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: Three months ended March 31, 2018
Business Overview: The Company is a Bermuda-based international ship owning and chartering company engaged in the ownership and operation of vessels and offshore assets. Its fleet includes crude oil tankers, dry bulk carriers, container vessels, car carriers, and drilling rigs. A significant portion of its business involves related parties, including Frontline, Seadrill, and Golden Ocean.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2018 | Q1 2017 |
|---|---|---|
| Total Operating Revenues | $92,349 | $96,880 |
| Net Operating Income | $35,361 | $39,721 |
| Net Income | $24,655 | $32,282 |
| Diluted Earnings Per Share | $0.24 | $0.32 |
| Cash Provided by Operating Activities | $49,972 | $45,523 |
| Cash Provided by Investing Activities | $52,530 | $14,054 |
| Cash Used in Financing Activities | ($115,563) | ($60,405) |
| Cash and Cash Equivalents (End of Period) | $139,991 | $61,554 |
| Total Debt Principal Outstanding | $1,452,404 | $1,522,900 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by 5% to $92.3 million, primarily due to the absence of profit-sharing revenues ($5.6 million in Q1 2017 vs. $0 in Q1 2018) and the sale of five tankers between March 2017 and February 2018.
- Net Income Decrease: Net income fell by 24% to $24.7 million. This was driven by lower net operating income, reduced earnings from equity-accounted associated companies (due to Seadrill restructuring), and higher interest expenses offset by lower interest income.
- Asset Disposal: The Company recorded a net loss of $1.4 million on the sale of the VLCC Front Circassia in February 2018. Proceeds included $17.9 million in cash and a $4.4 million loan note from Frontline Shipping.
- Debt Reduction: The Company fully redeemed its $63.2 million 3.25% senior unsecured convertible bonds due 2018 in February 2018. Total debt principal decreased by approximately $70.5 million compared to the prior year.
- Investing Cash Flow: Net cash provided by investing activities increased significantly to $52.5 million, driven by $27.5 million received from associated companies and reduced capital expenditures on newbuildings.
Guidance, Outlook, Risks, and Unusual Items
- Seadrill Restructuring: A significant portion of the Company's net income (29% in Q1 2018) is derived from associated companies leasing rigs to Seadrill. As part of Seadrill's Chapter 11 restructuring plan, charter hires were reduced by approximately 29% for a five-year period starting January 1, 2018. Seadrill emerged from Chapter 11 in July 2018.
- Accounting Changes: The Company adopted ASU 2016-01 in Q1 2018, requiring fair value changes in equity securities to be recognized in net income. This resulted in a $1.0 million unrealized loss in the period. The Company also adopted ASC 606 (Revenue Recognition) with no material impact on the period.
- Subsequent Events:
- Issued $164 million of Convertible Senior Notes due 2023 in April/May 2018.
- Acquired four 14,000 TEU container vessels in May 2018.
- Agreed to sell three VLCCs in July 2018 for expected net proceeds of $77.6 million.
- Declared a dividend of $0.35 per share in May 2018.
- Risks: Key risks include the financial stability of major charterers (Frontline, Seadrill, Golden Ocean), fluctuations in interest rates (LIBOR increased to 2.31% in Q1 2018), and currency exchange rates. The Company has significant exposure to related parties, with Frontline Shipping accounting for 11% of operating revenues.
Investor Verification Checklist
- Related Party Exposure: Verify the financial health and payment capabilities of major related-party charterers (Frontline, Seadrill, Golden Ocean), as they represent a significant concentration of revenue.
- Seadrill Restructuring Impact: Assess the long-term impact of the 29% charter hire reduction on the Company's earnings from its equity-accounted drilling subsidiaries.
- Debt Maturity Profile: Review the debt repayment schedule, noting $227.4 million due in the remainder of 2018 and $280.3 million due in 2019.
- Profit Sharing Volatility: Monitor the tanker and dry bulk markets, as the absence of profit-sharing revenue in Q1 2018 significantly impacted earnings compared to Q1 2017.
- Subsequent Asset Sales: Confirm the closing and proceeds of the three VLCC sales announced in July 2018 and the acquisition of the four new container vessels.