Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: SFL is a Bermuda-based international ship-owning company engaged in the ownership and operation of vessels and offshore assets. The fleet includes oil tankers, drybulk carriers, container vessels, chemical tankers, and offshore drilling units. The company primarily generates revenue through long-term fixed-rate time charters and bareboat charters, with significant exposure to related parties (Frontline, Seadrill, Deep Sea, Golden Ocean).
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 (in millions) | 2008 (in millions) |
|---|---|---|
| Total Operating Revenues | $345.2 | $457.8 |
| Net Operating Income | $209.3 | $337.4 |
| Net Income | $192.6 | $181.6 |
| Earnings Per Share (Diluted) | $2.59 | $2.50 |
| Cash Flow from Operating Activities | $125.5 | $211.4 |
| Total Assets | $3,001.4 | $3,348.5 |
| Total Debt (Short & Long Term) | $2,136.0 | $2,595.5 |
| Cash and Cash Equivalents | $84.2 | $46.1 |
| Stockholders' Equity | $749.3 | $517.4 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 25% to $345.2 million, primarily driven by a significant drop in profit-sharing revenues ($33.0 million in 2009 vs. $111.0 million in 2008) due to lower spot market charter rates. Direct financing lease interest income also declined due to asset disposals and the natural amortization of lease payments.
- Net Income Increase: Despite lower operating income, Net Income increased 6% to $192.6 million. This was driven by a substantial increase in "Equity in earnings of associated companies" ($75.6 million vs. $22.8 million) and a net gain on other financial items ($24.5 million vs. a loss of $54.9 million), which included a $20.6 million gain on the repurchase of Senior Notes.
- Impairment Charges: The company recorded a $26.8 million vessel impairment charge in 2009 related to six single-hull VLCCs due to IMO regulations limiting their operation from 2010. No such charge was recorded in 2008.
- Debt Reduction: Total debt decreased by approximately $460 million to $2.1 billion, reflecting debt repayments and the repurchase of $148 million in Senior Notes.
- Dividends: Dividends declared per share decreased to $1.20 in 2009 from $2.29 in 2008. Shareholders were offered a cash-or-stock option for dividends in 2009.
Guidance, Outlook, and Risks
- Market Outlook: Management notes that the tanker market weakened in 2009 due to high newbuilding deliveries and weak oil demand. The drybulk market showed unexpected strength in 2009 driven by Chinese demand, while the container market remained weak. The offshore drilling market remains strong for ultra-deepwater units.
- Regulatory Risks: Significant risk exists regarding the phase-out of single-hull tankers. IMO regulations accelerate the phase-out, potentially limiting the trading ability of seven single-hull VLCCs in the fleet starting in 2010. This led to the 2009 impairment charge and potential future charter terminations.
- Counterparty Concentration: The company is highly dependent on a few major charterers. Frontline accounted for 72% of operating revenues in 2009. Risks include the financial stability of these charterers and their ability to pay charter hire or profit-sharing amounts.
- Interest Rate Risk: The company has significant floating-rate debt exposure. While interest rate swaps fix a portion of this exposure, a 1% change in interest rates could impact interest expense by approximately $5.5 million annually.
- Dividend Policy: The Board seeks to pay regular quarterly dividends based on contracted revenues and growth prospects, but the amount is at the Board's discretion and depends on operating results and debt covenants.
Key Facts for Investor Verification
- Single-Hull Fleet Status: Verify the specific phase-out dates and trading restrictions for the seven single-hull VLCCs and the potential impact on future charter revenues and asset values.
- Related Party Dependence: Confirm the financial health of Frontline, Seadrill, and other major related-party charterers, given they represent the vast majority of revenue.
- Debt Covenants: Review the specific financial covenants (e.g., minimum vessel value, free cash, working capital) in the loan facilities to ensure compliance, especially given the volatility in vessel values.
- Profit Sharing Volatility: Assess the sensitivity of future earnings to spot market rates, as profit-sharing payments from Frontline are a significant but volatile revenue component.
- Equity Method Investments: Verify the performance of the three equity-accounted subsidiaries (Front Shadow, SFL West Polaris, SFL Deepwater), which contributed significantly to the 2009 net income increase.