Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended September 30, 2015
Business Overview: SFL operates a fleet of 72 vessels and rigs across eight sub-sectors, primarily chartered on long-term fixed-rate contracts. The company focuses on building distribution capacity through conservative financing and long-term charters to reputable operators.
Key Financial Metrics
| Metric | Q3 2015 | Q2 2015 |
|---|---|---|
| Charter Revenues (Non-GAAP) | $167 million | $148 million |
| EBITDA (Non-GAAP) | $136 million | $125 million |
| Net Income (GAAP) | $45.5 million | $67.9 million |
| Earnings Per Share (Basic) | $0.49 | $0.73 |
| Operating Income (GAAP) | $58.6 million | $16.7 million |
| Net Cash from Operating Activities | $66.1 million | $38.0 million |
| Liquidity (Cash + Revolvers) | $289 million | N/A |
| Total Debt (Short + Long Term) | $1.78 billion | N/A |
Note: Charter revenues and EBITDA include assets classified as 'Investment in associates' and profit share income, whereas GAAP operating revenues exclude these items.
Material Changes vs. Prior Period
- Revenue Growth: Non-GAAP charter revenues increased 13% to $167 million, driven by new vessel deliveries and profit share income.
- Profit Share Impact: A new 50% profit share agreement with Frontline contributed $16.6 million ($0.18 per share) in Q3, compared to minimal contribution in Q2.
- Net Income Decline: GAAP net income decreased 33% to $45.5 million. This was primarily due to a $12.4 million negative mark-to-market adjustment on interest rate hedging instruments and a one-time $44.5 million gain on the sale of Horizon notes and warrants recorded in Q2 2015.
- Asset Acquisitions: The company delivered eight Capesize dry bulk carriers (acquired for $272 million) and began acquiring container vessels, increasing the fixed-rate charter backlog to approximately $4 billion.
- Asset Disposals: Sold one Suezmax tanker (Front Glory) in Q3 for a $3.4 million book gain; two additional tankers were sold in October and November with expected gains.
Guidance, Outlook, and Risks
- Dividend: The Board declared an increased quarterly cash dividend of $0.45 per share (47th consecutive dividend), payable December 30, 2015.
- Outlook: Management expects distributable cash flow to increase due to new vessel deliveries. The crude oil tanker market remains strong, with good prospects for significant profit share in Q4.
- Capital Expenditure: Remaining net capex for current container vessel acquisitions is limited to $36 million. Future container vessel acquisitions (late 2016/early 2017) have an estimated net capex of $45 million.
- Risks:
- Market Volatility: Exposure to fluctuations in charter hire rates, vessel values, and oil prices.
- Drilling Sector: The drilling market has experienced a downturn; however, SFL maintains low leverage on its four drilling units.
- Counterparty Risk: Reliance on major charterers like Frontline and Maersk Line.
Investor Verification Checklist
- Profit Share Sustainability: Verify the stability of the $16.6 million profit share from Frontline and the impact of the Frontline merger on future earnings.
- Non-GAAP Reconciliation: Review the reconciliation of Net Income to EBITDA to understand the impact of non-cash charges (hedging, amortization) on reported profitability.
- Debt Structure: Confirm the terms of the new $166 million and $210 million amortizing bank loan facilities used for recent acquisitions.
- Asset Accounting: Understand the "Investment in Associate" treatment for drilling units and specific subsidiaries, which excludes their operating revenues from the consolidated income statement.
- Dividend Coverage: Assess whether the increased dividend of $0.45 per share is fully covered by the reported distributable cash flow.