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, 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, dry bulk 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) | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|
| Total Operating Revenues | $182,114 | $155,656 |
| Net Operating Income | $58,920 | $77,432 |
| Net Income | $101,053 | $63,092 |
| Basic Earnings Per Share | $1.08 | $0.68 |
| Diluted Earnings Per Share | $0.94 | $0.64 |
| Net Cash Provided by Operating Activities | $103,627 | $57,077 |
| Cash and Cash Equivalents (End of Period) | $61,571 | $49,480 |
| Total Debt Outstanding | $1,461,712 | $1,732,459 |
| Stockholders' Equity | $1,199,430 | $1,176,022 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 17% to $182.1 million, driven by a 66% increase in time charter revenues and higher profit-sharing revenues ($21.0 million vs. $14.3 million). This was partially offset by decreases in direct financing lease interest income and finance lease service revenues due to the sale of three VLCCs in late 2014.
- Net Income Surge: Net income increased 60% to $101.1 million. This increase was primarily driven by a one-time $44.6 million gain on the sale of Horizon Lines loan notes and share warrants, lower interest expense, and higher equity earnings from associated companies.
- Operating Income Decline: Despite revenue growth, Net Operating Income decreased 24% to $58.9 million. This was caused by a $29.2 million vessel impairment charge on two container vessels and the absence of $15.2 million in gains on charter terminations recorded in the prior year.
- Debt Reduction: Total debt decreased by approximately $270 million to $1.46 billion, reflecting the repayment and cancellation of several secured term loan facilities (including a $725 million facility and a $210 million facility) and the sale of assets.
Guidance, Outlook, and Material Events
- Frontline Restructuring: In June 2015, the Company amended charter agreements with Frontline Shipping for 12 VLCCs and 5 Suezmax tankers. Changes effective July 1, 2015, include reduced time charter rates, increased operating fees, and an increased profit share to 50%. In exchange, the Company received 55 million shares of Frontline (approx. 28% stake), valued at $150.2 million, and Frontline was released from guarantee obligations.
- Asset Sales and Acquisitions:
- Sold Horizon Lines loan notes and warrants for $71.7 million net proceeds.
- Disposed of five container vessels in February 2015, recording a $0.1 million loss.
- Agreed to acquire eight Capesize dry bulk carriers from Golden Ocean for $272 million (delivered Q3 2015).
- Agreed to acquire three newbuilding container vessels (9,300-9,500 TEU) with deposits of $43.4 million paid.
- Dividends: The Board declared a dividend of $0.44 per share on August 26, 2015, payable September 30, 2015.
- Liquidity: The Company maintains $61.6 million in cash and $48.4 million in available-for-sale securities. It has $278.9 million available to draw under secured revolving credit facilities and entered into a new $250 million revolving credit facility in June 2015 (undrawn as of June 30).
- Risks: Significant concentration of revenue risk with Frontline (approx. 32% of operating revenues). Exposure to fluctuations in charter rates, vessel values, and interest rates. Contingent liabilities exist regarding P&I association calls and guarantees on debt of equity-accounted subsidiaries ($255 million guaranteed).
Investor Verification Checklist
- Impairment Charges: Verify the specific vessels subject to the $29.2 million impairment charge and the methodology used to determine fair value.
- One-Time Gains: Assess the sustainability of earnings given the $44.6 million non-recurring gain from the Horizon Lines asset sale.
- Related Party Exposure: Review the terms of the amended Frontline charters and the impact of the 50% profit share structure on future cash flows.
- Debt Covenants: Confirm continued compliance with financial covenants across all secured facilities, particularly given the recent debt restructuring.
- Equity Method Investments: Analyze the financial health of associated companies (SFL Deepwater, SFL Hercules, SFL Linus, and Frontline) which represent a significant portion of the Company's asset base and earnings.