SFL Corporation Ltd. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2021. Although the request identifies “2021 Q4,” the filing is an annual Form 20-F and reports full-year results under U.S. GAAP. The filing was signed March 24, 2022. SFL is a Bermuda-based maritime and offshore asset-owning and chartering company listed on the NYSE under “SFL.”
Business context
SFL owns, leases and charters vessels and offshore assets, seeking stable cash flow primarily through medium- and long-term bareboat or time charters. At December 31, 2021, the fleet included six crude tankers, 15 dry bulk carriers, 35 container vessels, two car carriers, two chemical tankers, four product tankers, one jack-up rig and one ultra-deepwater drilling unit. The company also had four LNG-capable 7,000-CEU car carriers under construction.
Revenue is diversified by customer and asset type, but exposure remains concentrated. Maersk accounted for approximately 32% of 2021 operating revenue, Evergreen for approximately 15%, Golden Ocean for approximately 12%, and Seadrill-rig revenue for approximately 6%.
Financial performance and key metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total operating revenue | $513.4 million | $471.0 million | Up 9.0% |
| Net operating income/(loss) | $242.8 million | $(138.2) million | Improved $381.0 million |
| Net income/(loss) | $164.3 million | $(224.4) million | Improved $388.8 million |
| Basic EPS | $1.35 | $(2.06) | Returned to profit |
| Diluted EPS | $1.30 | $(2.06) | Returned to profit |
| Cash provided by operating activities | $293.6 million | $276.5 million | Up $17.1 million |
| Cash used in investing activities | $(389.1) million | $176.3 million provided | Higher acquisition spending |
| Cash provided by/(used in) financing activities | $25.0 million | $(431.4) million | Improved $456.4 million |
| Cash and cash equivalents | $145.6 million | $215.4 million | Down $69.8 million |
| Stockholders’ equity | $982.3 million | $795.7 million | Up $186.7 million |
Operating margin, calculated as net operating income divided by operating revenue, was approximately 47.3% in 2021 versus negative 29.3% in 2020. The 2021 result included a $39.4 million gain on asset sales and only $1.9 million of vessel impairment charges, compared with $333.1 million of impairment charges in 2020.
- Time charter revenue increased to $369.7 million from $320.6 million.
- Voyage charter revenue increased to $61.8 million from $37.3 million.
- Bareboat charter revenue increased to $30.7 million from $7.9 million, largely following the reclassification and consolidation of drilling assets.
- Sales-type, direct-financing and leaseback interest income declined to $19.5 million from $71.2 million, mainly because vessels were sold or purchase options were exercised.
- Profit-sharing revenue declined to $20.7 million from $22.6 million. Frontline profit share fell to $0.3 million, while Golden Ocean profit share increased to $9.8 million and Maersk fuel-saving revenue increased to $10.6 million.
- Interest expense declined to $97.1 million from $135.4 million, despite higher debt, primarily due to lower LIBOR and refinancing activity.
Debt, liquidity and capital allocation
Total debt principal was $1.904 billion at December 31, 2021, compared with $1.663 billion at December 31, 2020. Finance lease liabilities were $524.2 million, and finance lease liabilities in associated companies were $221.3 million. Including debt and lease liabilities in associated companies, reported obligations totaled approximately $2.649 billion.
- Unsecured bonds totaled approximately $507.6 million, including the $137.9 million 4.875% convertible bonds due 2023 and the $150.0 million 7.25% sustainability-linked bonds due 2026.
- The 5.75% convertible bonds due 2021 were repurchased in part and redeemed in full for $144.7 million in October 2021.
- Approximately $1.5 billion of debt was floating-rate; interest-rate swaps fixed approximately $0.7 billion. Net exposure to interest-rate fluctuations was approximately $607.1 million, with a one-percentage-point rate change estimated to affect annual exposure by approximately $6.1 million.
- Current and long-term debt principal maturities were $302.8 million in 2022, $673.0 million in 2023, $350.2 million in 2024, $304.7 million in 2025, $170.2 million in 2026 and $102.9 million thereafter.
- The company generated $293.6 million of operating cash flow but spent $520.3 million on vessel acquisitions and capital improvements, $61.4 million on newbuilding deposits and $77.6 million on dividends.
- Management stated that charter cash flows should fund anticipated debt service and working capital needs in the short and medium term, but additional borrowing or equity issuance is expected to be required over the longer term.
SFL was in compliance with its financial covenants at year-end. Key requirements include minimum liquidity of $25 million, positive working capital, minimum book equity ratios and minimum collateral values. Dividend payments may be restricted if covenants are breached or a default occurs.
Material changes versus the prior comparable period
- Profitability recovered sharply from the 2020 loss, primarily because 2020 included major impairments related to the COVID-19 downturn, while 2021 included stronger charter revenue and a $39.4 million gain on asset sales.
- The company acquired seven vessels in 2021 for approximately $519.2 million: five container vessels, one Suezmax tanker and two product tankers, as reported in the detailed asset disclosures; the filing also describes related acquisitions and delivery timing.
- SFL sold or redelivered 18 feeder container vessels, seven Handysize dry bulk carriers and the West Taurus drilling unit. Net proceeds from the feeder vessel transaction were $82.0 million; proceeds from the Handysize sale were $97.7 million; West Taurus was recycled for net proceeds of $3.0 million.
- The active fleet decreased from 84 vessels and drilling assets at December 31, 2020 to 66 at December 31, 2021, primarily because of disposals and purchase-option exercises, despite new acquisitions.
- SFL issued $150 million of 7.25% sustainability-linked bonds, entered into $130 million of container-vessel lease-debt financing, issued 10.7 million shares under its DRIP and ATM programs for net proceeds of $89.4 million, and reduced total cash dividends per share to $0.63 from $1.00.
- West Hercules was consolidated from August 27, 2021 after amendments to its charter and financing arrangements. West Linus had already been consolidated from 2020 and was reclassified from a direct-financing lease to an operating lease in March 2021.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings guidance. Management’s strategy is to grow distributable cash flow per share through selective acquisitions, fleet and customer diversification, and medium- to long-term fixed-rate charters, while also pursuing environmental and energy-transition investments.
- Market outlook: Tanker markets were exceptionally weak in 2021, while dry bulk and container markets improved materially. Management expected potential support for tankers and dry bulk in 2022 but emphasized substantial uncertainty. Container market conditions were strong, although a large orderbook and easing congestion could pressure rates.
- Drilling assets: West Hercules was expected to remain employed with an oil major into the second half of 2022 before redelivery to SFL, potentially requiring significant reactivation investment and creating off-hire risk. West Linus was expected to transition to an SFL subsidiary and Odfjell management, subject to regulatory approvals, while retaining a ConocoPhillips drilling contract through the fourth quarter of 2028.
- Seadrill exposure: Seadrill filed for Chapter 11 in February 2021 and emerged in February 2022. During the restructuring, SFL received reduced charter hire of approximately 65%–75% of contractual amounts for West Linus and West Hercules. Counterparty performance and post-redelivery employment remain important risks.
- Debt and refinancing: The company is highly leveraged, has substantial maturities in 2022–2025 and relies on charter cash flows, asset values, refinancing and capital-market access. LIBOR discontinuation after June 30, 2023 requires transition of affected debt and derivatives to alternative benchmarks.
- Market and asset values: Charter rates, vessel values, oil prices, interest rates, currencies and profit-sharing receipts are volatile. Declining vessel values could affect collateral covenants, refinancing capacity and dividends.
- Regulation and ESG: IMO 2020 sulfur rules, ballast-water requirements, forthcoming EEXI/CII standards, EU emissions trading, environmental regulation and investor ESG expectations may increase operating costs, capital expenditures and financing costs.
- Other risks: COVID-19-related crew and supply-chain disruptions, Russia-Ukraine sanctions and shipping-route disruption, cyberattacks, pollution liability, insurance limitations, litigation, customer concentration, related-party conflicts and potential U.S. PFIC or shipping-income tax exposure.
Contractual commitments at year-end totaled approximately $3.507 billion, including debt and interest, finance leases, vessel purchases, newbuilding contracts and ballast-water installations. This included $190.0 million for four vessels delivered in January and February 2022 and $254.2 million for four LNG-capable car carriers scheduled for delivery in 2023 and 2024.
Most important facts for investors to verify
- Verify the sustainability-linked bond terms, related performance targets, 7.25% coupon and $150 million outstanding balance.
- Review the debt maturity schedule, refinancing plans and compliance with minimum liquidity, working-capital, equity-ratio and vessel-value covenants.
- Assess the sustainability of cash flow after the $520.3 million of 2021 vessel acquisitions and capital spending and the lower 2021 dividend.
- Monitor West Hercules redelivery, potential reactivation costs, West Linus regulatory approvals and the transfer of its ConocoPhillips contract.
- Evaluate customer concentration, particularly Maersk, Evergreen, Golden Ocean and Seadrill-related revenue and counterparty exposure.
- Reconcile reported net income with recurring charter earnings, given the $39.4 million asset-sale gain, sharply lower impairment expense and derivative fair-value gains.
- Assess sensitivity to tanker, dry bulk, container and offshore drilling markets, vessel values, fuel spreads, interest rates and LIBOR replacement.
- Review the $254.2 million newbuilding commitment, $190.0 million vessel commitments and the company’s expected need for additional debt or equity funding.
- Confirm tax positions, including Section 883 U.S. shipping-income exemption and the company’s conclusion that it was not a PFIC for 2021.