Business Context and Reporting Period
Ship Finance International Limited, a Bermuda-based maritime asset-owning and chartering company listed on the NYSE, filed its Form 20-F for the fiscal year ended December 31, 2016. The filing is annual rather than a standalone fourth-quarter filing. The Company owns, leases and charters vessels and offshore assets across tanker, dry bulk, container, car carrier, chemical tanker, drilling rig and offshore support markets, primarily under medium- and long-term charters.
At year-end, the Company reported 71 active vessels and rigs, including 15 oil tankers, 22 dry bulk carriers, 21 container vessels, two car carriers, two jack-up rigs, two ultra-deepwater units and five offshore support vessels. Two product tankers were under construction for delivery in 2017.
Financial Performance and Position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total operating revenues | $413.0 million | $406.7 million | +1.5% |
| Net operating income | $168.1 million | $166.0 million | +1.2% |
| Net income | $146.4 million | $200.8 million | -27.1% |
| Basic EPS | $1.57 | $2.15 | Down |
| Diluted EPS | $1.50 | $1.88 | Down |
| Cash provided by operations | $230.1 million | $258.4 million | Down |
| Cash and cash equivalents | $62.4 million | $70.2 million | Down |
| Consolidated debt | $1.58 billion | $1.67 billion | Down |
| Total debt including equity-accounted subsidiaries | $2.46 billion | Not clearly provided in the cited table | — |
| Stockholders’ equity | $1.13 billion | $1.24 billion | Down |
Net operating margin was approximately 40.7%, compared with approximately 40.8% in 2015. Net margin declined to approximately 35.5% from approximately 49.4%, primarily because 2015 included significant non-operating gains and higher equity-accounted earnings.
- Time charter revenue increased to $226.7 million from $160.8 million, reflecting additional container vessels, dry bulk carriers and the Suezmax tanker Everbright entering time charter service.
- Profit-sharing revenue declined to $51.5 million from $59.6 million. Frontline-related profit sharing increased to approximately $50.9 million, but the prior cash-sweep arrangement contributed no revenue in 2016 compared with $19.9 million in 2015.
- Bareboat revenue declined to $45.0 million from $68.0 million, primarily because the Soehanah jack-up rig generated no charter hire after the first quarter and offshore support vessel charter rates were reduced.
- Operating expenses declined modestly to $244.7 million from $248.1 million. Higher vessel operating costs and depreciation were substantially offset by lower impairment charges.
- Interest expense increased slightly to $71.8 million from $70.6 million. Interest income fell to $21.7 million from $39.1 million, largely because 2015 included interest and redemption-related income from Frontline loan notes.
- Other non-operating income fell to $0.7 million from $32.6 million. The 2015 result included gains on the sale of Horizon assets and redemption of Frontline loan notes; 2016 included an $8.8 million loss on bond repurchases and $11.6 million of Frontline dividend income.
- Equity in earnings of associated companies declined to $27.8 million from $33.6 million. The associated companies primarily own rigs chartered to Seadrill-related entities.
Cash Flow, Liquidity and Capital Structure
- Operating cash flow was $230.1 million. Investing activities provided $39.4 million, mainly reflecting repayments from lease investments and amounts received from associated companies, partly offset by newbuilding expenditures.
- Financing activities used $277.3 million, including $168.3 million of dividends, $296.8 million of bond repurchases, debt repayments and other financing costs, partly offset by $522.0 million of new borrowings.
- The Company paid four quarterly dividends totaling $1.80 per share, or $168.3 million. A further $0.45 per share dividend was declared in February 2017 and paid in March 2017.
- Net available capacity under secured revolving credit facilities was $204.6 million at year-end, subject to continued covenant compliance.
- Contractual commitments included $76.1 million for two product tanker newbuildings, $122.4 million of capital lease obligations related to a chartered-in 19,200 TEU vessel, and $203.0 million of future commitments for another 19,200 TEU vessel charter-in.
- Including equity-accounted subsidiaries, contractual debt repayments totaled $2.46 billion, with substantial maturities concentrated in 2017 through 2021. The Company stated that it was in compliance with all loan covenants at December 31, 2016.
- Approximately $1.4 billion of floating-rate debt was effectively fixed through interest-rate swaps. Management estimated net exposure to interest-rate fluctuations at approximately $5 million, including equity-accounted subsidiaries.
Material Changes Versus Prior Comparable Period
- Two newbuilding container vessels, Maersk Skarstind and Maersk Shivling, were delivered in 2016 and entered five-year charters to Maersk. MSC Anna, a 19,200 TEU vessel, was delivered in December 2016 and entered a 15-year bareboat charter to MSC.
- The Company sold the offshore support vessel Sea Bear and the VLCC Front Vanguard in 2016, recording a combined net loss of approximately $0.2 million. Front Century was classified as held for sale at year-end and delivered to its buyer in March 2017.
- In October 2016, the Company issued $225 million of 5.75% senior unsecured convertible bonds due 2021 and repurchased approximately $165.8 million principal amount of its 3.25% convertible bonds due 2018.
- The Company issued 8 million shares in connection with the 2021 convertible bond share-lending arrangement. These shares were included in year-end shares outstanding but excluded from weighted-average shares because they are owned by the Company and are expected to be returned by bond maturity.
- Available-for-sale securities declined to $118.5 million from $199.6 million, and accumulated other comprehensive loss increased substantially to $84.8 million, primarily reflecting fair-value losses on securities, including Frontline shares.
- The fleet expanded from 70 active vessels and rigs at year-end 2015 to 71 at year-end 2016, despite disposals, as new container vessel deliveries offset asset sales.
Outlook, Management Commentary and Principal Risks
Management emphasized that the Company seeks to grow distributable cash flow through diversified asset acquisitions and medium- to long-term fixed-rate charters. However, the operating environment remained difficult: tanker rates fell during 2016, dry bulk rates remained depressed, container markets continued to suffer from surplus capacity, and offshore drilling utilization and day rates declined sharply following the oil-price downturn.
- Seadrill exposure: Three drilling units are owned through equity-accounted subsidiaries and chartered to Seadrill-related entities. Seadrill was negotiating a comprehensive restructuring that could involve schemes of arrangement or Chapter 11 proceedings. Lease renegotiations, terminations, covenant breaches or defaults could reduce earnings and cash flow, trigger defaults under rig facilities and require the Company to honor up to $240 million of guarantees.
- Charterer concentration: Frontline accounted for approximately 28% of 2016 operating revenue, while income from associated companies represented approximately 31.7% of net income. The ability of Frontline, Seadrill-related entities, Golden Ocean and other charterers to perform is critical to dividend capacity.
- Market and asset values: Oversupply, weak charter rates and depressed vessel and rig values could reduce earnings, impair assets, limit borrowing capacity or trigger minimum-value covenants.
- Liquidity and refinancing: The Company is highly leveraged and depends on charter receipts, revolving credit availability and future refinancing. Covenant compliance may deteriorate if charterers default or asset values decline.
- Regulation and environmental compliance: Ballast-water treatment, sulfur-emission limits, greenhouse-gas requirements, safety rules and other maritime regulations may require material capital expenditures and increase operating costs.
- Counterparty, operational and legal risks: Risks include charterer defaults, piracy, sanctions, accidents, pollution liabilities, insurance limitations, vessel arrests, litigation and changing tax rules, including potential PFIC treatment for U.S. shareholders.
- Dividend risk: Dividends are discretionary and subject to cash generation, lender restrictions, covenant compliance and the outcome of Seadrill-related restructuring efforts.
Important Facts for Investors to Verify
- Current status and final terms of any Seadrill restructuring, including effects on the three rig leases, guarantees, associated-company earnings and related debt covenants.
- Actual availability of the $204.6 million of revolving credit capacity after covenant testing and any subsequent lender restrictions.
- Near-term debt maturities, particularly the NOK 600 million bonds due in 2017 and the 3.25% convertible bonds due in 2018, and the Company’s refinancing or repayment plans.
- Whether Frontline, Golden Ocean, Deep Sea and other related-party charterers continue making contractual payments and whether amended charter rates or profit-sharing arrangements remain sustainable.
- Carrying values versus current market values of vessels and offshore units, including potential future impairment charges and minimum-value covenant headroom.
- Delivery, financing and charter status of the two product tanker newbuildings and subsequent container vessel deliveries.
- Future dividend declarations, lender restrictions and the proportion of distributable cash flow dependent on Seadrill-related leases.
- Potential effects of new maritime environmental rules and the Company’s future capital requirements for compliance.