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, 2008
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, jack-up drilling rigs, ultra-deepwater drilling units, and offshore supply vessels. The company generates revenue primarily through long-term time charters and bareboat charters, with a significant portion of assets chartered to related parties (Frontline, Seadrill, Deep Sea).
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | 2008 (in thousands) | 2007 (in thousands) |
|---|---|---|
| Total Operating Revenues | $458,346 | $398,792 |
| Net Operating Income | $337,402 | $304,881 |
| Net Income | $181,611 | $167,707 |
| Earnings Per Share (Basic) | $2.50 | $2.31 |
| Cash Provided by Operating Activities | $211,386 | $202,416 |
| Total Assets | $3,348,486 | $2,950,028 |
| Total Debt (Short & Long Term) | $2,595,516 | $2,269,994 |
| Cash and Cash Equivalents | $46,075 | $78,255 |
| Stockholders' Equity | $517,350 | $614,477 |
Note: The company reported a net cost of $54.9 million in "Other financial items" in 2008, primarily due to mark-to-market valuation changes on financial instruments (interest rate swaps, bond swaps, and equity swaps).
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 15% to $458.3 million, driven largely by a 111% increase in profit-sharing revenues ($111.0 million in 2008 vs. $52.5 million in 2007) due to higher spot market rates earned by charterers. This offset a decrease in finance lease interest income.
- Profitability: Net income increased 8% to $181.6 million. Net operating income rose 11% to $337.4 million.
- Debt Expansion: Total debt increased by approximately $325 million to $2.6 billion, reflecting significant acquisitions of ultra-deepwater drilling units (West Polaris, West Hercules, West Taurus) and other vessels.
- Dividend Reduction: The quarterly dividend was reduced by 50% to $0.30 per share (declared Feb 2009) from the previous $0.60 per share, reflecting the challenging market environment and reduced profit-sharing expectations.
- Equity Method Investments: Significant increase in "Investment in associated companies" from $4.5 million to $421.0 million, as three new subsidiaries holding drilling units were accounted for under the equity method rather than consolidated.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
- Market Conditions: Management anticipates a softer spot tanker market in 2009 compared to 2008. The container market is expected to be challenging with excess capacity and low rates. The ultra-deepwater drilling market remains attractive due to limited supply.
- Profit Sharing: Future profit-sharing payments from Frontline Charterers are highly dependent on volatile spot market rates. Management cannot assure that profit-sharing payments will be received in future periods.
- Dividend Policy: The Board seeks to pay regular quarterly dividends, but the amount is at their discretion and depends on operating results, cash requirements, and financing restrictions. The recent 50% reduction signals caution.
Key Risks
- Concentration Risk: Frontline accounted for 75% of operating revenues in 2008. The company depends heavily on the ability of Frontline Charterers and Seadrill Charterers to make payments.
- Financial Market Disruption: The global credit crisis and volatility in financial markets could impair the ability of lenders to perform or the company's ability to refinance debt.
- Regulatory Phase-outs: Nine non-double hull tankers face phase-out dates ranging from 2010 to 2018, potentially reducing their tradeability and value.
- Interest Rate Exposure: Despite hedging, the company has significant floating rate debt exposure. A 1% change in interest rates could impact interest expense by approximately $7.5 million annually.
- Derivative Valuations: The company uses Total Return Swaps (TRS) for share repurchases and bond swaps. Declines in share price or bond values result in mark-to-market losses recognized in operations.
Unusual Items
- Mark-to-Market Losses: A $54.9 million charge in "Other financial items" reduced net income, driven by the valuation of derivatives in a volatile market.
- Related Party Transactions: A significant portion of assets were acquired from and chartered to related parties (Frontline, Seadrill, Deep Sea), creating complex inter-company financial flows and potential conflicts of interest.
Investor Verification Checklist
- Dividend Sustainability: Verify the company's ability to maintain dividend payments given the 50% reduction and reliance on volatile profit-sharing income.
- Debt Covenants: Confirm compliance with financial covenants (minimum cash, working capital, adjusted book equity ratios) given the high leverage and potential for vessel value depreciation.
- Related Party Solvency: Assess the financial health of Frontline and Seadrill, as their ability to pay charter hire is critical to SFL's cash flow.
- Derivative Exposure: Review the fair value adjustments on Total Return Swaps and interest rate swaps, as these significantly impact reported earnings.
- Asset Valuation: Monitor the market value of the vessel fleet, particularly non-double hull tankers facing regulatory phase-outs, to assess potential impairment risks.
- Refinancing Needs: Evaluate the maturity profile of the $2.6 billion debt and the company's ability to refinance in a constrained credit market.