SFL

Business Context and Reporting Period

Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter ended September 30, 2004 (Interim Report)
Business Overview: The Company operates a fleet of tankers (VLCCs, Suezmax tankers, and Suezmax OBO carriers) primarily chartered to Frontline Ltd. Revenue is derived from fixed charter rates and a 20% profit share on earnings Frontline generates above those fixed rates.

Key Financial Metrics

Cash Flow (Q3 2004): Operating activities provided $47.4 million; investing activities generated $65.3 million (primarily repayment of amounts due from Frontline); financing activities used $81.5 million.

Material Changes and Operational Highlights

• Profit Share Recognition: The Company recognized $36.7 million in profit share revenue from Frontline in Q3. Approximately $19.5 million of accumulated profit share remains unrecognised and is expected to be recognized in Q4 if vessels continue to earn above fixed rates.
• Market Rates: Average daily Time Charter Equivalents (TCEs) for Q3 were $63,100 (VLCCs), $46,700 (Suezmax tankers), and $27,300 (Suezmax OBOs). These rates reflect a strong tanker market driven by high global oil demand.
• Debt Management: The Company repurchased $29.7 million of its 8.5% Senior Notes in Q3 ($49.7 million YTD). Refinancing of bank debt is underway, expected to reduce annual financing costs by over $9 million.
• Equity Transactions: Issued 1.6 million shares in a private placement in July 2004 for $25.2 million. Frontline Ltd. reduced its stake by 10 percentage points in September and announced a further 13.2 percentage point distribution in December, reducing its holding to 50.3%.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Dividend: Declared a quarterly dividend of $0.45 per share, payable December 7, 2004. Management expects this to be a sustainable long-term minimum dividend.
• Cash Flow Expectations: Cash position is expected to increase significantly in Q1 2005 due to the annual profit share payment from Frontline, which is projected to exceed $100 million.
• Growth Strategy: Discussions are ongoing to acquire and lease three modern VLCCs currently chartered to Frontline, aiming to increase minimum yield with limited new equity.
• Market View: While current spot rates (VLCCs >$200,000/day) are unsustainable, management anticipates a favorable income environment through 2010 due to the single-hull phase-out, strong demand, and limited newbuilding capacity.

Risks and Contingencies

• Market Volatility: Fluctuations in charter hire rates, vessel values, and world oil demand.
• Operational Costs: Changes in bunker prices, dry-docking, and insurance costs.
• Regulatory and Political: Changes in government regulations, potential route disruptions, and geopolitical events.
• Forward-Looking Statements: Actual results may differ materially due to uncertainties in global economic conditions and OPEC production levels.

Investor Verification Checklist

• Profit Share Realization: Verify if the unrecognised $19.5 million profit share is fully recognized in Q4 2004 as projected.
• Debt Refinancing: Confirm the completion of bank debt refinancing and the actual reduction in annual financing costs.
• Dividend Sustainability: Monitor cash flow generation in Q1 2005 to ensure the $0.45/share dividend remains sustainable.
• Frontline Shareholding: Track the completion of the December 15, 2004, share distribution and its impact on Frontline's remaining 50.3% stake.
• Asset Acquisition: Confirm the status of the proposed acquisition of three VLCCs and the associated financing terms.