SFL Corp. Ltd. 2018 Form 20-F Summary
Business context and reporting period
Ship Finance International Limited, now SFL Corp. Ltd., is a Bermuda-based maritime asset-owning and chartering company reporting under U.S. GAAP. The filing is an annual report for the fiscal year ended December 31, 2018, rather than a standalone fourth-quarter filing. The company owns or leases vessels, drilling units and offshore support assets and generally seeks stable cash flows through medium- and long-term time or bareboat charters.
At December 31, 2018, the active fleet totaled 86 assets, including 45 container vessels, 22 dry bulk carriers, five oil tankers, two chemical tankers, two product tankers, two car carriers, two ultra-deepwater drilling units, one jack-up rig and five offshore support vessels. Three drilling units are held through wholly owned subsidiaries accounted for under the equity method.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total operating revenues | $418.7 million | $380.9 million | +9.9% |
| Net operating income | $117.6 million | $154.6 million | -24.0% |
| Net income | $73.6 million | $101.2 million | -27.3% |
| Basic diluted EPS | $0.70 / $0.69 | $1.06 / $1.03 | Declined |
| Operating cash flow | $201.0 million | $177.8 million | +13.0% |
| Cash dividends declared | $149.3 million, or $1.40 per share | $152.9 million, or $1.60 per share | Per-share dividend reduced |
Net income margin was approximately 17.6%, compared with approximately 26.6% in 2017. Net operating margin was approximately 28.1%, compared with approximately 40.6% in 2017. The decline primarily reflected $64.3 million of impairment charges on four VLCCs and five offshore support vessels, higher depreciation and higher interest expense.
Revenue growth was driven mainly by additional container vessels and higher time-charter revenue, which increased to $292.7 million from $238.4 million. Profit-sharing revenue fell to $1.8 million from $5.8 million, including a decline in Frontline-related profit share to $1.5 million from $5.6 million.
Cash and cash equivalents were $211.4 million at year-end, compared with $153.1 million in 2017. Net cash used in investing activities was $866.6 million, principally reflecting $1.14 billion of vessel purchases. Financing activities provided $724.9 million, including $944.1 million of sale-and-leaseback proceeds. The company reported no net available borrowing capacity under secured revolving credit facilities at year-end.
Consolidated total assets were $3.88 billion and stockholders’ equity was $1.18 billion. Consolidated debt principal was $1.46 billion, while total debt including equity-accounted subsidiaries was approximately $2.12 billion. Capital lease obligations increased substantially to $1.17 billion from $239.6 million, primarily because of 2018 sale-and-leaseback transactions involving container vessels.
Material changes versus the prior comparable period
- The company acquired 15 feeder containerships, four 13,800-TEU containerships, three 10,600-TEU containerships and chartered in two 19,400-TEU containerships, expanding the active fleet from 70 to 86 assets.
- The company sold six VLCCs, one container vessel and the jack-up rig Soehanah. The rig disposal generated a $7.6 million gain, while vessel sales and charter terminations produced a net loss of $2.6 million.
- Four VLCCs and five offshore support vessels were impaired, resulting in a $64.3 million vessel impairment charge; no vessel impairment charge was recorded in 2017.
- Seadrill emerged from Chapter 11 in July 2018. SFL agreed to reduce charter hire on three drilling units by approximately 29% for five years, with reduced amounts added back later. The related charters for West Hercules and West Taurus were extended to December 2024.
- Under a July 2018 Solstad restructuring, SFL receives 50% of agreed charter hire for Sea Cheetah and Sea Jaguar through the end of 2019, with other payments deferred until then. All five offshore support vessels remain in lay-up.
- The company issued $164 million principal amount of 4.875% convertible bonds due 2023 and NOK600 million of bonds due 2023, while redeeming the remaining $63.2 million principal amount of 3.25% convertible bonds due 2018.
- The company adopted ASC 606 and ASC 2016-01 in 2018. The latter caused approximately $98.8 million of accumulated unrealized equity-investment losses to be reclassified to retained earnings and introduced income-statement volatility from equity-security fair-value changes.
Guidance, outlook, management commentary and risks
Management’s strategy is to continue selective acquisitions, diversify asset classes and customers, and emphasize medium- and long-term fixed-rate charters. The filing does not provide formal quantitative earnings or dividend guidance. The board retains discretion over dividends; a $0.35-per-share dividend was declared for payment around March 2019.
Management described tanker and container markets as improved in parts of 2018 but still volatile. Dry bulk fundamentals were generally positive but exposed to trade tensions and Chinese demand. Offshore drilling and offshore support vessel markets remained depressed, with oversupply, idle assets and counterparty financial stress.
- Counterparty and concentration risk: Maersk represented approximately 27% of 2018 operating revenue, Golden Ocean approximately 13%, MSC approximately 11% and Frontline Shipping approximately 8%. Income from equity-accounted companies, principally the Seadrill-related drilling units, represented 39.1% of net income.
- Seadrill exposure: A Seadrill default or renewed restructuring could reduce lease income, impair investments and affect covenants. West Taurus was idle at the filing date.
- Solstad exposure: Further restructuring, charter renegotiation or termination could result in losses, redelivery of vessels and covenant pressure.
- Leverage and refinancing: The company has significant secured, unsecured, convertible and lease obligations. Contractual cash obligations totaled approximately $4.18 billion, including debt, interest and capital leases. Certain debt agreements restrict dividends and require minimum liquidity, working capital, asset-value and leverage metrics.
- Interest-rate and benchmark risk: Approximately $1.1 billion of consolidated floating-rate debt and approximately $0.7 billion in equity-accounted subsidiaries were reported. Swaps fixed interest on approximately $0.9 billion of floating-rate debt. LIBOR transition risk and higher interest rates could increase financing costs.
- Regulatory and environmental risk: IMO sulfur limits effective in 2020, ballast-water requirements, emissions rules and other environmental regulations may require substantial retrofit and compliance expenditures. Eighteen vessels were identified as not yet compliant with updated ballast-water guidelines, with compliance costs depending on contractual responsibility.
- Market-value and impairment risk: Several asset classes had carrying values above estimated charter-free market values. The filing identified approximately $2.8 billion of aggregate carrying value for 75 owned assets, with notable valuation deficits in tankers, dry bulk vessels and certain liner assets.
- Dividend risk: Dividends depend on charter receipts, counterparty performance, debt covenants, subsidiary distributions and board discretion; they may be reduced or eliminated.
The company stated that it was in compliance with applicable loan covenants at December 31, 2018, as were Solship and Seadrill for the disclosed relevant facilities. Management also concluded that disclosure controls and internal control over financial reporting were effective, and the auditor expressed an unqualified opinion.
Important facts investors should verify
- Reconcile consolidated debt of $1.46 billion with approximately $2.12 billion including equity-accounted subsidiaries and separately assess the $1.17 billion of capital lease obligations.
- Review maturities and refinancing requirements, particularly the NOK900 million bonds due in 2019 and secured debt due in 2019–2021.
- Assess the collectability and contractual recovery profile of Seadrill and Solstad-related receivables, guarantees and deferred charter payments.
- Validate current charter coverage, counterparty concentration and the $1.41 billion of minimum operating-lease revenues disclosed at year-end.
- Examine the assumptions supporting the $64.3 million impairment charge and remaining vessel carrying values relative to current market values.
- Confirm the cost, timing and allocation of IMO 2020 sulfur-compliance and ballast-water retrofits, including the $3.4 million EGCS commitment.
- Evaluate whether cash generation can support scheduled debt service, capital-lease payments and the current dividend policy without additional refinancing or equity issuance.
- Review related-party transactions with Frontline, Golden Ocean, Seadrill, Hemen-affiliated entities and ADS, including management fees, guarantees, vessel sales and financing arrangements.