Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: SFL is a Bermuda-based international shipowning company engaged in the ownership and operation of vessels and offshore assets. The fleet includes oil tankers (VLCCs and Suezmaxes), drybulk carriers, container vessels, and jack-up drilling rigs. The company's primary strategy is to generate stable cash flows through medium to long-term time or bareboat charters. A significant portion of the fleet is chartered to Frontline Charterers (subsidiaries of Frontline Ltd.), with revenue supplemented by profit-sharing arrangements based on spot market performance.
Key Financial Metrics (Year Ended Dec 31, 2006)
| Metric | 2006 (in millions) | 2005 (in millions) |
|---|---|---|
| Total Operating Revenues | $424.7 | $437.5 |
| Net Operating Income | $293.7 | $300.7 |
| Net Income | $180.8 | $209.5 |
| Earnings Per Share (Basic & Diluted) | $2.48 | $2.84 |
| Cash Flow from Operating Activities | $193.5 | $280.8 |
| Cash Flow from Investing Activities | ($110.7) | ($269.6) |
| Cash Flow from Financing Activities | ($51.1) | ($7.6) |
| Total Assets | $2,553.7 | $2,393.9 |
| Total Debt (Long-term + Current) | $1,915.2 | $1,793.7 |
| Stockholders' Equity | $600.5 | $561.5 |
| Cash and Cash Equivalents | $64.6 | $32.9 |
| Cash Dividends Paid | $149.1 ($2.05/share) | $148.9 ($2.00/share) |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 3% to $424.7 million. This was primarily driven by a decrease in profit-sharing revenues ($78.9 million in 2006 vs. $88.1 million in 2005) due to lower average Time Charter Equivalent (TCE) rates earned by Frontline Charterers in the spot market. Voyage charter revenues turned negative ($-0.7 million) due to adjustments and claims, compared to $9.7 million in 2005.
- Net Income Decrease: Net income fell 14% to $180.8 million. While operating income remained relatively stable, interest expense increased slightly to $113.6 million due to higher underlying interest rates, partially offset by swap interest income.
- Debt Expansion: Total debt increased to $1.915 billion to fund new acquisitions, including container vessels and a jack-up drilling rig. Floating rate debt exposure remains significant, though partially hedged via interest rate swaps.
- Asset Diversification: The company continued to diversify beyond tankers, acquiring container vessels (Horizon Lines), a drybulk carrier (Golden Ocean), and a jack-up drilling rig (Seadrill).
Guidance, Outlook, Risks, and Unusual Items
Outlook and Guidance
Management anticipates continued growth through accretive acquisitions. The company expects to receive profit-sharing payments dependent on spot market strength, which is volatile. Dividend policy aims for regular quarterly payments, with amounts dependent on contracted revenues and growth prospects. The company has significant contractual commitments for newbuilding vessels totaling $362.5 million as of year-end 2006.
Key Risks
- Customer Concentration: Frontline Charterers accounted for over 80% of operating revenues in 2006. The company's cash flows and ability to pay dividends are heavily dependent on these charterers' ability to pay.
- Regulatory Phase-Out: Eleven non-double hull tankers in the fleet face accelerated phase-out dates (2010-2015) under IMO regulations, potentially limiting their trading markets and value.
- Interest Rate Risk: Approximately $1.5 billion of debt is floating rate. While swaps fix rates on $738.7 million, a 1% increase in rates could increase interest expense by approximately $7.9 million annually.
- Market Volatility: The shipping industry is cyclical. Over-supply of container capacity and volatility in oil prices could impact charter rates and profit-sharing income.
Unusual Items
- Deemed Dividends: The company recorded $15.6 million in deemed dividends paid to Frontline Charterers in 2006, related to the transition of vessels from third-party charters to Frontline charters.
- Derivative Valuation: The company recorded a $2.8 million unrealized loss on interest rate swaps in 2006, compared to a gain in 2005.
Investor Verification Checklist
- Frontline Financial Health: Verify the financial stability of Frontline Charterers, as they are the primary source of revenue and their insolvency could materially impact SFL.
- Single Hull Fleet Valuation: Assess the remaining useful life and market value of the 11 non-double hull tankers subject to 2010-2015 phase-out regulations.
- Interest Rate Hedging: Review the effectiveness of interest rate swaps and the impact of rising LIBOR on the $1.5 billion floating rate debt portfolio.
- Profit Sharing Realization: Monitor spot market TCE rates to gauge the likelihood of future profit-sharing payments from Frontline.
- Newbuilding Delivery Schedule: Confirm the timely delivery and chartering of contracted newbuildings (container vessels, seismic vessels, and drybulk carriers) to ensure projected cash flows materialize.