SFL Corporation Ltd. — FY2022 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; quarterly FY2022 results are not separately presented in the provided text. Financial statements are prepared under U.S. GAAP and were audited by MSPC, which issued unqualified opinions on the financial statements and internal controls.
Business context
SFL is a Bermuda-based maritime and offshore asset-owning and chartering company. At December 31, 2022, its portfolio included tankers, dry bulk carriers, container vessels, car carriers, a jack-up drilling rig and an ultra-deepwater drilling unit, with four dual-fuel car carriers under construction. The strategy emphasizes diversified assets and medium- to long-term bareboat or time charters intended to generate stable distributable cash flow.
The active fleet increased from 66 vessels and rigs at December 31, 2021 to 74 at December 31, 2022. Major revenue concentrations were Maersk at 31% of operating revenue, Evergreen at 15%, Trafigura at 9% and Golden Ocean at 8%.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total operating revenue | $670.4 million | $513.4 million | +30.6% |
| Net operating income | $275.5 million | $242.8 million | +13.4% |
| Net income | $202.8 million | $164.3 million | +23.4% |
| Basic EPS | $1.60 | $1.35 | +18.5% |
| Diluted EPS | $1.53 | $1.30 | +17.7% |
| Cash provided by operating activities | $355.1 million | $293.6 million | +21.0% |
| Cash and cash equivalents | $188.4 million | $145.6 million | +29.4% |
| Stockholders’ equity | $1.091 billion | $982.3 million | +11.1% |
Calculated margins improved in operating scale but not proportionately: net operating margin was approximately 41.1% in 2022 versus 47.3% in 2021, while net margin was approximately 30.2% versus 32.0%. The filing does not present a separately defined adjusted EBITDA measure.
Revenue composition
| Revenue category | FY2022 | FY2021 |
|---|---|---|
| Time charter revenue | $476.0 million | $369.7 million |
| Voyage charter revenue | $72.4 million | $61.8 million |
| Bareboat charter revenue | $59.0 million | $30.7 million |
| Profit-sharing revenue | $27.8 million | $20.7 million |
| Drilling contract revenue | $18.8 million | Not reported |
| Lease interest and service revenue | $10.7 million | $26.1 million |
Cash flow, liquidity and capital structure
- Operating cash flow was $355.1 million. Investing activities used $499.1 million, primarily reflecting $602.5 million of vessel acquisitions, capital improvements and newbuilding installments.
- Financing activities provided $178.4 million, including $959.6 million of debt issuance proceeds, partly offset by $611.3 million of debt repayments and $111.6 million of cash dividends.
- Total debt principal was $2.214 billion, up from $1.904 billion. Finance lease liabilities were $473.0 million, with an additional $209.9 million attributable to SFL’s 49.9% interest in River Box.
- Total borrowings and lease liabilities, including associated-company finance lease liabilities, were approximately $2.897 billion.
- Current debt and current finance lease liabilities totaled approximately $974.9 million, compared with cash of $188.4 million. Management stated that charter cash flows should fund anticipated short- and medium-term debt service and working capital needs.
- Substantially all owned vessels and rigs were pledged as security; the book value of consolidated assets pledged under ship mortgages was $2.579 billion.
- As of December 31, 2022, SFL was in compliance with all financial covenants. Key requirements include minimum liquidity, positive working capital, minimum equity ratios and vessel-value tests. Financing agreements may restrict dividends following a covenant breach.
- Approximately $1.5 billion of debt was floating-rate debt. Interest-rate swaps fixed approximately $0.6 billion, leaving reported net exposure of approximately $903.7 million. A one-percentage-point rate change was estimated to affect annual interest exposure by approximately $9.0 million.
Material changes versus FY2021
- Revenue growth primarily reflected acquisitions and the consolidation or direct operation of the Linus and Hercules drilling assets. Linus began generating drilling contract revenue directly from ConocoPhillips after redelivery from Seadrill in September 2022.
- Operating expenses increased to $408.1 million from $310.0 million, driven by higher vessel count, rig operating expenses, depreciation and administrative costs. Depreciation increased to $187.8 million from $138.3 million.
- No vessel impairment charge was recognized in 2022, compared with a $1.9 million charge in 2021.
- Gain on sale of assets declined to $13.2 million from $39.4 million. FY2022 disposals included two VLCCs and one container vessel; the VLCC sales also generated $4.5 million of early-charter-termination compensation from Frontline Shipping.
- Interest expense rose to $117.3 million from $97.1 million because of higher floating-rate debt, increased borrowings and higher benchmark rates.
- Other non-operating gains increased to $33.8 million from $7.7 million, including gains on debt and equity securities and derivative fair-value movements.
- Quarterly dividends increased from $0.15, $0.15, $0.15 and $0.18 per share in 2021 to $0.20, $0.22, $0.23 and $0.23 in 2022, totaling $0.88 per share. A $0.24 per-share dividend was declared in February 2023.
- The company completed substantial refinancing and acquisition activity, including new SOFR-based facilities, sale-and-leaseback financing and a temporary $290 million acquisition facility that was fully repaid in February 2023.
Guidance, outlook, risks and unusual items
Management did not provide formal consolidated earnings guidance in the filing. Its outlook assumes continued growth through asset acquisitions and contracted cash flows, while acknowledging significant market uncertainty.
- Tankers benefited from stronger 2022 markets and management cited a generally constructive 2023 tanker outlook, but warned that economic weakness, sanctions and emissions regulation could reverse the improvement.
- Dry bulk markets were weaker in 2022, although management expected potential improvement from China’s reopening. Profit-sharing revenue from Golden Ocean declined to $3.0 million from $9.8 million.
- Container markets softened sharply during the second half of 2022 as congestion eased, inflation increased and goods demand normalized. This may pressure charter rates and asset values, although much of SFL’s fleet remains under long-term contracts.
- Hercules was redelivered from Seadrill in December 2022 and was expected to begin an approximately 135-day ExxonMobil Canada contract in the second quarter of 2023 after a special periodic survey.
- Four dual-fuel 7,000 CEU car carriers remain under construction, with total remaining commitments of $209.7 million. Two were expected for delivery in 2023 and two in 2024, with long-term charters to Volkswagen and K Line.
- Total contractual cash obligations were $3.485 billion, including debt, interest, finance leases, scrubber and ballast-water-treatment commitments, and shipbuilding contracts.
- Key risks include leverage and refinancing needs, rising interest rates, charterer and counterparty credit risk, volatile vessel values and freight rates, sanctions and geopolitical conflict, inflation and supply-chain disruption, environmental regulation, energy transition, cyber risk, insurance limitations and fleet aging.
- The 4.875% convertible bonds had $137.9 million outstanding and matured May 1, 2023. A new $150 million sustainability-linked senior unsecured bond due 2027 was issued in January 2023, primarily for refinancing and working capital.
- In January 2023, SFL agreed to sell Glorycrown for gross proceeds of $43.5 million; delivery occurred March 9, 2023.
- The company adopted ASU 2020-06 in 2022, reclassifying the convertible notes’ equity component into liabilities and reducing opening additional paid-in capital by $5.9 million.
- MSPC will not stand for reappointment for FY2023; the audit committee selected Ernst & Young as successor auditor. MSPC reported no disagreements or reportable events.
Most important facts for investors to verify
- Near-term refinancing and repayment capacity for the approximately $921.3 million of debt principal due in 2023 and the May 2023 convertible bonds.
- Actual charter coverage, counterparty credit quality and exposure to Maersk, Evergreen, Trafigura, Golden Ocean and other major customers.
- Performance and contract commencement of Linus and Hercules, including survey costs, downtime and future drilling utilization.
- Remaining acquisition, newbuilding, scrubber and ballast-water-treatment commitments and the financing required to meet them.
- Compliance with minimum liquidity, working-capital, equity-ratio and vessel-value covenants as interest rates and vessel markets change.
- Impact of LIBOR discontinuation and the transition of remaining contracts and derivatives to alternative benchmarks.
- Whether dividends remain sustainable after debt service, capital expenditures and required refinancing.
- Potential changes in tanker, dry bulk, container and offshore drilling markets resulting from recession risk, China’s demand, sanctions, energy transition and environmental rules.
- U.S. tax exemption under Section 883 and the risk of PFIC classification for U.S. shareholders.