SFL Corp. Ltd. — 2013 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2013; filed March 28, 2014. The filing is an annual Form 20-F, not a standalone quarterly report. Financial statements use U.S. GAAP and U.S. dollars.
Business context
Ship Finance International Limited is a Bermuda-based owner and charterer of maritime and offshore assets. Its strategy is to generate stable distributable cash flow through diversified vessels, drilling units and medium- to long-term charters. At December 31, 2013, the active fleet comprised 59 assets, including oil tankers, drybulk and container vessels, car carriers, chemical tankers, jack-up and ultra-deepwater drilling units, and offshore supply vessels. Several drilling-unit subsidiaries are accounted for under the equity method.
2013 financial results and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total operating revenues | $270.9 million | $319.7 million | Down 15% |
| Net operating income | $117.4 million | $207.6 million | Down $90.3 million |
| Net income | $89.2 million | $185.8 million | Down 52% |
| Basic diluted EPS | $1.00 / $0.99 | $2.31 / $2.22 | Lower |
| Operating cash flow | $140.1 million | $86.6 million | Up $53.6 million |
| Cash and equivalents | $58.6 million | $60.5 million | Down $1.9 million |
| Total assets | $3.05 billion | $2.97 billion | Up 2% |
| Consolidated debt | $1.74 billion | $1.83 billion | Down $94.3 million |
| Total debt including equity-accounted subsidiaries | $2.87 billion | Not clearly provided in comparable format | Not clearly provided |
| Stockholders’ equity | $1.19 billion | $994.8 million | Up 20% |
| Dividends declared and paid | $109.1 million; $1.17/share | $152.0 million; $1.86/share | Lower |
Operating margin, measured as net operating income divided by operating revenues, was approximately 43.3% in 2013 versus 64.9% in 2012. Net margin was approximately 32.9% versus 58.1%.
Revenue and earnings drivers
- Direct financing and sales-type lease interest income declined to $59.6 million from $65.7 million, primarily because lease balances amortize over time and because vessels were sold.
- Finance lease service revenue declined to $54.2 million from $64.8 million.
- Profit-sharing revenue fell to $0.8 million from $52.2 million. No cash-sweep revenue was earned from Frontline in 2013; the $0.8 million represented profit sharing from four drybulk carriers chartered to UFC.
- Time-charter revenue increased to $83.4 million from $60.3 million, reflecting full-year contributions from assets delivered or transferred to time charters in 2012 and the addition of a drybulk carrier.
- Bareboat charter revenue declined to $61.0 million from $74.9 million following charter terminations and vessel disposals.
- Voyage charter revenue was $9.7 million, generated after two Suezmax tankers reverted to the Company following purchaser defaults.
- Operating expenses increased to $171.5 million from $159.5 million, primarily due to higher vessel operating expenses and depreciation.
- Gain on asset sales was $18.0 million, compared with $25.7 million in 2012. The 2012 $21.7 million gain on charter termination did not recur.
- Equity in earnings of associated companies declined to $28.2 million from $43.5 million, mainly because of lower earnings from ultra-deepwater drilling units and higher related financing costs.
Cash flow, liquidity and capital structure
- Operating cash flow was $140.1 million. Investing activities used $74.0 million, principally reflecting $109.3 million of newbuilding additions and $81.3 million of net amounts invested in associated companies, partly offset by $83.6 million of vessel-sale and charter-termination proceeds.
- Financing activities used $68.0 million. The Company issued $128.9 million of equity, issued debt, repaid debt, repurchased bonds and paid $109.1 million of dividends.
- Consolidated debt was $1.74 billion at year-end, including $639.7 million of unsecured borrowings and $1.10 billion of secured borrowings. Equity-accounted subsidiaries had an additional $1.13 billion of debt.
- Available borrowing capacity was approximately $177.7 million, including $149.5 million under secured revolving facilities and $28.2 million under a securities facility.
- Debt repayments, including consolidated and equity-accounted subsidiaries, totaled $2.87 billion under the contractual schedule, with $534 million due within one year. Contractual interest payments were estimated at $435 million and vessel purchase commitments at $795 million.
- The Company reported compliance with all loan covenants at December 31, 2013. Key requirements include minimum liquidity, positive working capital, asset-value coverage and a total-liabilities-to-adjusted-assets ratio below 0.80.
- Interest-rate exposure was reduced through swaps and charter interest-adjustment clauses. Net exposure to interest-rate movements was estimated at $207 million; a one-percentage-point change in rates would affect annual interest expense by approximately $2.1 million.
Material changes and unusual items
- The Company issued $350 million of 3.25% senior unsecured convertible bonds in January 2013 and used part of the proceeds to redeem the remaining $248 million of 8.5% senior notes in March 2013.
- The Company issued 8 million common shares in a June 2013 follow-on offering, raising approximately $129 million net. Total shares outstanding increased to 93.26 million from 85.23 million.
- Five vessels were sold in 2013, including two VLCCs, a Suezmax tanker, an OBO and a non-double-hull VLCC. Two VLCC sales included $79 million of amortizing loan notes from Frontline with a face value of $79 million and an initial fair value of $56.8 million.
- The purchaser of two Suezmax tankers defaulted; the vessels returned to the Company and were operated under voyage charters.
- The Company agreed to acquire the West Linus harsh-environment jack-up rig from a related party for approximately $600 million. It was delivered in February 2014 and placed on a charter exceeding 15 years to North Atlantic Linus, guaranteed by NADL.
- Two substantially delayed 4,800 TEU newbuilding contracts were subsequently cancelled, with reimbursement of installments and interest expected. The Company also expanded its container-vessel program through agreements for 8,700 TEU newbuildings and second-hand 4,100 TEU and 5,800 TEU vessels.
- In March 2014, the Company announced a settlement related to four Handysize drybulk carriers and expected to record an approximately $25 million gain.
Outlook, management commentary and principal risks
Management expected tanker spot rates to benefit from improving conditions observed late in 2013 and early in 2014, but cautioned that excess capacity could prevent a sustained recovery. Drybulk fundamentals were expected to improve modestly, while container markets were expected to remain difficult because of overcapacity. Offshore drilling demand remained strong, although additional rig deliveries and greater financial discipline by oil and gas companies could pressure utilization and day-rates.
- Revenue and liquidity are highly dependent on charterers, especially Frontline, Seadrill, NADL and related entities. Frontline represented approximately 38% of 2013 operating revenue, and the Frontline charter amendments reduced base rates by $6,500 per day per vessel through 2015.
- Frontline may face refinancing and liquidity pressure, creating risk of further charter restructuring or payment disruption.
- Shipping and offshore markets are cyclical; vessel oversupply, weak charter rates, declining asset values and charterer defaults could reduce earnings and trigger financing-covenant pressure.
- The Company is highly leveraged and exposed to refinancing requirements, secured asset-value covenants, floating interest rates and counterparty credit risk.
- Environmental, safety, emissions, ballast-water, piracy, sanctions, political and regulatory developments may increase operating or capital costs and restrict vessel deployment.
- Related-party transactions and common ownership with Frontline, Seadrill, NADL, Golden Ocean, Deep Sea and UFC create potential conflicts of interest.
- The Company believes it was not a passive foreign investment company for 2013, but acknowledges significant uncertainty regarding future PFIC status and related U.S. shareholder tax consequences.
- Purchase options, early termination rights and fixed-price sale or purchase obligations could reduce fleet size, future revenues or asset values.
Investor verification points
- Reconcile consolidated debt of $1.74 billion with the additional $1.13 billion of debt at equity-accounted subsidiaries and review all guarantees.
- Assess the sustainability of dividends, including the February 2014 declaration of $0.40 per share, against operating cash flow, debt maturities and vessel commitments.
- Review Frontline’s financial condition, the temporary charter-rate reductions and the absence of Frontline cash-sweep revenue in 2013.
- Verify delivery, financing and charter status for West Linus and the remaining container newbuildings, including delayed or cancelled contracts.
- Evaluate vessel market values relative to carrying values; the filing identified substantial charter-free market-value deficits despite no 2013 impairment charge.
- Review related-party charter, management, financing and guarantee arrangements, including concentration of revenue with Frontline and Seadrill-related counterparties.
- Confirm the status of the approximately $25 million expected drybulk settlement gain and other post-year-end transactions.
- Consider PFIC, U.S. shipping-tax exemption, environmental liability and sanctions exposures before relying on reported dividend or equity returns.