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: First Quarter ended March 31, 2008 (filed May 23, 2008)
Business Overview: The Company operates a fleet of vessels, primarily crude oil tankers, under long-term fixed-rate charters and profit-sharing arrangements. A significant portion of assets are accounted for as finance leases, where principal repayments are classified as investing activities rather than operating revenue.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 | Q4 2007 |
|---|---|---|---|
| Total Operating Revenues | $121.9 million | $86.5 million | $99.7 million (implied from annual) |
| Net Operating Income | $94.7 million | $83.0 million | N/A |
| Net Income | $59.8 million | $55.3 million | N/A |
| Earnings Per Share (Basic) | $0.82 | $0.76 | N/A |
| Profit Share Income | $33.7 million | $0 | $16.1 million |
| Fixed-Rate Charter Hire | $136.3 million | N/A | N/A |
| Net Cash from Operating Activities | $84.1 million | $112.1 million | N/A |
| Net Cash Used in Investing Activities | ($14.9 million) | $6.4 million | N/A |
| Net Cash Used in Financing Activities | ($46.7 million) | ($36.6 million) | N/A |
| Available Funds (Cash + Credit Lines) | $215.4 million | N/A | N/A |
| Long-Term Debt | $2,092.9 million | $1,749.9 million | $2,090.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 41% year-over-year to $121.9 million, driven primarily by a $33.7 million profit share contribution from Frontline Ltd. vessels, compared to zero in Q1 2007.
- Profit Share Surge: Profit share income doubled from $16.1 million in Q4 2007 to $33.7 million in Q1 2008 due to strong spot charter markets for crude oil tankers.
- Derivative Adjustments: The non-cash mark-to-market loss on swaps decreased significantly to $2.2 million in Q1 2008, compared to a $5.5 million loss in Q4 2007.
- Asset Sales: The Company recognized a $6.4 million book profit on the sale of the Suezmax tanker Front Maple in Q1 2008.
- Debt Levels: Long-term debt increased by approximately $343 million compared to Q1 2007, reflecting new financing for vessel acquisitions and newbuildings.
Guidance, Outlook, and Material Events
Dividend Declaration
The Board declared an increased cash dividend of $0.56 per share for Q1 2008, payable on or about June 30, 2008.
Capital Expenditures and Acquisitions
- West Polaris Drillship: Agreed to acquire a newbuilding ultra-deepwater drillship for approximately $850 million, to be chartered back to Seadrill for 15 years. Expected delivery in late June 2008.
- Chemical Tankers: Agreed to acquire two 17,000 dwt chemical tanker newbuildings for $60 million, chartered to Bryggen/Sinochem.
- Container Vessels: Announced 12-year charters for two 1,700 TEU container vessels (Sea Alfa and Sea Beta) with accumulated net charter revenues of approximately $117.4 million.
- Capital Commitments: Estimated gross investment commitments are $233 million for the remainder of 2008, $326 million for 2009, and $98 million for 2010.
Backlog and Market Conditions
As of March 31, 2008, the gross fixed-rate charter backlog exceeded $6.6 billion with an average remaining term of 10.2 years. Average daily Time Charter Equivalent (TCE) earnings for VLCCs, Suezmax, and OBOs were approximately $82,100, $58,700, and $43,200, respectively, showing significant improvement over Q4 2007.
Risks and Contingencies
Forward-looking statements are subject to risks including fluctuations in charter hire rates, vessel values, interest rates, and global economic conditions. The Company utilizes Total Return Swaps (TRS) to effectively repurchase shares; as of March 31, 2008, TRS agreements covered approximately 692,000 shares.
Investor Verification Checklist
- Profit Share Sustainability: Verify the durability of the spot market rates driving the $33.7 million profit share income from Frontline Ltd.
- Debt Servicing Capacity: Assess the impact of the $850 million drillship acquisition and $657 million total capital commitments on future leverage and liquidity.
- Charter Backlog Quality: Review the specific terms of the $6.6 billion backlog, noting that purchase options by charterers could reduce the remaining charter term.
- Derivative Exposure: Monitor the mark-to-market volatility of swaps and the effective interest rate on the $449 million Senior Notes subject to Bond Swap Agreements.
- Share Repurchase Mechanics: Confirm the status of the 692,000 shares held under Total Return Swaps and the potential for actual cancellation in the future.