Business Context and Reporting Period
Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Three months ended March 31, 2014
Business Overview: SFL is a Bermuda-based global ship-owning company engaged in the ownership, operation, charter, purchase, and sale of vessels and offshore assets. Its portfolio includes oil tankers, drybulk carriers, container vessels, car carriers, jack-up drilling rigs, ultra-deepwater drilling units, offshore supply vessels, and chemical tankers. A significant portion of revenue is derived from related parties, particularly Frontline Ltd.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2014 | Q1 2013 | Full Year 2013 |
|---|---|---|---|
| Total Operating Revenues | $82,671 | $65,087 | $270,860 |
| Net Operating Income | $46,636 | $43,781 | $117,366 |
| Net Income | $40,733 | $32,378 | $89,206 |
| Diluted Earnings Per Share | $0.40 | $0.33 | $0.99 |
| Cash Provided by Operating Activities | $37,061 | $68,000 | $140,124 |
| Cash Used in Financing Activities | ($82,337) | ($134,039) | ($68,043) |
| Total Debt (Short & Long Term) | $1,695,225 | N/A | N/A |
| Cash and Cash Equivalents | $36,982 | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 27% to $82.7 million, driven primarily by $12.2 million in profit-sharing revenues (cash sweep) from Frontline Charterers, which were $0 in the prior year. This was offset by lower gains on asset sales ($10.2 million vs. $18.0 million) and reduced direct financing lease interest income due to vessel sales in late 2013.
- Profitability: Net income rose 26% to $40.7 million. This increase was fueled by higher net operating income, increased interest income, and lower interest expenses ($20.6 million vs. $23.2 million), partially offset by a decline in equity earnings from associated companies ($6.0 million vs. $8.5 million).
- Operating Expenses: Total operating expenses increased to $46.2 million from $39.3 million. The rise was attributed to increased ship operating expenses (due to two Suezmax tankers moving from bareboat to time charters) and higher depreciation.
- Cash Flow: Operating cash flow decreased significantly to $37.1 million from $68.0 million, largely due to the absence of a $52.2 million cash sweep receipt in Q1 2013 that had accrued in 2012.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The company recorded a $10.2 million gain on the settlement of a claim regarding four Handysize dry bulk carriers redelivered in 2012. Additionally, $1.1 million of interest income was recognized from the cancellation of a newbuilding container vessel.
- Asset Transactions: SFL acquired three second-hand container vessels for $53.1 million. Conversely, it cancelled one newbuilding container vessel due to delays (refund received) and two others in April/May 2014 (refunds expected). In May 2014, the company agreed to acquire two Kamsarmax dry-bulk carriers and charter four newbuilding container vessels.
- Debt Management: In March 2014, SFL issued NOK 900 million ($150.3 million) senior unsecured bonds due 2019. In April 2014, it repaid the NOK 500 million bond maturing in April 2014. The company maintains a significant portfolio of interest rate and currency swaps to hedge floating rate debt.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for approximately 41% of consolidated operating revenues in Q1 2014.
- Guarantees: SFL provided guarantees totaling $749 million for loan facilities of its equity-accounted subsidiaries (SFL West Polaris, SFL Deepwater, SFL Hercules, and SFL Linus). This guarantee amount was scheduled to reduce to $364 million upon the sub-charter of the SFL Linus rig in May 2014.
- Market Risks: Exposure to fluctuations in charter rates, vessel values, bunker prices, and global economic conditions.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of the 41% revenue concentration from Frontline and the terms of the profit-sharing/cash sweep agreements.
- Debt Maturity Profile: Review the repayment schedule for the $1.7 billion total debt, noting the significant maturities in 2018 ($613.8 million) and the recent issuance of the 2019 NOK bonds.
- Equity Method Investments: Assess the financial health and covenant compliance of the four major equity-accounted subsidiaries (SFL West Polaris, SFL Deepwater, SFL Hercules, SFL Linus) which hold significant debt guaranteed by SFL.
- Asset Portfolio Changes: Confirm the delivery and charter status of the newly acquired second-hand container vessels and the two Kamsarmax dry-bulk carriers agreed upon in May 2014.
- Liquidity Position: Monitor the $37 million cash balance against the $206.8 million available under secured revolving credit facilities to ensure sufficient liquidity for upcoming debt maturities and capital expenditures.