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: Preliminary results for the quarter and twelve months ended December 31, 2010.
Filing Date: February 22, 2011 (Press Release dated February 18, 2011)
The Company operates a diversified fleet of vessels and offshore drilling rigs, primarily chartered on long-term fixed-rate contracts. The filing incorporates a press release detailing Q4 2010 performance, capital market activities in early 2011, and strategic asset acquisitions and dispositions.
Key Financial Metrics
| Metric | Q4 2010 | Q4 2009 | Full Year 2010 | Full Year 2009 |
|---|---|---|---|---|
| Total Operating Revenues | $71.2 million | $80.1 million | $308.1 million | $345.2 million |
| Net Operating Income | $38.7 million | $72.2 million | $211.8 million | $209.3 million |
| Net Income | $30.5 million | $62.4 million | $165.7 million | $192.6 million |
| Earnings Per Share (Basic) | $0.39 | $0.80 | $2.10 | $2.59 |
| Cash and Cash Equivalents (Dec 31, 2010) | $87.0 million | $84.2 million | - | - |
| Net Cash Provided by Operating Activities | $14.2 million | $12.5 million | $153.8 million | $125.5 million |
| Total Debt (Short + Long Term) | $1.92 billion | $2.14 billion | - | - |
Note: Q4 2010 Net Income includes an accrued profit share of $2.0 million. Total accrued profit share for 2010 was $30.6 million.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 11% in Q4 2010 compared to Q4 2009, driven by a reduction in finance lease revenues and a softer tanker spot market affecting profit share income.
- Profit Share Reduction: Profit share income dropped from $5.8 million in Q3 2010 to $2.0 million in Q4 2010 due to low spot tanker rates, though it remained positive.
- Accounting Reclassification: The subsidiary owning the drilling rig West Prospero was reclassified from a finance lease to an "investment in associate" effective December 31, 2010, following charter amendments. This changes how future revenues from this asset are reported.
- Asset Mix: The Company delivered three new vessels in Q4 2010, increasing operating expenses. Additionally, non-double hull VLCCs were fully on reduced rates and classified as operating leases for the first full quarter, resulting in a negative contribution of $0.7 million compared to a positive $3.0 million in Q4 2009.
Guidance, Outlook, and Management Commentary
Capital Markets and Financing
- Convertible Notes: In February 2011, the Company completed a $125 million offering of 5-year senior convertible notes with a 3.75% coupon and an initial conversion price of $27.05.
- Bank Financing: Secured approximately $54 million for two Supramax carriers (Nov 2010) and $75.4 million for three additional Supramax carriers (Feb 2011). A commitment of up to $95 million was received for the acquisition of the jack-up rig Soehanah.
- Liquidity: As of Dec 31, 2010, the Company held $87.0 million in cash with no short-term refinancing requirements.
Strategic Transactions
- Acquisitions: Agreed to acquire the jack-up rig Soehanah (Jan 2011) and two Supramax dry bulk carriers (Nov 2010). Remaining capital commitments are estimated at $347 million, with $170 million of financing already secured.
- Dispositions: Agreed to sell two single-hull VLCCs in Feb 2011 for net proceeds of approximately $14.5 million. Sold the vessel Golden Shadow in Dec 2010 for net proceeds of $4.4 million.
- Dividend: Declared an increased quarterly dividend of $0.38 per share, marking the fourth consecutive increase in 12 months.
Risks and Contingencies
- Market Conditions: Spot tanker and dry bulk markets remain soft, impacting profit share income and potential asset values.
- Counterparty Risk: Reliance on long-term charters with major counterparties (e.g., Frontline, Seadrill, Glovis). While fixed-rate contracts provide stability, the Company is exposed to charterer performance.
- Forward-Looking Statements: Actual results may differ due to global economic strength, currency fluctuations, interest rates, and regulatory changes.
Investor Verification Checklist
- Dividend Sustainability: Verify the ability to maintain the increased dividend of $0.38/share given the reduced profit share income from the tanker segment.
- Capital Commitments: Confirm the execution of the remaining $177 million net investment required for newbuildings and the Soehanah rig, and the status of financing for the seven Handysize vessels.
- Accounting Impact: Assess the long-term impact of reclassifying the West Prospero rig to "investment in associate" on consolidated revenue recognition and balance sheet leverage.
- VLCC Disposal: Monitor the closing of the two single-hull VLCC sales and the associated $5.8 million compensation payment to Frontline Ltd.
- Convertible Note Terms: Review the conversion price ($27.05) and call provisions relative to the current market price of SFL shares.