SFL Corp. Ltd. (formerly Ship Finance International Limited) — FY2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 20-F and does not provide separate fourth-quarter financial statements.
Business context
SFL is a Bermuda-based maritime asset-owning and chartering company operating a diversified fleet across tankers, dry bulk carriers, container vessels, car carriers, drilling rigs and offshore support vessels. Its strategy is to generate relatively stable cash flow through medium- and long-term time and bareboat charters, while selectively expanding and diversifying its asset base.
At December 31, 2017, the active fleet comprised 70 assets, including 22 dry bulk carriers, 22 container vessels, 11 oil tankers, two chemical tankers, two product tankers, two car carriers, four drilling units and five offshore support vessels. Three drilling assets are owned through wholly owned subsidiaries accounted for under the equity method.
Key financial metrics
<>| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total operating revenues | $380.9 million | $413.0 million | Down 7.8% |
| Net operating income | $154.6 million | $168.1 million | Down 8.0% |
| Net income | $101.2 million | $146.4 million | Down 30.9% |
| Basic EPS | $1.06 | $1.57 | Down 32.5% |
| Diluted EPS | $1.03 | $1.50 | Down 31.3% |
| Cash dividends declared | $152.9 million; $1.60 per share | $168.3 million; $1.80 per share | Per-share dividend down 11.1% |
| Cash provided by operating activities | $177.8 million | $230.1 million | Down 22.7% |
| Cash provided by investing activities | $48.4 million | $39.4 million | Higher by $9.0 million |
| Cash used in financing activities | $135.5 million | $277.3 million | Lower use by $141.8 million |
Net operating margin was approximately 40.6% in 2017 versus 40.7% in 2016. Net margin was approximately 26.6% versus 35.5% in 2016.
Revenue and operating changes
- Time charter revenue increased to $238.4 million from $226.7 million, primarily due to the delivery of two product tankers and a full year of earnings from certain container vessels.
- Direct financing lease interest income increased to $38.3 million from $23.2 million, principally due to additional container vessel leases.
- Profit-sharing revenue declined sharply to $5.8 million from $51.5 million. Frontline-related profit sharing fell to $5.6 million from $50.9 million because of weaker tanker markets and fewer vessels on charter.
- Bareboat charter revenue declined to $40.6 million from $45.0 million, partly reflecting lower earnings from the Soehanah jack-up rig and amended offshore support vessel charters.
- Operating expenses declined to $227.4 million from $244.7 million. Depreciation decreased, vessel operating costs declined following tanker disposals, and no vessel impairment charge was recorded in 2017 versus $5.3 million in 2016.
- Interest expense increased to $90.4 million from $71.8 million, reflecting higher LIBOR, additional debt and capital lease interest.
- Other non-operating items produced a net loss of $3.8 million versus a net gain of $9.5 million in 2016, including a $4.4 million impairment charge on available-for-sale securities and $4.5 million of foreign exchange losses.
Liquidity, debt and balance sheet
| Balance-sheet metric | December 31, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $153.1 million | $62.4 million |
| Total assets | $3.012 billion | $2.937 billion |
| Vessels and equipment, net | $1.763 billion | $1.737 billion |
| Direct financing and sales-type lease investments | $618.1 million | $556.0 million |
| Consolidated debt principal | $1.523 billion | $1.580 billion |
| Total debt including equity-accounted subsidiaries | $2.309 billion | Not clearly provided as a comparable total |
| Stockholders’ equity | $1.195 billion | $1.134 billion |
- The company had approximately $29.0 million of net undrawn availability under secured revolving facilities at year-end, subject to covenant compliance.
- Substantially all owned vessels and rigs were pledged as collateral. Consolidated assets pledged under ship mortgages had a book value of approximately $1.908 billion.
- Approximately $1.2 billion of floating-rate debt, including equity-accounted subsidiaries, was hedged through interest-rate swaps. Reported net exposure to interest-rate fluctuations was $132.4 million; a one-percentage-point rate change was estimated to affect annual interest expense by approximately $1.3 million.
- Minimum contractual cash obligations were presented at $3.238 billion, including debt repayments, interest, capital lease obligations and related interest. This schedule assumed court approval of the Seadrill restructuring plan.
Material changes, outlook and unusual items
- Seadrill restructuring: SFL agreed, subject to court approval, to reduce charter hire for three drilling units by approximately 29% for five years beginning in 2018, with the reduction added back later. The leases for West Hercules and West Taurus would be extended by 13 months to December 2024. Seadrill’s restructuring creates material counterparty, liquidity and dividend risks.
- Dividend reduction: Quarterly dividends fell from $0.45 per share in the first two quarters of 2017 to $0.35 per share in the third and fourth quarters. The Board declared another $0.35 per share dividend in February 2018.
- Fleet activity: SFL delivered MSC Viviana and two product tankers in 2017 and sold four tankers. In March 2018, it announced an agreement to acquire 15 second-hand feeder container vessels and sell the SFL Avon.
- Debt and equity actions: SFL issued NOK500 million of bonds, prepaid a $53 million secured facility, redeemed NOK600 million of bonds, and converted $121 million of 3.25% convertible bonds into 9.4 million common shares. The remaining $63.2 million of those convertible bonds was redeemed in February 2018, with the premium settled in shares.
- Market environment: Tanker markets weakened materially in 2017, while dry bulk and container markets improved. Offshore drilling and offshore support vessel markets remained substantially oversupplied, with pressure on utilization, day rates and charterer credit quality.
- Regulatory costs: Ballast-water treatment requirements and the IMO global sulfur cap scheduled for 2020 may require additional operating and capital expenditures.
- Accounting changes: The company expected a minor opening-retained-earnings adjustment upon adopting the new revenue standard in 2018. Adoption of the financial-instruments standard was expected to reclassify approximately $100.4 million of net unrealized losses from accumulated other comprehensive income to retained earnings.
Principal risks and contingencies
- Reliance on charterers and related parties, including Frontline Shipping, Golden Ocean, Seadrill and Solship; Frontline Shipping represented 15% of 2017 revenue, Golden Ocean approximately 14%, and MSC approximately 10%.
- Seadrill’s restructuring could reduce or eliminate a significant source of earnings and cash flow and could trigger covenant or guarantee exposure if the plan is not approved or performed.
- Five offshore support vessels were in lay-up under charters to the Solstad Charterer, which was discussing a capital restructuring with creditors. Charters could be renegotiated or terminated.
- Depressed tanker, drilling and offshore support markets may reduce vessel values, charter rates, refinancing capacity and dividend capacity.
- Financial covenants require, among other things, minimum cash, positive working capital, minimum collateral values and a total-liabilities-to-adjusted-assets ratio below 0.80. The company reported compliance at December 31, 2017.
- The company had $235.0 million of guarantees related to debt of equity-accounted drilling subsidiaries and $785.8 million of borrowings at those subsidiaries.
- Environmental incidents, piracy, sanctions, cyber risks, changing maritime regulations and uninsured or underinsured liabilities could materially affect results.
- The company reported a $100.4 million accumulated unrealized loss on available-for-sale securities, primarily related to Frontline shares, and a $4.4 million 2017 impairment charge on certain investments.
Investor verification checklist
- Verify court approval and final implementation of Seadrill’s restructuring plan, including the 29% charter-hire reduction, revised guarantees and debt maturities.
- Assess the credit condition and payment performance of Frontline Shipping, Solship and other concentrated charterers.
- Reconcile consolidated debt of $1.523 billion with total debt of $2.309 billion including equity-accounted subsidiaries, guarantees and off-balance-sheet obligations.
- Review dividend sustainability in light of lower 2017 profit sharing, reduced dividends, Seadrill exposure and contractual distribution restrictions.
- Evaluate vessel market values against carrying values, particularly tanker, liner and offshore assets where carrying values exceeded estimated charter-free market values.
- Review the subsequent redemption of the $63.2 million convertible bond and the associated share issuance, as well as the announced 2018 vessel acquisition and disposal transactions.
- Confirm the effect of 2018 accounting-standard adoptions on retained earnings, revenue timing and financial statement comparability.