Business Context and Reporting Period
Ship Finance International Limited, a Bermuda-based maritime asset owner and chartering company listed on the NYSE, filed its Form 20-F for the fiscal year ended December 31, 2011. The filing is prepared under U.S. GAAP and covers the company’s shipping and offshore assets, including tankers, drybulk carriers, containerships, drilling units, offshore supply vessels and chemical tankers.
At December 31, 2011, the company had 79,125,000 common shares outstanding. Its strategy is to acquire and diversify marine assets and place them on medium- to long-term time or bareboat charters to generate stable cash flows.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total operating revenues | $295.1 million | $308.1 million | Down 4% |
| Net operating income | $162.7 million | $211.8 million | Down 23% |
| Net income | $131.2 million | $165.7 million | Down 21% |
| Basic EPS | $1.66 | $2.10 | Down 21% |
| Diluted EPS | $1.62 | $2.09 | Down 22% |
| Dividends declared per share | $1.55 | $1.34 | Up 16% |
| Cash provided by operating activities | $163.7 million | $153.8 million | Up 6% |
| Cash used in investing activities | $5.9 million | Cash provided of $77.0 million | Unfavorable change |
| Cash used in financing activities | $149.9 million | $228.0 million | Lower outflow |
| Cash and cash equivalents | $94.9 million | $87.0 million | Up 9% |
| Stockholders’ equity | $857.1 million | $828.9 million | Up 3% |
| Consolidated debt | $1.91 billion | $1.92 billion | Broadly unchanged |
Reported net operating margin was approximately 55.1% in 2011 versus 68.8% in 2010, while net margin was approximately 44.4% versus 53.8%. The filing does not present a separate quarterly fourth-quarter income statement; the reported figures are annual figures for the year ended December 31, 2011.
Revenue and Profit Drivers
- Direct financing and sales-type lease interest income declined to $104.6 million from $126.8 million as lease balances amortized and assets were sold or transferred to operating leases.
- Finance lease service revenue declined to $70.0 million from $76.9 million.
- Profit-sharing revenue fell sharply to $0.5 million from $30.6 million because of weak tanker market rates and the removal of certain non-double-hull tankers from the arrangement.
- Time charter revenue increased to $29.4 million from $4.4 million, primarily due to newly delivered drybulk carriers and containerships.
- Bareboat charter revenue increased to $90.3 million from $68.9 million, principally reflecting the acquisition of the Soehanah jack-up drilling rig.
- Gain on sale of assets declined to $8.5 million from $28.1 million.
- Operating expenses increased to $140.9 million from $124.3 million, mainly due to higher depreciation from new asset deliveries and higher administrative costs. Ship operating expenses were broadly stable.
Debt, Liquidity and Cash Flow
Consolidated debt was $1.91 billion at year-end, including $274 million of 8.5% senior notes due 2013, $75 million of NOK-denominated bonds due 2014, $125 million of 3.75% convertible bonds due 2016 and $1.44 billion of floating-rate secured debt. Debt repayments scheduled for 2012 totaled approximately $150 million on a consolidated basis.
Including equity-accounted subsidiaries, total outstanding indebtedness was approximately $3.3 billion. The equity-accounted subsidiaries included approximately $1.41 billion of debt related to ultra-deepwater drilling assets. The company stated that it was in compliance with all loan covenants at December 31, 2011.
Operating cash flow of $163.7 million exceeded cash dividends paid of $122.6 million. Investing cash flow was nearly neutral after lease repayments, vessel purchases, newbuilding expenditures and asset-sale proceeds. Financing cash flow was negative primarily because of debt repayments, debt fees, bond repurchases and dividends.
Interest-rate swaps effectively fixed approximately $2.0 billion of floating-rate debt, including equity-accounted subsidiaries. Reported net exposure to interest-rate fluctuations was approximately $462 million; a one-percentage-point change in interest rates was estimated to affect annual interest expense by approximately $4.6 million.
Material Changes Versus the Prior Comparable Period
- Net income declined by $34.5 million, or 21%, primarily because of lower profit-sharing revenue, lower asset-sale gains and increased depreciation.
- The tanker market weakened materially. Modern VLCC average time-charter-equivalent rates were reported at $22,100 per day in 2011 versus $42,600 in 2010.
- The company expanded its fleet through delivery of four drybulk carriers, the Soehanah jack-up rig and two 13,800 TEU containership investments, while disposing of five vessels and selling or agreeing to sell additional non-double-hull tankers.
- On December 30, 2011, amendments to 28 Frontline charter agreements provided $106 million of compensation, including a $50 million non-refundable advance against future profit sharing. In exchange, daily charter rates were reduced by $6,500 per vessel from January 1, 2012 through December 31, 2015, after which rates are scheduled to revert to prior levels.
- Beginning in 2012, Frontline’s profit-sharing percentage increased from 20% to 25% above specified thresholds. During the temporary rate reduction, Frontline is to pay 100% of earnings above the reduced rates, subject to a $6,500 daily cap.
- The five-year Horizon Lines charters for five containerships were terminated in April 2012. The company received $40 million of second-lien notes and warrants, and expects to re-employ the vessels in the time-charter market.
Guidance, Outlook, Risks and Unusual Items
Management expects contracted charter cash flows to fund short- and medium-term debt service and working-capital needs, but expects additional borrowing or equity issuance to be required over the longer term. The filing does not provide formal earnings guidance.
Management reported continued weakness in tanker, containership and drybulk charter markets entering 2012, driven by vessel overcapacity and newbuilding deliveries. Offshore drilling markets were described as stronger, supported by higher oil prices and exploration activity.
- Revenue is concentrated among related-party charterers: Frontline accounted for 56% of 2011 operating revenues, and Seadrill is the principal charterer of the drilling units.
- Frontline completed a restructuring in December 2011, increasing counterparty and charter-payment risk despite compensation received and continuing guarantees.
- Charterer purchase options, early termination rights and declining base charter rates may reduce future contracted revenues.
- Vessel market values were below carrying values for substantial portions of the fleet, although management concluded that existing charter cash flows supported the carrying values and no additional impairment was required in 2011.
- The company faces refinancing requirements, including senior notes and secured facilities maturing in 2012 and 2013, as well as substantial debt at equity-accounted subsidiaries.
- Shipping and offshore operations are exposed to charter-rate volatility, vessel oversupply, interest rates, counterparty defaults, environmental regulation, pollution liability, piracy, geopolitical disruption and insurance adequacy.
- The company had two non-double-hull tankers subject to agreed sales, with delivery expected in 2012 and 2013, and remains exposed to phase-out and regulatory risks until delivery.
- U.S. tax exemption under Section 883 and the company’s non-PFIC position depend on factual and legal conditions that could change.
Most Important Facts for Investors to Verify
- Whether Frontline and Seadrill continue making charter payments under the amended agreements and maintain required guarantees.
- The refinancing or repayment plan for 2012–2013 maturities, including debt at equity-accounted subsidiaries.
- Compliance with minimum-value, liquidity, working-capital and leverage covenants as vessel values and charter rates change.
- The timing and economics of the remaining non-double-hull tanker sales and other vessel disposals.
- The re-chartering performance and credit exposure associated with the five containerships formerly chartered to Horizon Lines.
- The sustainability of the $1.55 per-share 2011 dividend given lower earnings, debt obligations and contractual distribution restrictions.
- The effect of vessel-market values below carrying values on future impairment charges, collateral requirements and financing access.
- The company’s reliance on related parties and the potential effect of conflicts of interest on chartering, management and asset transactions.