Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: Third Quarter ended September 30, 2008 (Unaudited)
Business Overview: SFL operates a fleet of vessels and drilling rigs, primarily under long-term bareboat charters. The company focuses on crude oil shipping and deepwater drilling sectors. As of September 30, 2008, the fleet consisted of 61 vessels and rigs, with a gross fixed-rate charter backlog exceeding $8.5 billion.
Key Financial Metrics
| Metric (in millions, except per share) | Q3 2008 | Q3 2007 | YTD 9M 2008 |
|---|---|---|---|
| Total Operating Revenues | $114.3 | $93.4 | $357.1 |
| Net Operating Income | $80.3 | $59.9 | $271.7 |
| Net Income | $47.4 | $20.6 | $178.5 |
| Earnings Per Share (Basic) | $0.65 | $0.28 | $2.45 |
| Profit Share Income | $28.5 | $5.5 | $95.3 |
| Free Cash (as of Sept 30, 2008) | $118.7 | N/A | N/A |
| Total Debt (Short + Long Term) | $2,426.1 | N/A | N/A |
Note: A significant portion of charter hire ($46.6 million in Q3) is classified as "Repayment of investment in finance leases" and deducted from revenues under US GAAP.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 22.3% year-over-year to $114.3 million, driven by new asset deliveries and higher profit share income.
- Profit Share: Profit share income surged to $28.5 million in Q3 2008 compared to $5.5 million in Q3 2007, reflecting strong spot market earnings for vessels chartered to Frontline Ltd.
- Derivative Adjustments: The company recorded a $10.4 million non-cash negative adjustment for mark-to-market of swaps in Q3 2008, compared to a $14.0 million negative adjustment in Q3 2007.
- Net Income: Net income more than doubled to $47.4 million from $20.6 million in the prior year quarter.
Guidance, Outlook, and Management Commentary
Dividends
The Board declared an increased quarterly cash dividend of $0.60 per share, marking 19 consecutive quarters of stable or increasing dividends. Payment is scheduled for January 7, 2009.
Strategic Acquisitions and Sales
- Drilling Rigs: Acquired two ultra-deepwater drilling rigs (West Hercules and West Taurus) for approximately $1.7 billion in November 2008, with 15-year charters to Seadrill. Expected to generate ~$46.5 million annual net cash contribution in the first five years.
- Vessel Sales: Sold two newbuilding Suezmax tankers for $111 million each. Expected book profit of $68 million to be recognized upon delivery in 2009.
- Terminations: Terminated an agreement to acquire three seismic vessels from SCAN Geophysical ASA due to delivery delays.
Liquidity and Capital Expenditure
As of September 30, 2008, free cash stood at $118.7 million. Subsequent to quarter-end, the company arranged a new secured loan facility with net proceeds of approximately $72 million. Net investment commitments for 2009 are estimated at a net outflow of $16 million, largely offset by committed financing.
Risks and Market Conditions
Management notes significant turmoil in international credit markets and softer shipping markets. However, the company views the crude oil shipping and deepwater drilling sectors as relatively strong. The substantial contract backlog provides stability. Risks include fluctuations in charter rates, vessel values, interest rates, and potential disruption of shipping routes.
Investor Verification Checklist
- Profit Share Volatility: Verify the sustainability of the $28.5 million profit share, which depends on Frontline's spot market earnings exceeding base charter rates.
- Derivative Exposure: Assess the impact of the $10.4 million mark-to-market loss on swaps and the $30 million additional restricted cash security deposited post-quarter due to declining bond/share values.
- Debt Structure: Review the $2.4 billion total debt load and the reliance on secured financing for the $1.7 billion drilling rig acquisition.
- Accounting Treatment: Confirm understanding of "Investment in Associate" accounting for West Polaris and Golden Shadow, where only net income is consolidated, not full revenues.
- Future Cash Flows: Validate the timing of the $68 million book profit recognition from the Suezmax sales scheduled for 2009.