Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2011
Filing Date: November 23, 2011
SFL is a major ship owning company listed on the NYSE with a diversified fleet of 69 vessels (including newbuildings) across crude oil tankers, drybulk carriers, container vessels, and offshore drilling units. The majority of the fleet is employed on long-term charters. The filing incorporates preliminary financial results and press releases regarding Q3 2011 performance.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 |
|---|---|---|
| Total Operating Revenues | $73.3 million | $236.9 million |
| Operating Income | $38.0 million | $173.1 million |
| Net Income (GAAP) | $27.5 million ($0.35/share) | $135.2 million ($1.71/share) |
| Adjusted Net Income | $31.4 million ($0.40/share) | N/A |
| Cash and Cash Equivalents | $81.2 million | $66.8 million (Year-end 2010) |
| Net Cash from Operating Activities | $37.8 million | $139.6 million (9M 2010) |
| Dividend Declared | $0.39 per share | N/A |
Note: Q3 2010 revenue figures are significantly higher due to the inclusion of charter hire classified as 'repayment of investments in finance lease' ($24.4M excluded in Q3 2011) and revenues from assets classified as 'investment in associate' ($102.1M excluded in Q3 2011).
Material Changes vs. Prior Period
- Revenue Decline: Reported operating revenues decreased significantly compared to Q3 2010, primarily due to accounting treatment changes where revenues from certain subsidiaries (drilling units and container vessels) are now recognized as "Results in associate" rather than consolidated operating revenue.
- Profit Share Adjustment: A negative adjustment of approximately $1.6 million was recorded due to a weak tanker spot market, reducing the accumulated profit share from Frontline charters from $2.4 million in Q2 to $0.8 million in Q3.
- Derivative Losses: A non-cash mark-to-market loss of $2.4 million on derivatives impacted net income.
- Asset Sales: The company agreed to sell three non-double hull tankers (expected delivery 2012-2013) and sold one combination carrier in October 2011.
Guidance, Outlook, and Management Commentary
Management Commentary: CEO Ole B. Hjertaker described the quarter as "steady," highlighting the on-time delivery of two newbuilding dry-bulk vessels which immediately entered long-term charters. Management emphasized the diversification of the fleet, noting that the offshore sector now represents approximately 43% of the charter backlog, providing stability against short-term market fluctuations.
Liquidity and Financing:
- Long-term financing has been arranged for all vessels under construction.
- The company expects a positive cash flow effect of nearly $90 million in Q4 2011 from newbuilding financing and the sale of the SFL Avon container vessel.
- Remaining capital commitments are approximately $303 million, with the newbuilding program expected to be net cash positive through 2013.
Risks and Contingencies:
- Market Conditions: Continued economic turbulence in Europe and downward pressure on asset values across shipping segments.
- Charterer Risk: Specific focus on the restructuring efforts announced by major charterer Frontline.
- Profit Share Volatility: Risk that remaining accrued profit share from Frontline charters may be reversed in Q4 if charter rates remain weak.
Investor Verification Checklist
- Profit Share Reversal: Verify the status of the remaining $0.8 million accrued profit share from Frontline and the likelihood of further reversals in Q4 2011.
- Asset Sale Execution: Confirm the timing and net proceeds of the three non-double hull tanker sales (expected 2012-2013) and the $26.2 million compensation payment to Frontline.
- Offshore Sector Exposure: Review the specific terms and duration of the long-term fixed-rate contracts for the four drilling units (Seadrill and Apexindo) to assess cash flow stability.
- Capital Commitments: Validate the $303 million remaining capital commitments against the secured financing and projected cash inflows from newbuildings.
- Accounting Treatment: Understand the impact of the "Investment in Associate" accounting method on consolidated revenue visibility for the drilling and container segments.