Business Context and Reporting Period
Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Unaudited Condensed Interim Financial Statements)
Reporting Period: Six months ended June 30, 2018
Business Overview: SFL is a Bermuda-based international ship owning and chartering company engaged in the ownership and operation of vessels and offshore assets. The fleet includes crude oil tankers, dry bulk carriers, container vessels, car carriers, jack-up drilling rigs, and ultra-deepwater drilling units. The company primarily generates revenue through medium to long-term bareboat or time charters.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Operating Revenues | $189,144 | $191,103 |
| Net Operating Income | $52,583 | $78,402 |
| Net Income | $40,421 | $52,393 |
| Basic Earnings Per Share | $0.39 | $0.56 |
| Diluted Earnings Per Share | $0.39 | $0.54 |
| Net Cash Provided by Operating Activities | $94,104 | $101,147 |
| Net Cash Used in Investing Activities | ($439,667) | $63,476 |
| Net Cash Provided by Financing Activities | $337,298 | $21,994 |
| Cash and Cash Equivalents (End of Period) | $144,787 | $248,999 |
| Total Debt Principal Outstanding | $1,944,104 | $1,522,900 |
| Total Assets | $3,464,048 | $3,012,082 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by approximately 1% ($1.96 million) compared to the prior year period. This was driven by a 32% decrease in finance lease service revenues due to the sale of five tankers and the absence of profit-sharing revenues from Frontline Shipping ($0 vs. $5.6 million in 2017). These declines were partially offset by a 9% increase in time charter revenues following the acquisition of four 14,000 TEU container vessels.
- Impairment Charge: A significant non-cash vessel impairment charge of $21.8 million was recorded against three VLCCs leased to Frontline Shipping, contributing to a 33% decrease in Net Operating Income.
- Net Income Decrease: Net income fell by $12.0 million (23%) primarily due to the impairment charge, lower earnings from equity-accounted associated companies (Seadrill-related), and higher interest expenses. This was partially offset by a $21.0 million net gain in "Other financial items," largely driven by a $15.3 million unrealized gain on equity investments following the adoption of ASU 2016-01.
- Capital Expenditures: Investing activities shifted from a net cash inflow in 2017 to a significant outflow of $439.7 million in 2018, primarily due to $511.0 million spent on the purchase of vessels and capital improvements.
- Debt Expansion: Total debt principal increased by $421.2 million to $1.94 billion. This included the issuance of $164 million in 4.875% convertible bonds due 2023 and a $320 million unsecured intermediary loan facility from a related party (Sterna Finance).
Guidance, Outlook, and Risks
- Seadrill Restructuring: A significant portion of the company's net income (36% in H1 2018) is derived from associated companies leasing rigs to Seadrill. Seadrill emerged from Chapter 11 in July 2018. Under the Restructuring Plan, SFL agreed to reduce charter hire payments by approximately 29% for a five-year period starting January 1, 2018, with amounts added back thereafter. This restructuring impacts future cash flows and earnings from these assets.
- Solstad Farstad Restructuring: In July 2018, SFL entered a restructuring agreement regarding two offshore support vessels chartered to a Solstad Farstad subsidiary. The company will receive 50% of agreed charter hire until the end of 2019, with the remaining 50% deferred until the end of 2019.
- Asset Sales and Acquisitions:
- Sold three VLCCs in July 2018 for net proceeds of approximately $77.6 million.
- Agreed to sell the subsidiary Rig Finance Limited (owner of the jack-up rig Soehanah) in July 2018.
- Acquired three 10,600 TEU container vessels in August 2018 with long-term charters to Maersk, financed partly by a new $200 million secured credit facility.
- Dividends: The Board declared a dividend of $0.35 per share on August 22, 2018, payable in late September 2018.
- Risks: Key risks include the ability of counterparties (specifically Seadrill and Frontline Shipping) to honor obligations, fluctuations in charter hire rates and vessel values, interest rate volatility, and the impact of the Seadrill restructuring on future profitability.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used for the $21.8 million impairment charge on the three VLCCs and the subsequent sale of these vessels to ADS Crude Carriers Ltd.
- Seadrill Exposure: Assess the long-term impact of the 29% charter hire reduction on the equity-accounted subsidiaries (SFL Deepwater, SFL Hercules, SFL Linus) and the company's overall dividend capacity.
- Related Party Concentration: Review the concentration of revenue from related parties (Frontline Shipping, Golden Ocean, Seadrill) and the specific terms of the profit-sharing agreements that yielded zero revenue in H1 2018.
- Debt Covenants: Confirm compliance with financial covenants on the $1.94 billion debt portfolio, particularly given the restructuring of Seadrill and the new debt issuances.
- Accounting Changes: Understand the impact of the adoption of ASU 2016-01, which moved fair value changes of equity investments to the income statement, creating a $15.3 million non-cash gain that boosted net income.