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, 2016
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership, operation, chartering, purchase, and sale of vessels and offshore assets. The fleet includes oil tankers, dry bulk carriers, container vessels, car carriers, and drilling rigs. A significant portion of revenue is derived from related parties, particularly Frontline Shipping Limited.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Operating Revenues | $221,574 | $182,114 |
| Net Operating Income | $101,682 | $58,920 |
| Net Income | $85,611 | $101,053 |
| Basic Earnings Per Share | $0.92 | $1.08 |
| Diluted Earnings Per Share | $0.78 | $0.94 |
| Cash Provided by Operating Activities | $123,721 | $103,627 |
| Cash and Cash Equivalents (End of Period) | $82,016 | $61,571 |
| Total Debt Principal Outstanding | $1,643,997 | $1,666,476 |
| Available-for-Sale Securities | $119,975 | $199,594 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 22% to $221.6 million, driven by a 57% increase in time charter revenues due to new vessel deliveries (eight Capesize dry bulk carriers and three container vessels) and higher profit-sharing revenues ($39.0 million vs. $21.0 million).
- Net Income Decline: Despite higher operating income, Net Income decreased 15% to $85.6 million. This was primarily due to the absence of a $44.6 million one-time gain on the sale of loan notes and share warrants recorded in the prior year and lower interest income from redeemed Frontline loan notes.
- Operating Expenses: Total operating expenses decreased slightly to $119.9 million from $123.1 million, largely because the prior year included a $29.2 million vessel impairment charge. However, vessel operating expenses increased by $15.3 million due to a larger fleet and higher management fees.
- Balance Sheet: Available-for-sale securities dropped significantly to $120.0 million from $199.6 million, reflecting a $92.1 million unrealized loss recorded in Other Comprehensive Income (OCI). Total debt principal remained relatively stable.
Guidance, Outlook, and Risks
- Management Commentary: Management highlighted the successful delivery of new vessels and the restructuring of charter agreements with Frontline Shipping, which increased profit-sharing percentages to 50% effective July 2015. The company noted that results for the interim period are not necessarily indicative of full-year results.
- Subsequent Events:
- July 2016: Sold VLCC Front Vanguard for approx. $24 million.
- July 2016: Amended charters with Deep Sea affiliate, reducing rates temporarily in exchange for extended terms and 50% profit share.
- August 2016: Declared a dividend of $0.45 per share.
- September 2016: Terminated charter for jack-up rig Soehanah, receiving a $6 million loan note.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for approximately 33% of consolidated operating revenues.
- Market Risk: Exposure to fluctuations in charter rates, vessel values, and bunker prices. Significant exposure to interest rate and foreign currency risk, managed via swap agreements.
- Debt Covenants: The company is in compliance with all financial covenants as of June 30, 2016, but failure to comply could trigger acceleration of debt.
- Equity Method Investments: Significant exposure to three wholly-owned subsidiaries (SFL Deepwater, SFL Hercules, SFL Linus) accounted for under the equity method, which hold drilling rigs leased to Seadrill and NADL.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of revenue streams from Frontline and other related parties, which constitute a majority of the business.
- Debt Structure: Review the maturity profile of the $1.64 billion debt principal, noting the redemption of the 3.75% convertible bonds in February 2016 and upcoming maturities.
- Asset Valuation: Assess the impact of the $92.1 million unrealized loss on available-for-sale securities (primarily Frontline shares) on the company's equity position.
- Charter Amendments: Evaluate the long-term impact of the amended charter agreements with Deep Sea and Frontline on future cash flows and profit-sharing potential.
- Equity Method Entities: Monitor the financial health of SFL Deepwater, SFL Hercules, and SFL Linus, as their performance directly impacts "Equity in earnings of associated companies."