Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Preliminary Financial Results)
Reporting Period: Quarter ended December 31, 2016
Business Overview: SFL operates a diversified fleet of 73 vessels and rigs, including tankers, offshore drilling rigs, container vessels, and dry bulk carriers. The company employs a strategy of long-term charters with profit-sharing features to mitigate market volatility.
Key Financial Metrics
| Metric | Q4 2016 | Q3 2016 |
|---|---|---|
| Total Charter Revenues (Non-GAAP) | $153.5 million | $149 million |
| U.S. GAAP Operating Revenues | $97.8 million | $93.5 million |
| Adjusted EBITDA | $120.6 million | $114.6 million |
| Net Income | $28.5 million | $32.3 million |
| Earnings Per Share (Basic) | $0.31 | $0.35 |
| Net Cash from Operating Activities | $50.2 million | $56.1 million |
| Liquidity (Cash + Available Credit) | $267 million | N/A |
| Dividend Declared | $0.45 per share | $0.45 per share |
Note: GAAP revenues exclude $48.3 million from assets classified as "Investment in associate" and $7.3 million classified as repayment of investment in finance leases.
Material Changes vs. Prior Period
- Profit Share Income: Increased to $7.0 million in Q4 from $5.5 million in Q3, driven by improved crude oil tanker market rates and performance of vessels chartered to Frontline.
- Net Income Decline: Net income decreased to $28.5 million from $32.3 million in Q3. This was primarily due to a $5.3 million vessel impairment charge and an $8.8 million expense from the repurchase of convertible notes, partially offset by a $9.9 million gain on hedging instruments.
- Debt Restructuring: Issued $225 million of 2021 convertible notes and used proceeds to repurchase $166 million of 2018 convertible notes, reducing the 2018 notes outstanding to approximately $184 million.
- Fleet Composition: Delivered the first of two 19,200 TEU container vessels (MSC Anna) and agreed to sell the VLCC Front Century.
Outlook, Risks, and Management Commentary
Management Commentary
CEO Ole B. Hjertaker highlighted the company's diversified $3.7 billion contract backlog with a weighted average charter period of nearly nine years. Management emphasized prudent balance sheet strengthening and the expectation of adding new vessels in 2017 to support long-term distribution capacity.
Guidance and Outlook
- New Deliveries: Expect delivery of the second 19,200 TEU container vessel in March 2017 and two LR2 product tankers in H2 2017.
- Market Sentiment: Early signs of improvement in dry bulk rates; tanker market improved in Q4 but expected to soften in 2017 (mitigated by profit share floors).
Risks and Contingencies
- Seadrill Restructuring: Three drilling rigs are chartered to affiliates of Seadrill Limited, which is negotiating a financial restructuring. SFL has insulated its balance sheet, with only 28% of the $867 million aggregate bank loans guaranteed by SFL.
- Vessel Detention: The 1,700 TEU vessel SFL Europa is detained in Bangladesh due to unpaid port fees by prior charterer Hanjin Shipping. A $4.8 million impairment was recorded.
- Counterparty Merger: Offshore support vessel charterer Deep Sea Supply Plc. is merging with Solstad Offshore and Farstad Shipping; the new entity will assume charter guarantees.
Investor Verification Checklist
- Seadrill Exposure: Verify the status of Seadrill's financial restructuring and the specific terms of the debt guarantees for the three drilling rigs.
- Detained Vessel: Monitor legal proceedings regarding the release of the SFL Europa and potential recovery of costs.
- Convertible Note Terms: Review the dilution impact of the new 2021 Notes versus the retired 2018 Notes, specifically regarding dividend adjustment clauses.
- Impairment Charges: Assess the likelihood of further impairments on the aging VLCC fleet or other assets in a softening market.
- Capital Expenditures: Confirm funding sources for the remaining $91 million in capital commitments for newbuildings due in 2017.