Business Context and Reporting Period
Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Unaudited Condensed Interim Financial Statements)
Reporting Period: Six months ended June 30, 2017
Business Overview: SFL is a Bermuda-based international ship owning and chartering company. Its portfolio includes crude oil tankers, dry bulk carriers, container vessels, car carriers, and offshore drilling units. A significant portion of its business involves related parties, specifically Frontline Ltd. (tankers) and Seadrill Limited (drilling rigs).
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Total Operating Revenues | $191,103 | $221,574 |
| Net Operating Income | $78,402 | $101,682 |
| Net Income | $52,393 | $85,611 |
| Diluted Earnings Per Share | $0.54 | $0.78 |
| Operating Cash Flow | $101,147 | $123,721 |
| Total Debt Principal Outstanding | $1,694,603 | $1,580,006 |
| Cash and Cash Equivalents | $248,999 | $82,016 |
| Restricted Cash | $9,000 | $0 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by 14% ($30.5 million) primarily due to a significant drop in profit-sharing revenues from related parties (Frontline), which fell from $38.9 million to $5.6 million. This was partially offset by a 56% increase in direct financing lease interest income due to new container vessel charters.
- Net Income Reduction: Net income decreased by 39% ($33.2 million). Drivers included lower net operating income, higher interest expenses (due to increased LIBOR rates and new bond issuances), and lower dividend income from investments.
- Asset Sales: The Company recorded a net gain of $0.8 million on the sale of assets and termination of charters, including the sale of three crude oil tankers and the reclassification of a container vessel to a sales-type lease.
- Liquidity Improvement: Cash and cash equivalents increased significantly to $249.0 million from $62.4 million at year-end 2016, driven by strong operating cash flow and proceeds from asset sales.
Outlook, Risks, and Contingencies
- Seadrill Restructuring Risk: In September 2017, Seadrill announced a restructuring plan (Chapter 11). SFL has agreed to reduce charter hire payments by approximately 30% for five years starting in 2018. If the plan fails or is not approved, SFL faces potential default on loan covenants and loss of income from associated companies, which contributed 42% of consolidated net income in the period.
- Related Party Concentration: Frontline accounted for 18% of operating revenues, and Seadrill-related entities accounted for 42% of net income. The Company faces concentration risk with these counterparties.
- Debt Covenants: SFL is currently in compliance with all financial covenants. However, the Seadrill restructuring introduces uncertainty regarding future covenant compliance for the loan facilities securing the drilling rigs.
- Subsequent Events: The Company redeemed NOK600 million bonds in July 2017, took delivery of two new LR2 product tankers in August 2017, and declared a dividend of $0.35 per share in August 2017.
Investor Verification Checklist
- Seadrill Restructuring Approval: Verify the status of Seadrill's Chapter 11 restructuring plan and its impact on SFL's charter revenue and loan covenant compliance.
- Profit Sharing Volatility: Assess the sustainability of profit-sharing revenues given the sharp decline in the current period compared to the prior year.
- Debt Maturity Profile: Review the repayment schedule for the $1.7 billion debt principal, noting significant maturities in 2018 ($464 million) and 2021 ($457 million).
- Related Party Exposure: Confirm the financial health of Frontline and Seadrill, as they represent the majority of SFL's revenue and income streams.
- Dividend Sustainability: Evaluate the ability to maintain dividend payments given the agreed 30% reduction in charter hire from Seadrill starting in 2018.