Business Context and Reporting Period
Company: Ship Finance International Limited (SFL Corp Ltd.)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2016
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership, operation, chartering, purchase, and sale of vessels and offshore assets. The fleet includes oil tankers, dry bulk carriers, container vessels, car carriers, and drilling rigs. A significant portion of revenue is derived from related parties, particularly Frontline and its affiliates.
Key Financial Metrics
| Metric (in thousands, except per share) | Nine Months Ended Sep 30, 2016 | Nine Months Ended Sep 30, 2015 |
|---|---|---|
| Total Operating Revenues | $315,102 | $292,826 |
| Net Operating Income | $134,342 | $117,507 |
| Net Income | $117,877 | $146,539 |
| Basic Earnings Per Share | $1.26 | $1.57 |
| Diluted Earnings Per Share | $1.08 | $1.37 |
| Net Cash Provided by Operating Activities | $179,870 | $169,705 |
| Cash and Cash Equivalents (Sep 30, 2016) | $63,420 | $70,175 (Dec 31, 2015) |
| Total Debt Principal Outstanding | $1,582,656 | $1,666,476 (Dec 31, 2015) |
| Available-for-Sale Securities | $116,222 | $199,594 (Dec 31, 2015) |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 8% to $315.1 million, driven by a 50% increase in time charter revenues due to new vessel deliveries (eight Capesize dry bulk carriers and three container vessels) and higher profit-sharing revenues ($44.5 million vs. $38.6 million).
- Net Income Decline: Net income decreased 20% to $117.9 million. This was primarily due to the absence of a $44.6 million one-time gain on the sale of loan notes and share warrants recorded in the prior year, and lower interest income from redeemed Frontline loan notes.
- Operating Expenses: Increased to $180.6 million from $178.6 million. Vessel operating expenses rose $15.3 million due to new vessel deliveries and higher management fees, while depreciation increased $14.4 million. Notably, the $29.2 million vessel impairment charge recorded in the prior year was absent in 2016.
- Asset Sales: Recorded a net loss of $167,000 on asset sales (loss on VLCC Front Vanguard offset by gain on Sea Bear), compared to a $3.3 million gain in the prior year.
- Debt Reduction: Total debt principal decreased by approximately $84 million, largely due to the full redemption of $117.5 million in 3.75% convertible bonds in February 2016.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Events (Post-Sept 30, 2016):
- Issued $225 million in senior unsecured convertible notes due 2021 (5.75% interest).
- Repurchased $166 million of existing 3.25% convertible notes due 2018.
- Agreed to sell the VLCC Front Century for approximately $24.2 million, including charter termination compensation.
- Declared a quarterly dividend of $0.45 per share.
- Unusual Items:
- Frontline Investment: The Company's stake in Frontline was reclassified from an associated company to an available-for-sale security in late 2015. In 2016, it received $10.5 million in dividends from this holding.
- Derivative Losses: Recorded a net loss of $10.5 million in "Other financial items" due to fair value adjustments on non-designated derivatives and cash payments on interest rate swaps.
- Accumulated Other Comprehensive Loss: Significant unrealized losses of $95.8 million on available-for-sale securities (primarily Frontline shares) reduced comprehensive income to $15.4 million.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for approximately 30% of consolidated operating revenues.
- Legal Dispute: The container vessel SFL Europa was detained in Bangladesh in November 2016 due to unpaid expenses by a previous charterer (Hanjin Shipping).
- Charter Amendments: Agreements with Deep Sea involved temporary rate reductions in exchange for extended charter periods and profit-sharing arrangements.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of revenue streams from Frontline (approx. 30% of revenue) and Deep Sea, given the concentration risk.
- Debt Covenants: Confirm continued compliance with financial covenants on the $1.6 billion debt portfolio, particularly given the high leverage and interest rate exposure.
- Asset Valuation: Assess the impact of the $81.4 million unrealized loss on available-for-sale securities (Frontline shares) on the company's equity position.
- Legal Exposure: Monitor the resolution of the SFL Europa detention in Bangladesh and potential costs associated with the release.
- Cash Flow Sustainability: Review the ability to service debt and maintain dividend payments ($126.2 million paid in 9 months) amidst fluctuating charter rates and profit-sharing variability.