Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: Quarter ended March 31, 2009 (Preliminary Results)
Filing Date: May 14, 2009
Business Overview: SFL operates a fleet of 63 vessels and rigs, including crude oil tankers, OBO vessels, and ultra-deepwater drilling units. The company focuses on long-term fixed-rate charters to reputable operators to mitigate market volatility.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Operating Revenues | $96.8 million | $121.9 million |
| Operating Income | $62.6 million | $94.7 million |
| Net Income (GAAP) | $42.7 million ($0.59/share) | $59.8 million ($0.82/share) |
| Adjusted Net Income (Excl. $7.3M non-cash swap loss) |
$50.0 million ($0.69/share) | N/A |
| Profit Share Income | $14.5 million | $33.7 million |
| Free Cash | $50.1 million | $100.7 million |
| Restricted Cash | $54.3 million | $35.6 million |
| Fixed-Rate Charter Backlog | $7.8 billion | $5.5 billion |
Debt & Liquidity: Total interest-bearing debt (short and long term) was approximately $2.47 billion. The company reported no short-term refinancing needs and compliance with all bank covenants. Cash flow from operating activities was $72.5 million.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 20.6% year-over-year, primarily driven by a significant drop in profit share income ($14.5M vs $33.7M) due to softer spot market rates for tankers.
- Net Income Reduction: GAAP net income fell 28.7% to $42.7 million. This was exacerbated by a $7.3 million non-cash mark-to-market loss on bond and equity swap agreements.
- Backlog Growth: Despite market softness, the gross fixed-rate charter backlog increased by $2.3 billion year-over-year to $7.8 billion, with an average remaining term of 9.5 years.
- Drilling Unit Performance: From mid-February 2009, all ultra-deepwater drilling units earned full day rates, generating approximately $98 million in quarterly base bareboat charter revenues.
Guidance, Outlook, and Management Commentary
Management Actions & Strategy
- Capital Expenditure Management: SFL postponed delivery and yard payments for five newbuilding container vessels by up to 18 months. Net newbuilding commitments are reduced to $37 million.
- Dividend Declaration: A quarterly dividend of $0.30 per share was declared, payable in cash or newly issued shares. Approximately 55% of shareholders elected to receive the prior quarter's dividend in shares.
- Executive Change: CEO Lars Solbakken announced his resignation, effective July 31, 2009. Chairman Hans Petter Aas will serve as interim CEO.
Risks and Contingencies
- Market Conditions: Lower global oil demand and a significant orderbook of new tankers may negatively impact profit share contributions for the remainder of 2009.
- Derivatives: The company holds Total Return Swaps (TRS) and Bond Swap Agreements. Changes in market pricing of these instruments impact net income (e.g., the $7.3M loss in Q1).
- Forward-Looking Statements: Results depend on assumptions regarding world economies, charter rates, vessel values, and OPEC production levels.
Investor Verification Checklist
- Profit Share Volatility: Verify the sensitivity of future earnings to spot market rates for the 31 crude oil tankers and 8 OBO vessels chartered to Frontline Ltd.
- Derivative Exposure: Review the specific terms of the Bond and Equity Swap agreements to understand the magnitude of potential future mark-to-market adjustments.
- Capital Commitments: Confirm the status of the $37 million remaining net investment in newbuildings and the timeline for the sale of the two Suezmax tankers.
- Dividend Sustainability: Assess the impact of the 55% share dividend election on future earnings per share dilution versus cash conservation.
- Leadership Transition: Monitor the appointment of a permanent CEO to ensure strategic continuity following Mr. Solbakken's departure.