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, 2012
Business Overview: A Bermuda-based global ship-owning company engaged in the ownership and operation of vessels and offshore assets. As of January 24, 2013, the fleet comprised 62 vessels and drilling units across tanker, drybulk, car carrier, container, and offshore sectors. The company operates through subsidiaries in various jurisdictions and maintains significant related-party transactions with Frontline Ltd. and Seadrill Limited.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2012 | 9 Months Ended Sep 30, 2011 |
|---|---|---|
| Total Operating Revenues | $242.0 million | $219.1 million |
| Net Operating Income | $149.7 million | $120.7 million |
| Net Income | $134.7 million | $101.0 million |
| Earnings Per Share (Diluted) | $1.65 | $1.25 |
| Total Debt Outstanding | $1.9 billion | $2.0 billion |
| Cash and Cash Equivalents | $66.8 million | $81.2 million (Sep 30, 2011) |
| Operating Cash Flow | $68.3 million | $131.4 million |
| Dividends Paid | $85.5 million | $91.8 million |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 10.5% to $242.0 million. This was driven by a substantial increase in profit-sharing revenues ($40.1 million vs. $0.8 million) due to a "cash sweep" arrangement with Frontline, and higher time charter revenues from seven new drybulk vessels.
- Profitability: Net income rose 33.4% to $134.7 million. This improvement was supported by higher net operating income and a reduction in net interest expense, partially offset by a $3.4 million long-term investment impairment charge and lower equity earnings from associated companies.
- Asset Disposals: Gains on sale of assets and termination of charters increased significantly to $25.8 million (from $6.1 million), primarily due to the termination of bareboat charters with Horizon Lines ($21.7 million gain) and the sale of specific vessels.
- Expense Management: Ship operating expenses increased to $70.2 million due to the addition of new drybulk carriers and the reversion of five container vessels from bareboat to time charter (incurring operating costs). Administrative expenses decreased to $6.6 million.
- Debt Reduction: Total debt decreased by $100 million to $1.9 billion, aided by the prepayment of floating rate loans and the repurchase of senior notes.
Guidance, Outlook, and Risks
- Subsequent Events (Oct 2012 - Jan 2013):
- Capital Raising: Raised ~$89 million via a public offering of 6 million shares and ~$103.5 million net proceeds from a NOK 600 million senior unsecured bond (fixed at 6.06% USD equivalent).
- Acquisitions: Acquired two car carriers (financed 70% via a $53.2 million loan) and took delivery of a new Handysize drybulk carrier.
- Dividends: Declared and paid $0.78 per share ($66.5 million total) covering Q3 and Q4 2012.
- Asset Sales: Sold multiple vessels including OBOs and VLCCs, receiving significant compensation for charter terminations from Frontline.
- Outlook: The company maintains a diverse asset base with long-term charters (2 to 14 years) providing stable cash flows. Newbuilding deliveries are scheduled for 2013 and 2014 with secured time charters.
- Risks and Contingencies:
- Concentration Risk: Frontline accounted for approximately 57% of operating revenues in the period.
- Counterparty Risk: Significant exposure to related parties (Frontline, Seadrill, Deep Sea) and reliance on their performance under charters.
- Market Risk: Exposure to fluctuations in charter rates, vessel values, and interest rates (mitigated by swaps fixing ~$927 million of debt).
- Liquidity: Covenant requirements include maintaining available cash of at least $25 million and a total liabilities to adjusted total assets ratio below 0.80.
Investor Verification Checklist
- Related Party Dependence: Verify the stability of the "cash sweep" and profit-sharing agreements with Frontline, which contributed significantly to the revenue increase.
- Debt Maturity Profile: Review the repayment schedule for the $1.9 billion debt, noting significant maturities in 2013 ($490 million) and the refinancing of the SFL West Polaris facility.
- Asset Valuation: Assess the impact of the $3.4 million impairment charge on long-term investments and the valuation of Horizon Lines second-lien notes held as available-for-sale securities.
- Dividend Sustainability: Confirm that operating cash flows ($68.3 million) and new financing are sufficient to support the declared dividend policy ($0.78/share) amidst capital expenditures for newbuildings.
- Charter Termination Compensation: Validate the collectability of the $23.5 million compensation received from Frontline for the early termination of OBO charters.