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: Three months ended March 31, 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) | Q1 2016 | Q1 2015 | Full Year 2015 |
|---|---|---|---|
| Total Operating Revenues | $117,583 | $90,088 | $406,740 |
| Net Operating Income | $57,234 | $42,200 | $166,046 |
| Net Income | $46,799 | $33,110 | $200,832 |
| Basic EPS | $0.50 | $0.35 | $2.15 |
| Diluted EPS | $0.42 | $0.32 | $1.88 |
| Cash from Operating Activities | $42,650 | $65,589 | $258,401 |
| Cash from Investing Activities | $91,055 | $(23,713) | $(205,782) |
| Cash from Financing Activities | $(119,454) | $(42,964) | $(33,262) |
| Cash and Cash Equivalents (End of Period) | $84,426 | $49,730 | $70,175 |
| Total Debt (Outstanding) | $1,599,795 | N/A | N/A |
| Available-for-Sale Securities | $113,893 | N/A | $199,594 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 31% to $117.6 million, driven primarily by a 145% increase in profit-sharing revenues ($24.9 million vs. $10.1 million) due to a new 50% profit-sharing arrangement with Frontline effective July 2015. Time charter revenues also rose 45% due to additional vessels entering service.
- Profitability: Net income increased 41% to $46.8 million. Net operating income rose to $57.2 million, aided by higher revenues which outpaced a 26% increase in operating expenses.
- Asset Sales: The company sold the offshore supply vessel Sea Bear in February 2016, recording a gain of $14,000. This vessel had an impairment charge of $8.1 million recorded in the prior year.
- Debt Reduction: The company fully redeemed $117.5 million of 3.75% senior unsecured convertible bonds due 2016 in February 2016. Total debt outstanding was approximately $1.6 billion.
- Investing Cash Flow: Investing activities generated a net positive cash flow of $91.1 million, a reversal from the prior year's usage. This was largely due to a net $211.4 million increase in amounts received from associated companies.
- Comprehensive Income: While net income was positive, comprehensive income was a loss of $(50.6) million, primarily due to an $85.7 million unrealized loss on available-for-sale securities (Frontline shares).
Guidance, Outlook, and Risks
- Forward-Looking Statements: The filing includes standard cautionary language regarding forward-looking statements, noting that actual results may differ due to global economic conditions, charter rate fluctuations, and vessel values.
- Subsequent Events:
- Delivered the Maersk Shivling (9,300 TEU) in May 2016, chartered to Maersk Line for five years.
- Agreed to sell the VLCC Front Vanguard with expected net proceeds of ~$24 million by end of June 2016.
- Declared a dividend of $0.45 per share, payable around June 29, 2016.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for approximately 36% of consolidated operating revenues in Q1 2016.
- Derivatives: The company holds significant derivative positions (interest rate and cross-currency swaps) with a net liability fair value of $119.2 million. Adverse mark-to-market adjustments contributed to non-operating losses.
- Equity Method Investments: Three wholly-owned subsidiaries (SFL Deepwater, SFL Hercules, SFL Linus) are accounted for under the equity method due to variable interest entity rules. Their combined borrowings were $956.7 million, with the parent company guaranteeing $250 million.
- Charter Disputes: The company is assessing alternatives regarding the jack-up drilling rig Soehanah, where full charter hire was not received in Q1 2016.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of the 50% profit-sharing agreement with Frontline, which drove the majority of the revenue increase.
- Debt Maturity Profile: Review the debt repayment schedule, noting significant maturities in 2018 ($533 million) and 2019 ($269 million).
- Asset Valuation: Assess the impact of the $71.3 million accumulated unrealized loss on available-for-sale securities (Frontline shares) on the balance sheet.
- Equity Method Subsidiaries: Confirm the financial health of SFL Deepwater, SFL Hercules, and SFL Linus, as their debt is not consolidated but guaranteed by the parent.
- Liquidity Position: Monitor the $177.1 million available under secured revolving credit facilities against upcoming capital commitments and dividend obligations.