SFL Corporation Ltd. (NYSE:SFL) Q2 2024 Earnings Call Transcript

SFL Corporation Ltd. (NYSE:SFL) Q2 2024 Earnings Call Transcript August 14, 2024

SFL Corporation Ltd. beats earnings expectations. Reported EPS is $0.16, expectations were $-0.01.

Sander Borgli: Welcome to SFL’s Second Quarter 2024 Conference Call. My name is Sander Borgli. I’m Vice President for Investor Relations in SFL. Our CEO, Ole Hjertaker, will start the call with an overview of the second quarter highlights. Then our Chief Operating Officer, Trym Sjølie, will comment on vessel performance matters; followed by our CFO, Aksel Olesen, who will take us through the financials. The conference call will be concluded by opening up for questions, and I will explain the procedure to do so prior to the Q&A session. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements are based on our current plans and expectations and are inherently subject to risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include, but are not limited to, conditions in the shipping, offshore and credit markets. You should therefore not place undue reliance on these forward-looking statements. Please refer to our filings within the Securities and Exchange Commission for a more detailed discussion of risks and uncertainties, which may have a direct bearing on our operating results and our financial condition.

Then I will leave the word over to our CEO, Ole Hjertaker, with the highlights for the second quarter.

Ole Hjertaker: Thank you, Sander. We are now announcing our 82nd dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. We had full cash flow effect from our car carrier new builds this quarter, but charter revenues from drilling rigs were lower, partly due to U.S. GAAP accounting rules where mobilization fees received for the transit to Canada and corresponding costs will be recognized in the third quarter. We also, coincidentally had Linus out of service most of the quarter in connection with a scheduled periodic survey. We reported revenues of nearly $200 million this quarter and the EBITDA equivalent cash flow in the quarter was approximately $131 million. Over the last 12 months, the EBITDA equivalent has been $545 million.

The net income came in at around $21 million in the quarter, or $0.16 per share. We had a positive contribution relating to profit share on Capesize bulkers of $1.6 million and fuels cost savings of $2.8 million in the quarter. And in line with our commitment to return value to shareholders, we are paying a quarterly dividend of $0.27 per share or around 9% dividend yield. Our fixed rate backlog stands at approximately $4.9 billion and importantly, the backlog is concentrated around long-term charters to very strong end users, and this backlog figure excludes revenues from the vessels trading in the short-term market and also excludes revenue on the new dual-fuel chemical carrier that will operate in a pool with Stolt-Nielsen. And it also excludes future profit share optionality, which we have seen can contribute significantly to our net income.

Most of our vessels are long-term charters and we have over the last 10 years completely transformed the company’s operating model, making us relevant for large end users like Maersk, Volkswagen Group and Vitol. And we continue to build the asset portfolio and have taken delivery of four vessels so far this year and expect to take delivery of another three vessels by October. And most of these new vessels have dual fuel propulsion. We have also added massively to the backlog through multiple charter extensions on existing vessels and recently through the ordering of five large containerships in combination with 10-year charters. Our COO, Trym Sjølie will talk more about this later. And in order to fuel further growth and build long-term distributable cash flow per share, we raised $100 million in a public offering a few weeks ago.

And with that, I will give the word over to our Chief Operating Officer, Trym Sjølie.

Trym Sjølie: Thank you, Ole. Including vessels to be delivered, we have 81 maritime assets in our portfolio and our backlog from owned and managed shipping assets stands at $4.9 billion. The current fleet is made up of 15 dry bulk vessels, 39 containerships, 18 tankers, two drilling rigs and seven car carriers. We have a diversified fleet of assets chartered out to first class charterers on mostly long-term charters. Container vessels is now our largest segment with just under 50% of the backlog. We have over the last 10 years completely transformed the company’s operating model from variable polices to time charters, and the majority of our customer base is large industrial end users. In the second quarter, 95% of charter revenues from all assets came from time charter contracts and only about 5% from bareboats or dry leases.

In addition to fixed rate charter revenues, we’ve had significant contribution to cash flow from profit share arrangements over time, both relating to charter rates and cost savings on fuel. In Q2, profit split arrangements have contributed $4.3 million. Out of the 81 vessels and rigs, we have 11 containerships on bareboat type contracts and the rest on time charter and spot trading. In Q2, we had a total of 6,400 operating days defined as calendar day less technical of fire and dry dockings. Two vessels and one rig have been in dry dock in the quarter. Our overall utilization across the fleet in Q2 was 97.6%, mainly due to these dry dockings. The charter revenue from our fleet was $199 million in Q2, which is down from Q1, mainly due to reduced revenues from our two drilling rigs.

Hercules left Namibia mid-May and commenced operations in Canada in mid-July. Due to U.S. GAAP accounting rules, mobilization fees from the Canada campaign and associated costs are deferred and amortized over the drilling period. Therefore, we will accordingly record high revenues and costs in the third quarter from Hercules. Linus went in for its 10-year special periodic survey in mid-May and spent about 10 weeks in dock for the class survey. The rig was back on rate end of July. In the third quarter, we expect revenues to be materially higher than in the second quarter from both drilling rigs. In July, a judgment was made in the High Court case against Allseas, Loadstar, Green Ace charter for US$27.4 million in favor of SFL. Subsequent to this judgment, the Allseas guarantor has become subject to administration, which means there are challenging prospects for recovery of the awarded judgment.

SFL are currently considering next steps. Our OpEx philosophy is to continuously invest in our fleet to optimize the vessel’s performance and maintain a high level of service to our customers. This includes investing to minimize of fire as well as making investments to increase cargo carrying capacity and reducing energy consumption. Such investments in cooperation with our charterers is important as a way to grow our relationship and increase backlog from existing vessels. So far this year, we have increased the backlog to Maersk with new five-year charters for seven of our large container vessels, which is a result of close relationship and cooperation on vessel upgrades and performance enhancements. On the back of our container experience, we have also recently placed orders for 516,000 CEU dual fuel LNG containerships in China.

These ships will be charted out on 10-year time charters to a leading liner company. On the Hapag-Lloyd charters, the first two upgraded container ships have been delivered already and the third is scheduled for delivery from the yard this month. On the tanker side, we have delivered the first of three LR2 new buildings to vital from the yard in China. The second vessel is scheduled for delivery in about one week time. And we are also pleased to announce that we have just this morning taken delivery of the 33,000 ton deadweight chemical tanker SFL Aruba for deployment installed tankers pool. We further aim to take delivery of the sister vessel by the end of the month for delivery to installed under an eight-year time charter. I will now give the word over to our CFO, Aksel Olesen who will take us through the financial highlights of the quarter.

Aksel Olesen: Thank you, Trym. On this slide, we are shown our pro forma illustration of cash flows for second quarter. Please note that this is only a guideline to assess the company’s performance and is not in accordance with U.S. GAAP and also net of extraordinary and non-cash items. The company generated gross charter hire of approximately $199 million during the second quarter, with approximately $90 million coming from our container fleet. This includes approximately $2.8 million in profit share related to fuel savings on seven of large container vessels. The car carrier fleet generated approximately $26 million of charter hire and our tanker fleet generated approximately $30 million in charter hire in line with the previous quarter.

SFL has 15 dry bulk carriers, of which eight are employed on long-term charters. The vessels generated approximately $23 million in gross charter hire in the second quarter, including approximately $1.6 million profit share generated from our eight Capesize vessels on long-term charters to Golden Ocean. The seven vessels employed in the spot and short-term market contributed with approximately $8.2 million in charter revenue compared to approximately $6.5 million in the first quarter. In the second quarter, our energy assets generated approximately $29 million in contract revenues compared to approximately $66 million in the previous quarter. Linus is under a long-term contract with ConocoPhillips in Norway until the end of 2028. During the quarter, revenues from the rig were $10 million compared to $19.6 million in the previous quarter as the rig underwent its ten year special survey.

The rig was back on contract rate at the end of July after an additional repair scope, which extended SPS and docking scope by an additional five weeks. Hercules finalized the contract with Galp Energia in Namibia in mid-May and then spent approximately half of the quarter in mobilization mode, recording approximately $19.4 million of revenues compared to $46.9 million in the first quarter. The rig commenced the contract with Equinor in Canada in mid-July and on the U.S. GAAP mobilization fees and costs are deferred and amortized over the course of the contract. SFL has accordingly recorded lower income and costs on Hercules in the second quarter. Our operating and G&A expenses for the quarter was approximately $70 million compared to $85 million in the first quarter, mainly due to deferred operating costs of the Hercules as per the U.S. GAAP accounting treatment just mentioned.

This summarizes to an adjusted EBITDA of approximately $131 million compared to $152 million in the previous quarter. We then move on to the profit and loss statement as reported on the U.S. GAAP. As described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. And as our business strategy focuses on long-term charter contracts, some parts of our activities are classified as capital leasing. Therefore, a portion of our charter revenues are excluded from U.S. GAAP operating revenues. This includes repayment of investment in sales type, direct financing leases and leaseback assets, and revenues from entities classified as investment in associates for accounting purposes. So, for the second quarter report, total operating revenues according to U.S. GAAP of approximately $190 million, which is less than approximately $199 million of charter hire actually received for reasons just mentioned.

During the quarter, the company recorded profit share income approximately $4.4 million from fuel savings on some of our large container vessels, our car carriers or eight Capesize vessels on charter to Golden Ocean. Our revenue from our vessels were in line with the first quarter, both revenues and operating expenses from our energy assets was lower during the quarter for reasons previously mentioned. So overall and according to U.S. GAAP, the company reported a net profit of approximately $20.6 million or $0.16 per share, compared to approximately $45 million or $0.36 per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately $186 million of cash and cash equivalents. During the quarter the company arranged a $37 million JOLCO financing for previously debt free container vessel Maersk Phuket at very attractive terms and maturity matching the long-term charter.

In terms of CapEx commitments, we have recently acquired five tankers with a total CapEx of approximately 340 million, of which approximately 244 million will be financed with senior bank financing. Two of the vessels have already been delivered, the three remaining vessels expected to be delivered during the third and fourth quarter. In addition, our harsh environment jack-up rig Linus recently underwent its 10-year SPS with an estimated net remaining capital expenditure of approximately 30 million. Due to an additional repair scope, the CapEx scope increased from with approximately 10 million to a total of approximately 48 million [ph]. Subsequent to quarter end, the company entered into agreements to build five 16,800 teu container vessels with scheduled delivery in 2028 at an aggregate construction cost of approximately 1 billion.

The vessels are expected to be funded by combination of cash at hand and conventional pre- and post-delivery vessel financings. Furthermore, SFL has recently secured financing commitments for a combined amount of approximately 700 million, effectively covering most secure debt financing commitments maturing over the next 12 months. And finally, the company raised 100 million in net profits from a U.S. public offering by issuing 8 million common shares in July. Based on the Q2 numbers, the company had a book equity ratio of approximately 27%. Then, to conclude, the Board has declared the 82nd consecutive cash dividend of $0.27 per share, which represents a dividend yield of approximately 9%. Following recent investments and chart renewals, our fixed chart rate backlog currently stands at 4.9 billion, providing us with strong visibility on our cash flow going forward.

The company has a strong balance sheet and liquidity position and we recently raised $100 million of gross proceeds in a public offering and have secured more than $1 billion in senior secured financing this year to address refinancing of existing vessels and new acquisitions. And with that we conclude the presentation and move on to the Q&A session.

Operator: Thank you, Aksel. We will now open for a question-and-answer session. [Operator Instructions] Thank you. Now we will have our first question from Sherif Elmaghrabi [BTIG]. Please unmute your speaker to ask a question.

Q&A Session

Sherif Elmaghrabi: Hi. Thanks for taking my question. So first on the Hercules, that rig is now getting a little bit closer to the end of its existing contracts and given recent consolidation within the offshore space, our operators becoming more interested in the rig? Or would you say they’re still focused on within their own backlog at the moment?

Ole Hjertaker: Yes. Thank you. The rig is working now in Canada for Equinor doing a really good job there, made a big find in Namibia for Gulp. So there’s clearly a decent market for rigs of this caliber, but these are specialized assets. We have not concluded any follow-on work from the rig. The rig is expected to come off charter sometime during the fourth quarter. It all depends on call it both the drilling efficiency and the scope of work that Equinor wants to do in Canada. So we are in dialogue with various oil companies and potential charters, but have not concluded anything so far and cannot make any specific comments on that until you have something in place. In terms of M&A, what we have seen has been more relating to listed companies and consolidation, with a primary focus, I would think, on drill ships and not so much on semi-submersibles, which is the type of assets that the Hercules is.

But we are of course, following it closely. We see that charter rates are edging up, particularly for ultra-deepwater units, and have seen some quite strong charters and charter rates over the last few months. So we still believe strongly in the long-term story in this segment, but we cannot be specific on when we will announce a new charter for the Hercules quite yet.

Operator: Thank you. [Operator Instructions] As there are no further questions from the audience. I would like to thank everyone for participating in this conference call. If you have any follow-up questions to the management, there are contact details in the press release or you can get in touch with us through the contact pages on our webpage www.sflcorp.com. Thank you.