Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results Press Release)
Reporting Period: Quarter ended June 30, 2016
Business Overview: SFL is a Bermuda-based shipping and offshore finance company owning a diversified fleet of vessels and drilling rigs. The company focuses on long-term fixed-rate charters to provide cash flow stability. As of June 30, 2016, the fleet consisted of 74 vessels and rigs.
Key Financial Metrics
| Metric | Q2 2016 | Q1 2016 |
|---|---|---|
| Charter Revenues (Total Actual) | $159.5 million | $174.0 million |
| GAAP Operating Revenues | $104.0 million | $117.6 million |
| EBITDA (Non-GAAP) | $128.1 million | $139.5 million |
| Net Income | $38.8 million | $46.8 million |
| Earnings Per Share (Basic) | $0.42 | $0.50 |
| Profit Share from Frontline | $14.0 million | $24.7 million |
| Cash and Cash Equivalents | $82.0 million | $84.4 million |
| Available Liquidity | $247 million | N/A |
| Total Debt (Short + Long Term) | $1.64 billion | $1.60 billion |
Note: GAAP revenues exclude $8.0 million classified as repayment of finance lease investments and $47.5 million from assets classified as 'investment in associate'. EBITDA includes these excluded items.
Material Changes vs. Prior Period
- Revenue Decline: Total charter revenues decreased by approximately $14.5 million (8.3%) compared to Q1 2016, primarily driven by a significant drop in profit share income from Frontline ($14.0M vs $24.7M) due to softer crude oil tanker market conditions.
- Profitability: Net income decreased by $8.0 million (17.1%) to $38.8 million. Adjusted EPS was $0.48, compared to $0.50 in Q1.
- Non-Cash Charges: The quarter included approximately $6.1 million in negative non-cash charges, including a $3.3 million mark-to-market loss on interest rate hedging instruments and $2.8 million in amortization of deferred charges.
- Asset Portfolio: The company delivered its third 9,300-9,500 TEU newbuilding container vessel to Maersk Line and sold an older VLCC (Front Vanguard) for net proceeds of approximately $24 million.
Guidance, Outlook, and Management Commentary
- Dividend: The Board declared a quarterly cash dividend of $0.45 per share, marking the 50th consecutive quarterly dividend. Payment is scheduled for September 29, 2016.
- Charter Backlog: Fixed-rate charter backlog stands at approximately $4 billion with an average remaining term of 5 years (9 years weighted by revenue).
- Market Outlook: Management notes the crude oil tanker market leveled off significantly in Q3. The drilling market remains in a downturn; one jack-up rig (Soehanah) is currently idle. However, the majority of assets are on long-term fixed-rate contracts, providing stability.
- Capital Expenditures: Commitments remain for two 19,200 TEU container vessels (delivery late 2016/early 2017) and two LR2 product tankers (delivery 2017). Financing for the tankers is to be secured prior to delivery.
- Liquidity: The company maintains $247 million in available liquidity (cash plus revolving credit facilities) and $120 million in marketable securities.
- Risks: Key risks include fluctuations in charter hire rates, vessel values, oil prices, and the performance of charterers. The company faces exposure to the spot market through seven Handysize dry bulk carriers and two feeder container vessels.
Investor Verification Checklist
- Profit Share Volatility: Verify the sensitivity of earnings to Frontline's performance, as profit share income dropped 43% quarter-over-quarter.
- Idle Asset Status: Monitor the re-chartering timeline for the idle jack-up drilling rig (Soehanah) and the performance of short-term chartered dry bulk vessels.
- Capital Expenditure Funding: Confirm the execution of long-term financing for the two LR2 product tankers before their 2017 delivery to ensure no strain on liquidity.
- Accounting Treatment: Review the "Investment in Associate" accounting for drilling subsidiaries (West Hercules, West Taurus, West Linus) to understand the full cash flow contribution versus GAAP reported income.
- Debt Maturities: Verify the schedule of loan maturities, noting the company states no loans are due before Q4 2017.