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, 2015
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership, operation, charter, purchase, and sale of vessels and offshore assets. The fleet includes oil tankers, drybulk carriers, container vessels, car carriers, jack-up drilling rigs, ultra-deepwater drilling units, offshore supply vessels, and chemical tankers.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2015 | Q1 2014 |
|---|---|---|
| Total Operating Revenues | $90,088 | $82,671 |
| Net Operating Income | $42,200 | $46,636 |
| Net Income | $33,110 | $40,733 |
| Diluted Earnings Per Share | $0.32 | $0.40 |
| Cash Provided by Operating Activities | $65,589 | $37,061 |
| Cash Used in Investing Activities | ($23,713) | $23,617 (Generated) |
| Cash Used in Financing Activities | ($42,964) | ($82,337) |
| Cash and Cash Equivalents (End of Period) | $49,730 | $36,982 |
| Total Debt Outstanding | $1,543,043 | $1,732,459 |
| Available for Sale Securities | $69,116 | $73,656 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 9% to $90.1 million, driven by a 68% increase in time charter revenues due to the net addition of vessels (two drybulk carriers and four container vessels) and increased bareboat charter revenues.
- Profitability Decline: Net income decreased 19% to $33.1 million. This was primarily due to the absence of a $10.2 million gain on charter terminations recorded in Q1 2014 and higher non-operating losses ($8.1 million vs. $1.0 million loss in 2014).
- Asset Disposal: The Company recorded a $0.1 million loss on the disposal of five container vessels in February 2015. These vessels had previously been impaired by $11.8 million in Q4 2014.
- Debt Reduction: Total debt decreased by approximately $189 million year-over-year, largely due to the full repayment of a $725 million secured term loan facility in February 2015 and the transfer of a $210 million facility to third parties.
- Operating Cash Flow: Operating cash flow surged to $65.6 million (from $37.1 million) primarily due to the receipt of $32.7 million in cash sweep income accrued from the prior year.
Guidance, Outlook, and Risks
- Frontline Agreement Revision: A revised agreement for 12 VLCCs and five Suezmax tankers chartered to Frontline Ltd. takes effect July 1, 2015. Terms include reduced time charter rates ($20,000/day for VLCCs, $15,000/day for Suezmaxes), increased operating expenses, and a 50% profit split on earnings above base rates. As compensation, SFL received 55 million Frontline shares (~28% stake).
- New Acquisitions:
- Agreed to acquire eight Capesize dry-bulk carriers from Golden Ocean for $272 million (delivery Q3 2015) with 10-year guaranteed charters.
- Agreed to acquire three newbuilding 9,000 TEU container vessels (delivery Q4 2015/Q1 2016) with 5-year charters to a European line.
- Dividend: Declared a dividend of $0.43 per share, payable June 30, 2015.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for 32% of consolidated operating revenues in Q1 2015.
- Guarantees: The Company guarantees $260 million of debt held by equity-accounted subsidiaries (SFL Deepwater, SFL Hercules, SFL Linus) and $88 million of debt for the sold entity SFL West Polaris.
- Market Conditions: Exposure to fluctuations in charter rates, vessel values, bunker prices, and global economic conditions.
Investor Verification Checklist
- Frontline Exposure: Verify the impact of the revised July 2015 charter terms (lower base rates, higher profit share) on future cash flows and the valuation of the 55 million Frontline shares received.
- Debt Covenants: Confirm continued compliance with financial covenants across the $1.5 billion debt portfolio, particularly given the reduced base charter rates in the new Frontline agreement.
- Asset Quality: Review the status of the Horizon Lines notes and warrants (sold in June 2015 for $72 million) and the carrying value adjustments made prior to sale.
- Related Party Transactions: Assess the sustainability of revenue streams from related parties (Frontline, Seadrill, Deep Sea), which constitute a significant portion of the fleet's charter income.
- Liquidity: Monitor the $32.1 million available under secured revolving credit facilities and the $100 million available to equity-accounted subsidiaries against upcoming capital expenditures for new vessel acquisitions.