validity: Verify the methodology and assumptions used for the $28.6 million impairment charge on the four VLCCs.
- Seadrill Restructuring Impact: Confirm the long-term sustainability of the reduced charter hire rates (29% reduction) from Seadrill and the stability of the associated companies' cash flows.
- Debt Maturity Profile: Review the debt maturity schedule, noting $643.5 million due in 2019 and $197.8 million in 2020, to assess refinancing risks.
- Related Party Transactions: Scrutinize the terms of the $320 million unsecured loan facility from Sterna Finance (affiliate of principal shareholder Hemen) and the sale of vessels to ADS (related party).
- Liquidity Position: Assess the adequacy of the $144 million cash balance against upcoming debt maturities and capital expenditure commitments.