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: Nine months ended September 30, 2014
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) | Nine Months Ended Sep 30, 2014 | Nine Months Ended Sep 30, 2013 |
|---|---|---|
| Total Operating Revenues | $238,825 | $199,161 |
| Net Operating Income | $115,887 | $93,968 |
| Net Income | $97,678 | $70,904 |
| Basic Earnings Per Share | $1.05 | $0.80 |
| Diluted Earnings Per Share | $0.98 | $0.74 |
| Cash Provided by Operating Activities | $95,805 | $115,978 |
| Cash Used in Investing Activities | ($58,122) | ($115,935) |
| Cash Used in Financing Activities | ($63,701) | ($1,554) |
| Cash and Cash Equivalents (End of Period) | $32,623 | $59,031 |
| Total Debt Outstanding | $1,778,394 | $1,736,879 |
| Weighted Average Interest Rate (Floating) | 4.46% | 4.86% |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 20% ($39.7 million) year-over-year. This was driven primarily by a significant increase in voyage charter revenues ($26.4 million vs. $1.3 million) and profit sharing revenues ($22.3 million vs. $0.3 million) due to improved tanker spot rates and cash sweep arrangements with Frontline.
- Profitability: Net income increased by 38% ($26.8 million). Net operating income rose 23% due to higher revenues, partially offset by increased ship operating expenses and depreciation.
- Asset Sales: Recorded a gain on sale of assets and termination of charters of $20.1 million, primarily from a settlement regarding four Handysize drybulk carriers redelivered in 2012.
- Debt Structure: Issued NOK900 million senior unsecured floating rate bonds due 2019 ($138.8 million equivalent) and redeemed NOK500 million bonds due 2014. Total debt increased slightly, but the weighted average interest rate on floating rate debt decreased to 4.46%.
- Cash Flow: Operating cash flow decreased by $20.2 million, largely due to the receipt of a $52.2 million profit share payment in March 2013 that did not recur in the same period in 2014. Investing cash outflows decreased significantly due to refunds from cancelled newbuilding contracts and proceeds from asset sales.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the increase in net income to higher operating income, increased interest income, and lower interest expense. The company continues to manage its debt portfolio with interest rate swaps to fix rates on approximately $1.1 billion of floating rate debt.
- Subsequent Events:
- Sold three VLCCs (Front Opalia, Front Comanche, Front Commerce) in November 2014 for a combined net sales price of $67 million, plus $58 million in compensation for early charter termination.
- Delivered two newbuilding 8,700 TEU container vessels in September and November 2014; two more are scheduled for Q1 2015.
- Arranged a $39 million loan facility for two Kamsarmax dry-bulk carriers delivered in Q3 2014.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for approximately 37% of consolidated operating revenues in the nine months ended September 30, 2014.
- Market Risk: Exposure to fluctuations in charter rates, vessel values, and bunker prices. The company uses derivatives to hedge interest rate and foreign currency risks.
- Guarantees: The company provided guarantees totaling $359 million for loan facilities of its equity-accounted subsidiaries (SFL West Polaris, SFL Deepwater, SFL Hercules, SFL Linus).
- Legal: Routine litigation regarding charter hire obligations; management believes resolution will not have a material adverse effect.
Key Facts for Investor Verification
- Related Party Dependence: Verify the stability of revenue streams from Frontline (37% of revenue) and the terms of the "cash sweep" profit-sharing agreements.
- Debt Maturity Profile: Review the repayment schedule, noting $56.5 million due in the remainder of 2014 and $275.4 million due in 2015.
- Equity Method Investments: Assess the financial health of equity-accounted subsidiaries (SFL West Polaris, SFL Deepwater, SFL Hercules, SFL Linus), which hold significant drilling assets and debt.
- Asset Valuation: Confirm the carrying value of vessels and equipment ($1.32 billion) against current market rates, especially given the recent sale of older VLCCs.
- Liquidity Position: Monitor cash balances ($32.6 million) against upcoming debt maturities and capital expenditure commitments ($153 million in contractual commitments).