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, 2013
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership, operation, charter, purchase, and sale of vessels and offshore assets. As of August 29, 2013, the fleet comprised 61 vessels and drilling units across tanker, drybulk, car carrier, container, and offshore sectors. The company operates through subsidiaries in multiple jurisdictions and maintains significant long-term charters with major counterparties including Frontline Ltd., Seadrill Limited, and North Atlantic Drilling Ltd.
Key Financial Metrics
| Metric (in millions, except per share) | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|
| Total Operating Revenues | $131.1 | $167.7 |
| Net Operating Income | $69.6 | $114.6 |
| Net Income | $57.4 | $100.2 |
| Basic Earnings Per Share | $0.67 | $1.27 |
| Diluted Earnings Per Share | $0.60 | $1.22 |
| Cash Flow from Operations | $96.2 | $48.2 |
| Total Debt Outstanding | $1.75 billion | $1.83 billion |
| Cash and Cash Equivalents | $41.0 | $60.5 |
| Available-for-Sale Securities | $66.7 | $55.7 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $36.6 million (22%) primarily due to the absence of $29.9 million in profit-sharing revenues from the "cash sweep" arrangement with Frontline Charterers, attributed to low tanker spot rates. This was partially offset by increased time charter revenues from new vessel deliveries.
- Net Income Reduction: Net income fell by $42.7 million, driven by lower net operating income and a decrease in equity earnings from associated companies ($15.5 million vs. $22.7 million). The decline was partially mitigated by a reduction in net interest expense.
- Asset Disposals: Gains on sale of assets and charter terminations were $18.0 million, down from $23.9 million in the prior year, following the disposal of the OBO Front Guider, Suezmax Front Pride, and VLCC Edinburgh.
- Debt Structure: Total debt decreased by approximately $82 million. The company redeemed the remaining 8.5% Senior Notes due 2013 and repurchased NOK floating rate bonds. Conversely, the company issued $350 million in 3.25% convertible bonds in January 2013.
- Operating Expenses: Increased to $79.5 million from $77.1 million, largely due to the addition of new drybulk carriers and car carriers, and the conversion of certain bareboat charters to time charters which shifted operating costs to the company.
Guidance, Outlook, and Risks
- Recent Developments: In June 2013, the company completed an equity offering of 8 million shares for $129.2 million. It also acquired the newbuilding harsh-environment jack-up drilling rig West Linus from North Atlantic Drilling Ltd. (NADL) for $600 million, with a 15-year bareboat charter back to NADL guaranteed by NADL.
- Future Deliveries: The company has agreements for four 8,700 TEU container vessels (2014-2015), four 4,800 TEU container vessels (2013-2014), and one harsh environment jack-up rig (2013). Seven-year time charters are secured for the 4,800 TEU vessels.
- Liquidity: As of June 30, 2013, the company held $41.0 million in cash and $66.7 million in available-for-sale securities. It had $262.6 million in net available credit facilities, including $220.4 million under secured revolving facilities.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for approximately 41% of consolidated operating revenues in the first half of 2013.
- Market Risk: Exposure to fluctuations in charter rates, vessel values, and interest rates. The company utilizes interest rate swaps to fix rates on $1.2 billion of floating debt.
- Profit Sharing: No profit sharing revenue was recognized from Frontline in the period due to a $50 million prepayment made in 2011 that must be exhausted before new revenue is recognized.
Investor Verification Checklist
- Frontline Exposure: Verify the impact of the "cash sweep" and profit-sharing agreements with Frontline on future revenue stability, given the $50 million prepayment buffer.
- Debt Maturity Profile: Review the repayment schedule for the $1.75 billion debt, noting significant maturities in 2014 ($371 million) and 2017 ($195 million).
- Equity Method Investments: Assess the financial health of associated companies (SFL West Polaris, SFL Deepwater, SFL Hercules, SFL Linus) which hold significant drilling assets and debt not fully consolidated on the balance sheet.
- Newbuilding Commitments: Confirm the funding status and delivery timelines for the $467 million in newbuilding contractual commitments.
- Convertible Bonds: Monitor the conversion prices and market conditions for the $350 million 3.25% bonds due 2018 and $125 million 3.75% bonds due 2016.