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: Six months ended June 30, 2012 (Unaudited)
Filing Date: October 1, 2012
SFL is a Bermuda-based global ship-owning company engaged in the ownership and operation of vessels and offshore assets. As of October 1, 2012, the fleet comprised 61 vessels and drilling units across tanker, drybulk, container, and offshore sectors. The company maintains significant related-party relationships, particularly with Frontline Ltd., which accounted for approximately 55% of operating revenues in the first half of 2012.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|
| Total Operating Revenues | $167,749 | $145,803 |
| Net Operating Income | $114,607 | $82,673 |
| Net Income | $100,178 | $73,569 |
| Basic Earnings Per Share | $1.27 | $0.93 |
| Cash and Cash Equivalents (June 30, 2012) | $100,788 | $94,915 (Dec 31, 2011) |
| Total Debt Outstanding (June 30, 2012) | $1,899,283 | $1,910,464 (Dec 31, 2011) |
| Operating Cash Flow | $48,158 | $93,552 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 15% to $167.7 million, driven primarily by a $27.5 million increase in profit-sharing revenues from Frontline (due to a new "cash sweep" arrangement) and contributions from seven new drybulk vessels.
- Net Income Increase: Net income rose 36% to $100.2 million. This was fueled by higher net operating income and reduced net interest expense, partially offset by a $3.4 million impairment charge on long-term investments and lower earnings from associated companies.
- Gain on Sales: Gains on sale of assets and termination of charters surged to $23.9 million (from $6.1 million in 2011), largely due to the termination of bareboat charters with Horizon Lines ($21.7 million gain) and the sale of the vessel Front Duke.
- Operating Expenses: Increased 11% to $77.1 million, primarily due to the addition of new drybulk carriers and the reactivation of five container vessels previously chartered to Horizon Lines.
- Cash Flow: Operating cash flow decreased significantly to $48.2 million (from $93.6 million) due to timing differences in profit share receipts and an increase in trade receivables related to non-payment by charterer Hong Xiang.
Outlook, Risks, and Unusual Items
Recent Developments and Unusual Items
- Horizon Lines Termination: In April 2012, SFL terminated charters with Horizon Lines for five container vessels, receiving $40 million in second-lien notes and warrants. Three vessels are on short-term charters; two are seeking employment.
- Hong Xiang Default: In July 2012, charterer Hong Xiang redelivered four Handysize drybulk carriers early. SFL is pursuing legal action to recover amounts due. These vessels are currently on short-term charters.
- Asset Sales: Agreements were reached to sell the OBO carrier Front Climber (expected Q4 2012) and Front Rider (delivered July 2012).
- Impairment Charges: Recorded a $2.9 million impairment on an investment in Sea Change Maritime LLC and a $0.5 million impairment on Horizon Lines warrants.
Risks and Contingencies
- Concentration Risk: Frontline accounted for 55% of operating revenues. The company relies heavily on the performance of this related party.
- Liquidity and Debt: Total debt stands at approximately $1.9 billion. The company maintains interest rate swaps to fix rates on $0.9 billion of floating debt. Covenants require maintaining available cash of at least $25 million and a liabilities-to-assets ratio below 0.80.
- Legal Contingencies: Ongoing litigation regarding the Hong Xiang charter default.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of the "cash sweep" profit-sharing arrangement with Frontline, which drove a significant portion of H1 2012 revenue.
- Hong Xiang Recovery: Monitor the status of legal proceedings and potential recoveries from the Hong Xiang charter default.
- Horizon Lines Notes: Assess the creditworthiness of Horizon Lines and the realizable value of the $40 million second-lien notes received.
- Debt Maturity Profile: Review the repayment schedule for the $1.9 billion debt, noting significant maturities in 2013 ($497.7 million) and 2014 ($304.8 million).
- Short-Term Charter Exposure: Evaluate the impact of vessels (formerly Horizon Lines and Hong Xiang) being deployed on short-term charters versus long-term fixed rates.