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, 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, specifically Frontline Ltd. (tankers) and Seadrill Limited (offshore drilling rigs).
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2017 | Q1 2016 |
|---|---|---|
| Total Operating Revenues | $96,880 | $117,583 |
| Net Operating Income | $39,721 | $57,234 |
| Net Income | $32,282 | $46,799 |
| Diluted Earnings Per Share | $0.32 | $0.42 |
| Cash Provided by Operating Activities | $45,523 | $42,650 |
| Cash and Cash Equivalents (End of Period) | $61,554 | $84,426 |
| Total Debt Principal Outstanding | $1,562,736 | $1,580,006 |
| Available-for-Sale Securities | $124,700 | $118,489 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 18% to $96.9 million, primarily driven by a significant drop in profit-sharing revenues ($5.6 million vs. $24.9 million in Q1 2016) due to lower market rates for Frontline Shipping vessels. This was partially offset by a 14% increase in time charter revenues and a 37% increase in direct financing lease interest income due to new container vessel deliveries.
- Profitability: Net income decreased 31% to $32.3 million. The decline was attributed to lower net operating income, higher interest expenses ($21.1 million vs. $17.8 million), and reduced equity earnings from associated companies.
- Asset Sales: The company sold the VLCC Front Century in March 2017, recording a net loss of $26,000 on the disposal. Proceeds included $20.5 million in gross sales and $4.1 million in early termination compensation.
- Interest Expense: Interest expense increased by $3.3 million year-over-year, largely due to the issuance of 5.75% convertible bonds in late 2016 and higher LIBOR rates, despite a reduction in the average outstanding balance of floating-rate loans.
Guidance, Outlook, Risks, and Unusual Items
- Seadrill Restructuring Risk: A material risk exists regarding Seadrill Limited, a key related party. Seadrill is undergoing a comprehensive restructuring that may involve Chapter 11 proceedings. This poses a risk of default on loan covenants guaranteed by SFL ($240 million) and potential reduction or elimination of income from associated companies (which contributed 35% of consolidated net income in Q1 2017).
- Dividend Policy: The Board declared a quarterly dividend of $0.45 per share, payable around June 30, 2017. Management noted that a substantial portion of dividend capacity is generated from leases with Seadrill subsidiaries, making future payments vulnerable to Seadrill's restructuring.
- Subsequent Events:
- Agreed to sell VLCC Front Scilla and Suezmax Front Brabant in May 2017.
- Chartered out drilling rig Soehanah in May 2017 for 12 months.
- Issued NOK 500 million senior unsecured bonds due 2020 in June 2017 to refinance bonds due in 2017.
- 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: Monitor the progress of Seadrill's restructuring and potential Chapter 11 filing, as this directly impacts SFL's guaranteed debt exposure and equity earnings.
- Profit Sharing Volatility: Verify the sensitivity of SFL's revenue to spot market rates given the heavy reliance on profit-sharing arrangements with Frontline and Golden Ocean.
- Debt Maturity Profile: Review the upcoming maturity of the NOK 600 million bonds due October 2017 and the company's refinancing strategy (recently issued NOK 500 million bonds).
- Asset Sales Execution: Confirm the closing and proceeds of the agreed sales of Front Scilla and Front Brabant to assess cash flow impacts.
- Covenant Compliance: Ensure continued compliance with financial covenants on both SFL's debt and the debt of its equity-accounted subsidiaries, particularly given the volatility in the offshore sector.