SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended March 31, 2014
Business Overview: SFL operates a diversified fleet of vessels and drilling rigs, primarily chartered on long-term fixed-rate contracts. The company focuses on building asset bases and charter backlogs across container, dry-bulk, tanker, and offshore drilling segments.

Key Financial Metrics

Note: GAAP revenues exclude $11.2 million classified as repayment of investments in finance leases and $67.1 million of charter revenues from assets classified as 'investment in associate'. EBITDA includes these associate assets.

Material Changes vs. Prior Period

• Revenue Growth: Charter revenues increased 5.3% to $160 million, driven by new vessel acquisitions and the commencement of the West Linus drilling rig charter.
• Profitability Surge: Net income more than doubled to $40.7 million from $18.3 million. This was significantly aided by a $10.2 million book gain from the early termination settlement of four Handysize dry-bulk carriers and $11.7 million in cash sweep income from Frontline.
• Dividend Increase: The Board declared an increased quarterly dividend of $0.41 per share, marking the 41st consecutive quarter of dividends.
• Liquidity Position: Cash and cash equivalents decreased to $37 million from $58.6 million due to capital expenditures and debt repayments, though total liquidity remains strong at $334 million including credit facilities.

Guidance, Outlook, and Management Commentary

Management Commentary: CEO Ole B. Hjertaker emphasized the strategy of building the asset base and charter backlog to generate long-term distributable cash flow. The company maintains significant capital for new transactions.

Outlook and Strategy:

• Charter Backlog: As of March 31, 2014, the fixed-rate charter backlog stood at approximately $5.1 billion with an average remaining term of 5.7 years (9.7 years revenue-weighted).
• Market Conditions: The crude oil tanker market softened in Q2, impacting spot rates for Suezmax tankers. Container feeder rates remain low with no near-term upswing expected.
• Capital Allocation: The company cancelled four 4,800 TEU container vessels due to shipyard delays, receiving full refunds. Capital is being redirected to new projects, including four 8,700 TEU newbuildings and six 4,100 TEU second-hand vessels.
• Financing: Raised $150 million in senior unsecured bonds (NOK-denominated, swapped to USD) and repaid $73 million in maturing debt.

Risks and Contingencies:

• Exposure to short-term market fluctuations for assets not on long-term charters (e.g., spot market tankers, feeder containers).
• Counterparty performance and potential litigation risks.
• Timely delivery of newbuildings and adherence to contracted prices.
• Currency and interest rate fluctuations.

Key Facts for Investor Verification

• Non-GAAP Adjustments: Verify the reconciliation of Net Income to EBITDA, specifically the inclusion of $67.1 million in charter revenues from "investment in associate" subsidiaries which are not fully consolidated in GAAP operating revenues.
• One-Time Gains: Confirm the sustainability of earnings given the $10.2 million gain from the early termination settlement of dry-bulk charters.
• Dividend Sustainability: Assess the ability to maintain the increased $0.41 dividend given the cash outflow for new acquisitions and the softening of spot market rates for certain assets.
• Debt Structure: Review the terms of the new $150 million bond issuance and the impact of the $334 million liquidity position on future capital expenditure plans.
• Asset Accounting: Understand the "investment in associate" accounting treatment for drilling rigs and specific container vessels, which impacts the presentation of revenue and debt on the consolidated balance sheet.