Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Quarter ended December 31, 2011 (Preliminary Results)
Filing Date: February 24, 2012 (Press Release dated February 17, 2012)
SFL is a Bermuda-based shipping company operating a diversified fleet of vessels and offshore drilling units. The company reported preliminary financial results for the fourth quarter of 2011, highlighting a strategic restructuring of charters with Frontline and continued fleet expansion through newbuilding deliveries.
Key Financial Metrics
| Metric | Q4 2011 | Q3 2011 | Full Year 2011 |
|---|---|---|---|
| Charter Revenues (Non-GAAP) | $193.0 million | $200.0 million | N/A |
| Total Operating Revenues (GAAP) | $76.1 million | $73.3 million | $295.1 million |
| EBITDA (Non-GAAP) | $161.8 million | $169.0 million | $670.1 million |
| Net Income | $30.2 million | $27.5 million | $131.2 million |
| Earnings Per Share (Basic) | $0.38 | $0.35 | $1.66 |
| Cash and Cash Equivalents | $94.9 million | $81.2 million | $94.9 million |
| Dividend Per Share | $0.30 | $0.39 | N/A |
Debt and Liquidity: As of December 31, 2011, total interest-bearing debt (short and long-term) was approximately $1.91 billion. The company prepaid $156 million of bank financing related to Frontline vessels, reducing the specific debt load from ~$740 million to ~$584 million. The company reported no near-term refinancing requirements and compliance with all bank covenants.
Material Changes vs. Prior Period
- Revenue Composition: GAAP operating revenues increased to $76.1 million from $73.3 million in Q3 2011. However, this excludes $129.9 million classified as "repayment of investments in finance leases" and $93.7 million of charter revenues from assets classified as "investment in associate."
- Profitability: Net income rose to $30.2 million ($0.38/share) from $27.5 million ($0.35/share) in the prior quarter, driven by a $2.3 million gain on the sale of the combination carrier Front Striver and stable operating income.
- Frontline Restructuring: In December 2011, SFL amended charters with Frontline, temporarily reducing fixed rates by $6,500/day per vessel (2012-2015) in exchange for a $106 million upfront cash payment and an improved profit share structure (increased from 20% to 25%).
- Dividend Reduction: The quarterly dividend was declared at $0.30 per share, a decrease from $0.39 per share in Q3 2011, though the company has paid dividends for 32 consecutive quarters.
Guidance, Outlook, and Management Commentary
Management Commentary: CEO Ole B. Hjertaker noted that 2011 was the weakest tanker market in 12 years, yet the Frontline vessels generated a positive profit share for the year. The restructuring with Frontline is expected to provide a positive net effect of approximately $0.20 per share per quarter if market revenues align with previous base rates. The company maintains a diversified fleet of 65 vessels chartered to 13 customers, all current on payments.
Outlook and Strategy:
- Market Conditions: Management anticipates continued soft spot markets due to newbuilding deliveries outpacing demand growth. However, they believe their established status provides a competitive advantage in accessing funding compared to smaller entities.
- Capital Expenditure: Remaining capital commitments are estimated at $276 million. The company expects the newbuilding program to be net cash positive by $24 million in 2012 and require only $35 million net investment in 2013.
- Debt Service: The Frontline restructuring is estimated to reduce debt service payments by approximately $40 million in 2012 alone.
Risks and Contingencies: Forward-looking statements are subject to risks including global economic strength, currency and interest rate fluctuations, charter hire rate volatility, bunker price increases, and potential disruptions to shipping routes. The company also faces risks related to the timely delivery of newbuildings and the performance of charterers.
Investor Verification Checklist
- Frontline Restructuring Impact: Verify the long-term cash flow implications of the $106 million upfront payment versus the temporary reduction in fixed charter rates through 2015.
- Accounting Treatment: Confirm the classification of subsidiaries (e.g., drilling units and container vessels) as "Investment in Associate" under US GAAP and how this affects consolidated revenue recognition.
- Dividend Sustainability: Assess the rationale for the dividend reduction from $0.39 to $0.30 per share and its alignment with the company's long-term distribution capacity.
- Newbuilding Deliveries: Monitor the schedule and cost of the remaining seven vessels under construction (three Handysize drybulk and four container vessels) to ensure they remain fully financed and on schedule.
- Debt Covenants: Review the specific terms of the bank covenants to ensure the company remains in compliance given the high leverage ratio and market volatility.