SFL Corporation Ltd. (NYSE:SFL) Q3 2023 Earnings Call Transcript

SFL Corporation Ltd. (NYSE:SFL) Q3 2023 Earnings Call Transcript November 14, 2023

Unidentified Company Representative: Welcome to SFL’s Third Quarter 2023 Conference Call. My name is [indiscernible] and I’m an analyst in SFL. Our CEO, Ole Hjertaker will start the call by briefly going through the highlights of the quarter. Following that our Chief Operating Officer, Trym Sjølie will comment on vessel performance matters before our CFO, Aksel Olesen will take us through the financials. The call will be concluded by opening up for questions and I will explain the procedure to do so before 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 US 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 highlights for the third quarter.

Ole Hjertaker: Thank you, [indiscernible]. The charter revenues were $214 million in the quarter, which is up 23% from the previous quarter, primarily due to the drilling rig Hercules now back in service. The EBITDA equivalent cash flow in the quarter was approximately $130 million, which was also higher than the second quarter and over the last 12 months the EBITDA equivalent cash flow has been $485 million in total. The net income came in at around $29 million in the quarter or $0.23 per share. The net income was impacted by some one-off items in the quarter including gains on a vessel sale in the third quarter and some mark-to-market effects. This was offset by two tankers that were dried up in the quarter and an unscheduled of fire of around 14 days on the jack-up rig lines due to repair works on the top drive with associated higher OpEx in the quarter.

In line with the improved results and commitment to return value to our shareholders, we are also increasing our quarterly dividend to $0.25 per share. We have not paid dividends every quarter since our inception in 2004 and this has accumulated to $30 per share or more than $2.6 billion in total. And we have a robust charter backlog supporting continued dividend capacity going forward. Our fixed rate backlog stands at approximately $3.4 billion and importantly, the backlog is concentrated around long-term charters to very strong end users. This transition has been gradual as we have changed the business model from a maritime leasing company to maritime infrastructure provider over the last 10 years. This includes switching from primarily bareboat charters or financing arrangements to long-term time charters to end users.

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Q&A Session

And I would note that the backlog figure excludes revenues from the vessels traded in the short-term market and also excludes future profit share optionality, which we have seen can contribute significantly to our net income. In September, we took delivery of the first of our four dual-fuel car carrier newbuilds. The vessel named Emden will go on charter to Volkswagen Group for 10 years together with a sister vessel and we will deliver the vessels to Volkswagen in Europe. The short-term market is red piping hot right now and we have secured a very attractive interim charter from the shipyard in Asia to Europe generating around $8.5 million in EBITDA per vessel over a period of only two months. In addition to the new builds, we also have two existing vessels on charter to Volkswagen that have been extended for additionally three years firm plus extension options generating approximately $23.5 million in EBITDA per vessel per year.

We have a very close business relationship with Maersk Line with 17 vessels on long-term charters. Maersk Line recently exercised an option to extend the time charter for a 9,500 TEU vessel until mid-2025. This is at a higher rate than the current charter rate adding $13 million to the charter backlog. In addition, we have a profit share relating to scrubber benefits on that vessel where our share currently is 78%. In the third quarter, we also fully repaid a Norwegian kroner-denominated bond loan issued in 2018 where there was $48 million remaining at maturity. This was paid down from our cash balance. This loan was originally the equivalent of approximately $85 million and the rest had already been repurchased opportunistically in the market.

We have recently raised significant amounts in the new debt funding at very attractive terms in Asia and don’t see a need to refinance the recently repaid bond loan with new financing in the near-term. And after the extensive SPS and upgrade works to our harsh environment semi-submersible Hercules in the first half of 2023, the rig has been in Canada and drilled a well for ExxonMobil. This was finalized in September and since then the rig has mobilized to Namibia with a stopover in Las Palmas and is scheduled to start drilling for Galp Energia in Namibia next week. This is for two wells plus an optional well testing estimated to take around four months including mobilization. When we calculate average day rates we include mobilization of the rig from Las Palmas and back again and this is compensated by the customer.

This started in early October and the estimated contract value is approximately $50 million implying a day rate of approximately $435,000 per day for the period. After Namibia the rig will move back to Canada to commence our contract with Equinor. The contract is for one well plus one optional well. And the duration for the firm contract period is six months to seven months including transit to and from Canada implying a day rate of approximately $520,000 per day for the period. The rig will then be opened for new contracts from the fourth quarter 2024 onwards. This rig is one of only a handful of harsh environment ultra-deepwater semi-submersible rigs available and market analysts are positive to long-term market prospects based on recent tender activity and a tighter supply-demand balance.

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

Trym Sjølie: Thank you, Ole. Over the years we have changed both our fleet composition and structure and we are now a maritime infrastructure company with 73 maritime assets in our portfolio — and our backlog from owned and mine shipping assets stands at $3.4 billion. The current fleet is made up of 15 dry bulk vessels, 36 container ships, 13 tankers, two drilling rigs and seven car carriers where four are on the water and three are under construction in China. The remaining newbuildings are scheduled for delivery over the next seven months starting in November. We have involved from having a single asset class charter to one single customer to a diversified fleet and multiple counter parties. And the fleet composition has varied from originally 100% tankers via majority offshore assets 10 years ago to container vessels now being the largest segment with just under 50% of the backlog.

Most of our vessels are on long-term charters that we have over the last 10 years completely transformed the company’s operating model and have moved away from financing type bareboat charters and instead assume full operating exposure. This makes us relevant for large industrial end users like Volkswagen, Maersk, Hapag-Lloyd and others. In the third quarter, 94% of charter revenues from all assets came from time charter contracts and only 6% from bare boats 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. Last 12 months, the aggregate profit share has been more than $16 million. Out of the current 73 vessels, we have 13 on bareboat type contracts and 60 on time charter and spot.

Our operation is quite complex with vessels across multiple sectors and we have our own commercial operation out of Oslo as well as operational management out of Singapore and Stavanger. 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 off-hire, as well as investments to increase cargo carrying capacity and reducing energy consumption. This has become increasingly important with the implementation of IMO carbon intensity indicator, which will impact vessels operational profile including routing and speed. EU ETS is also another issue becoming live from next year. In Q3, we had a total of over 6,300 operating days defined as calendar days less technical or fire and dry dockings.