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: Nine months ended September 30, 2008
Business Overview: A Bermuda-based international ship-owning company with a diversified fleet including oil tankers, drybulk carriers, container vessels, drilling rigs, and offshore supply vessels. The company operates primarily through long-term finance leases and bareboat charters, with significant related-party transactions involving Frontline Ltd., Seadrill Limited, and Deep Sea Supply Plc.
Key Financial Metrics
| Metric (in millions, except per share) | 9 Months Ended Sept 30, 2008 | 9 Months Ended Sept 30, 2007 |
|---|---|---|
| Total Operating Revenues | $357.1 | $276.5 |
| Net Income | $178.5 | $115.3 |
| Basic & Diluted EPS | $2.45 | $1.59 |
| Cash Dividends Paid | $1.69 per share | $1.64 per share |
| Net Operating Income | $271.7 | $213.4 |
| Total Debt Outstanding | $2,426.1 | $2,270.0 |
| Cash and Cash Equivalents | $118.7 | $78.3 |
| Restricted Cash | $36.3 | $27.0 |
| Operating Cash Flow | $134.5 | $168.6 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 29% to $357.1 million, driven primarily by a surge in profit-sharing revenues ($95.3 million vs. $21.2 million) due to higher charter rates achieved by Frontline Charterers. This offset declines in finance lease interest income and service revenues.
- Profitability: Net income rose 55% to $178.5 million. This was bolstered by a significant increase in equity earnings from associated companies ($7.6 million vs. $0.7 million) following the acquisition of the ultra-deepwater drillship West Polaris.
- Expense Trends: Ship operating expenses decreased 7% to $74.5 million due to vessel disposals. However, administrative expenses increased to $7.3 million due to staff costs and legal fees. Depreciation expenses rose to $20.5 million due to new vessel deliveries.
- Debt Levels: Total debt increased to $2,426 million, reflecting new financing for vessel acquisitions, including $1.7 billion for two semi-submersible drilling rigs from Seadrill.
- Cash Flow: Operating cash flow decreased to $134.5 million, attributed to timing differences in profit share payments from Frontline. Investing cash outflows decreased significantly to $126.3 million compared to $415.3 million in the prior year.
Guidance, Outlook, and Risks
- Acquisitions and Disposals: The company continues to diversify its fleet. Notable 2008 acquisitions include two chemical tankers, the West Polaris drillship, and two semi-submersible drilling rigs. The company agreed to sell two newbuilding Suezmax tankers in July 2008.
- Subsequent Events: In November 2008, the company terminated an agreement to acquire three newbuilding seismic vessels due to delivery delays. A dividend of $0.60 per share was declared on November 28, 2008.
- Concentration Risk: There is a high concentration of revenue risk; Frontline accounted for 76% of operating revenues in the nine months ended September 30, 2008. Most vessels are chartered on long-term fixed rates, mitigating seasonal impacts but creating exposure to charterer credit risk.
- Financial Instruments: The company utilizes interest rate swaps and total return swaps to manage interest rate risk and finance share repurchases. Mark-to-market valuation changes on these instruments resulted in a net cost of $9.9 million.
- Forward-Looking Risks: Risks include fluctuations in charter rates and vessel values, changes in global oil consumption, availability of financing, and potential disruption of shipping routes.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of the 76% revenue concentration with Frontline and the terms of the profit-sharing agreements.
- Debt Covenants: Confirm continued compliance with financial covenants given the increase in total debt to $2.4 billion and the mix of floating vs. fixed rates.
- Asset Valuation: Review the fair value of the new ultra-deepwater drilling assets acquired from Seadrill and the impact of the terminated seismic vessel acquisition.
- Cash Flow Timing: Monitor the timing of profit share payments from Frontline, as these are paid after year-end and impact interim cash flow reporting.
- Dividend Sustainability: Assess the ability to maintain the declared dividend of $0.60 per share given the high interest expense ($93.3 million for the period) and debt service requirements.