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, 2017
Business Overview: SFL is a Bermuda-based international ship owning and chartering company with a diverse asset base including crude oil tankers, dry bulk carriers, container vessels, car carriers, and offshore drilling units. A significant portion of its business involves related parties, including Frontline, Seadrill, and Golden Ocean.
Key Financial Metrics
| Metric (in thousands, except per share) | Nine Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2016 |
|---|---|---|
| Total Operating Revenues | $284,776 | $315,102 |
| Net Operating Income | $115,985 | $134,342 |
| Net Income | $81,124 | $117,877 |
| Diluted Earnings Per Share | $0.83 | $1.08 |
| Net Cash Provided by Operating Activities | $133,104 | $179,870 |
| Cash and Cash Equivalents (End of Period) | $245,782 | $63,420 |
| Total Debt Principal Outstanding | $1,733,556 | $1,580,006 |
| Interest Expense | $68,421 | $52,723 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by approximately 10% ($30.3 million) compared to the prior year. This was primarily driven by a significant drop in profit-sharing revenues ($5.6 million in 2017 vs. $44.5 million in 2016) due to lower market rates for vessels chartered to Frontline Shipping.
- Net Income Reduction: Net income fell by $36.8 million (31%). Contributing factors included lower net operating income, higher interest expenses ($15.7 million increase), and reduced dividend income from related parties.
- Expense Management: Total operating expenses decreased by $10.7 million, largely due to the sale of five tankers previously chartered to Frontline Shipping, which reduced vessel operating expenses and depreciation.
- Liquidity Improvement: Cash and cash equivalents increased significantly from $62.4 million at year-end 2016 to $245.8 million at September 30, 2017, driven by strong operating cash flows and proceeds from asset sales.
- Debt Profile: Total debt principal increased by $153.5 million, reflecting new issuances (NOK500 million bonds due 2020) and new secured term loans, partially offset by the redemption of NOK600 million bonds due 2017.
Guidance, Outlook, Risks, and Unusual Items
- Seadrill Restructuring Plan: A critical development is the restructuring agreement entered into by Seadrill (a major related party charterer) in September 2017. SFL agreed to reduce charter hire payments by approximately 29% for a five-year period starting in 2018. This plan is subject to court approval. If terminated or not approved, SFL faces risks of covenant defaults and potential loss of income from associated companies (which contributed ~39% of net income).
- Asset Sales and Acquisitions: The company sold four crude oil tankers and one jack-up drilling rig during the period, recording a net gain of $1.1 million on sales and terminations. Conversely, it took delivery of two newbuilding oil product tankers in August 2017.
- Convertible Bond Conversions: Subsequent to the reporting period (October 2017), approximately $121 million of 3.25% convertible bonds due 2018 were converted into common shares.
- Dividend Declaration: On November 22, 2017, the Board declared a quarterly dividend of $0.35 per share.
- Accounting Standards: The company is assessing the impact of new FASB standards regarding revenue recognition (ASU 2014-09) and leases (ASU 2016-02), with adoption expected in 2018 and 2019 respectively.
Investor Verification Checklist
- Seadrill Restructuring Status: Verify the court approval status of the Seadrill Restructuring Plan, as failure could trigger debt defaults and eliminate a significant portion of SFL's income.
- Related Party Concentration: Assess the risk exposure to Frontline Shipping (16% of revenue) and Seadrill (39% of net income via equity method), given the heavy reliance on these entities.
- Debt Covenants: Review the specific financial covenants tied to the Seadrill-related subsidiaries (SFL Deepwater, SFL Hercules, SFL Linus) and the impact of the 29% charter rate reduction on compliance.
- Profit Sharing Volatility: Monitor the volatility of profit-sharing revenues, which dropped drastically year-over-year, as this significantly impacts net income stability.
- Convertible Bond Dilution: Confirm the final share count impact from the October 2017 conversion of $121 million in convertible bonds.