SFL Corporation Ltd. (SFL) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by and welcome to the Q2, 2021, SFL Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there would be a question and answer session. [Operator Instructions] For your information, this conference is being recorded. Now, I would like to hand the conference over to your speaker today, Ole Hjertaker. Please go ahead.

Thank you and welcome all to SFL's Second Quarter Conference Call. I will start the call by briefly going through the highlights of the quarter. Following that, our CFO, Aksel Olesen will take us through the financials, and then the call will be concluded by opening up for questions. 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, and 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 clients 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 with the Securities and Exchange Commission for more detailed discussion over risks and uncertainties which may have a direct bearing on our operational results and our financial condition. The announced dividend of $0.15 per share, it represents a dividend yield of around 8.5% based on closing price yesterday. This is our 17th quarter with dividends, so it's a bit of a celebration from that perspective. Over the years, we have paid nearly $28 per share in dividends or around $2.4 billion in total and we have had an increasing fixed-rate charter backlog recently supporting continued dividend capacity going forward. The total charter revenues was $141 million in the quarter with more than 80% of this from vessels on long-term charters and less than 20% from vessels employee from short-term charters and in the spot market. The EBITDA equivalent cash flow in the quarter was approximately $103 million. Last 12 months, the EBITDA equivalent has been approximately $424 million. The net income came in at around 20 million in the quarter or $0.16 per share. There were some one-offs in the quarter, including a smaller impairment on a rig we are recycling and negative mark-to-market on interest hedging instruments. There was also a higher interest element in the quarter. SPL already raised the capital to refinance the remaining $147 million convertible note in October and have therefore, around $2 million extra interest charge in the second quarter and third quarter until it's paid down. There were also around $900,000 higher upgrading costs in the quarter due to additional crew rotation costs linked to COVID restrictions. Our fixed-rate backlog has increased and stands at approximately $2.7 billion from owned and managed vessels after recent acquisitions and adjusted for at the recent disposals. This is provided continued cash flow visibility going forward. The backlog excludes revenues from 16 vessels traded into short-term market and also excludes future profit share optionality. In addition, we have excluded charter hire relating to the drilling rates to be conservative in light of the ongoing financial restructuring in Seadrill. We are very pleased to continue to execute on our commitment to invest in assets and markets with a lower carbon footprint. We have spent a lot of time on evaluating various new technology initiatives that can improve performance of vessels, including our existing vessels on the water. In April, we agreed with the Volkswagen Group to build and charter up to new build dual-fuel car carriers designed to use liquefied natural gas or LNG for propulsion. Today, we announced an agreement to build two more vessels in the same series. The charter period for all these four vessels is 10 years from delivery in 2023 and 2024. The transactions have added more than $400 million through the fixed-rate charter backlog. Important, they also added two very solid lead counterparties to our customer portfolio. We are not yet at liberty to disclose the name of the counterparty for the last two vessels, but actively to say so much that it's a large investment-grade, Asian-based, the shipping Company. We really look forward to working with them more closely. Hopefully over time, also develop more business opportunities with that. In addition to the car carriers, we have recently added two additional 14,000 TEU container vessels with charters to Evergreen. These are sister vessels to four vessels we already own and delivery schedule in just two to three weeks. In addition to the solid cash flow during the remaining 2.5 years or so with Evergreen, a key attraction here is the rechartering position in 2023 and 2024 for fuel-efficient vessels we know are very attractive assets in the market. The purchase price is confidential, but I can confirm that it's significantly below current charter-free values reported by brokers. We have also agreed to acquire two modern 6,800 TEU vessels with long-term charters to Maersk line. One of the vessels have been delivered to us already and the second vessel is expected in a week's time, so without good cash flow effect already this quarter. Total acquisition cost for these vessels is around $150 million. With the rallying second-end market, the charter values are in fact already off 40 to 50% from the levels we required in that, creating a nice buffer for us. With these vessels, we will have 15 vessels on charter to Maersk. All these vessels and also the Evergreen vessels and the car carriers are on time charter terms where we are responsible for technical management and vessels operation and therefore, also have the direct interaction with the counterparties. Coincidentally, our customer, MSC, has exercised purchase options for 18 vintage feeder vessels. Due to the age of these vessels, the deal structure was bareboat charters with no technical risks. MSC had purchase obligations at the end of the charter period. The vessels are now 25 years old on average and MSC has exercise for purchase options with some vessels delivering at the end of this month and the remaining in September. Net cash proceeds after repayment of associated debt is estimated to approximately $40 million and we expect a neutral to marginally positive book effect from this transaction in the third quarter. Excluding the drilling rigs, the backlog from owned and mileage shipping assets were 2.7 billion at the end of the quarter. Over the years, we have changed both fleet composition and structure, and we now have more than 70 shipping assets in the portfolio and no vessels remaining from the initial fleet in 2004. In addition to the long-term charter vessels, we have 16 vessels trading in the short-term market. We also had a significant contribution from profit share over time, both relating to charter rates and fuel savings. We do not have a set mix in this portfolio, focus is on evaluating deal opportunities across segments and try to do the right transactions from a risk-reward perspective. Over time, we believe this will balance itself off, but we try to be careful and conservative in our investments and not just invest because money is burning in our pockets. The two drilling rigs are not included in the reported charter backlog figures. With respect to Seadrill and the ongoing financial restructuring, we cannot give more details than what we have disclosed in our press releases or is otherwise, publicly available. We receive approximately 75% of the lease hire under the existing charter arrangements for West Linus and West Hercules during Seadrill Chapter 11 proceedings. Both rigs are active and working for all companies and the charter rate is sufficient to cover our debt service relating to the rates. We are, of course, pleased to see a strengthening, harsh environment market in the North Sea on the back of a firm, oil products. A few weeks ago, we entered into an amendment to the charter agreement relating to the semi-submersible drilling rig, West Hercules. Under the amendment agreement with Seadrill, the West Hercules is contracted to be employed with all major Equinor in Norway and Canada until the second half of 2022. And thereafter, we deliver to SFL in Norway. This agreement remains to be reconfirmed by the court in September. If so, SFL will continue to receive a bareboat hire of around $65,000 per day until Seadrill emerges from Chapter 11. Thereafter, approximately $60,000 per day while the rig is employed under a contract and generating revenues for Seadrill and approximately $40,000 per day in all other modes, including where the rig is idle and mobilized to and from Canada for the Equinor watch. We continue to have a constructive dialog with Seadrill regarding the rig West Linus, which is on a sub-charter to Conoco Phillips in the North Sea until the end of 2028. Seadrill has filed a Plant Support Agreement, which is also supported by a majority of its secured creditors. Based on these filings, a potential emerging from Chapter 11 could be in early 2022. We expect to have more clarity on West Linus well ahead of this. Over the years, we have gone from a single asset class chartered to one single customer, to a diversified fleet and multiple counterparties. Over time, the mix of the assets in charter backlog has varied from a 100% tankers to nearly 60% offshore 10-years ago to container and car carriers, now being the largest segment with 80% of the backlog. If you look at the counterparties, it is now mainly to end-users and market leaders in their respective segments and relative few are intermediaries where we have less visibility on the use of the assets and quality of operations. Strategically, this also gives us access to more deal full of opportunities such as the repeat business with Maersk, MSC, Evergreen, for example. Our strategy, as therefore being to maintain a strong technical and commercial operating platform incorporation with our sister companies in the Seatankers Group. This gives us the ability to offer a wider range of services to our customers, from structured financing to full-time time charters. With full control over vessel maintenance and performance, including energy, efficiency, and emission minimizing efforts, we can impact improvements to our vessels through the life of the assets and not only be passed of the owning vessels employee from bareboat charters, where the customer may not always have an incentive to make such improvements. In addition, we can retain more of the residual value in the assets when we charter out on time charter basis. In the current environment with rising raw material costs driving replacement costs for vessels, this value is for the benefit of SFL under stakeholders while for bareboat charter deals, the value is usually retained by the charterers through fixed price purchase option. With that, I will leave the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.

Thank you, Mr. Hjertaker. On this slide, they're from 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 not of extraordinary and non-cash items. The Company generated gross charter hire of approximately 142 million in the second quarter, with more than 80% of the revenue coming from our fixed charter rate backlog, which currently stands at 2.7 billion, providing us the stronger stability on our cash flow going forward. In the second quarter, the line of fleet generated gross charter hire of approximately 25 million, including approximately 2.4 million in profits with contribution relayed to this huge savings on some of our large container vessels. Of this amount, approximately 95% was derived from our vessels on long-term charters. Falling in the Company's recent acquisitions as it fell slightly feed backlog, currently it's down at approximately 2.2 billion, with an average remaining charter term for approximately 4.7 years, or approximately 7.5 years, if weighted, for charter hire. Our tanker fleet generated approximately 50 million in growth charter hire. Of this amount, more than 80% was derived from our vessels on long-term charters to among others, Phillips 66 and floor plan. The net charter hire from the Company's 22 smacks tankers, employees, inshore grew market was approximately 1.8 million compared to 2.5 million in the previous quarter. Our dry bulk fleet of 22 vessels generated approximately 39 million in gross charter hire, including approximately 1.2 million in profit share. Contribution from our capesize vessels on charter to Golden Ocean. Of this amount, approximately half was derived from our 12 vessels on long-term charters to Golden Ocean, Sinotrans, and Hyundai Glovis. While the other half was derived from our 10 supramax and handysize vessels employed in the short-term markets. These vessels generated approximately 14.9 million in net charter hire compared to 9.8 million in the previous quarter. A total of two drilling rigs, which have been chartered out to subsidiaries of Seadrill on variable terms. In the second charter, we received charter hire over approximately 12.2 million from the rigs. This summarizes to an adjusted EBITDA of approximately 103 million for the second quarter compared to 98 million in the first quarter. We then move on to the profit and loss statement as reported under U.S. GAAP. As they are described in previous earnings calls, our accounting statements are different from those of a traditional shipping Company. That's our business strategy focuses on long-term charter contracts. A large part of our activities are classified as capital leasing. As a result, a significant portion of our charter revenues are excluded from U.S. GAAP operating revenues. Instead, looked at revenues classified as repayment of investment in finance, leases, and vessel loans, results in associates and long-term investments, and interest income from associates. For the Second Quarter, report total operating revenues according to U.S. GAAP, of approximately 117 million, which is less than the approximately 142 million of charter hire actually received for the reasons just mentioned. During the quarter, the Company recorded profit net income of 3.6 million, mainly related to fuel savings on some of our large container vessels and the dry bulk vessels on long-term charters to Golden Ocean. Furthermore, the net result was impacted by a non-cash impairment of 1.9 million, reflecting the net proceeds from the recycling of [Indiscernible] during the third quarter, in addition to approximately 1 million in additional OpEx related to challenging crude changed logistics and approximately 2 million in additional interest cost due to the issuance of sustainability-linked bond in April ahead of maturity of the convertible bond in October. Overall, and according to U.S. GAAP, the Company reported a net profit of 19.5 million or $0.16 per share. Moving on to the balance sheet, at quarter-end, SFL had approximately 372 million of cash and cash equivalents, excluding approximately 8 million of cash held in the wholly-owned non-consolidated rig owning subsidiary. Furthermore, the computed marketable securities of approximately 23 million based on market prices at the end of the quarter. In April, the Company successfully placed a 150 million senior secured sustainability-linked bonds due in 2026. The bond will owe a coupon of dynamic quarter [Indiscernible] and the net proceeds will be used to refinance existing debt, including our convertible bonds in maturity in October, which is included in the short-term debt with approximately 147 million outstanding at quarter-end. The Company has remaining CapEx of approximately 670 million relating to recent acquisitions. During the second quarter, the Company issued approximately 10 million new shares through its ATM and rig programs with net proceeds of approximately 87 million to part-finance these acquisitions until additional investment capacity going forward. The remaining investment amounts are expected to be found in the senior debt. And there are no immediate plans to risk more new equity. As of today, we obtained approximately 300 million of senior debt from international banks after attractive terms addressing this funding of the vessels to be delivered during this Third Quarter. Based on the Q2 numbers, the computed book equity ratio were approximately 28%. To summarize, the Board has declared a cash dividend of $0.15 per share for the quarter. This represents a dividend yield of approximately 8.5.%, based on the closing share price yesterday. This is the 17th consecutive quarterly dividend. Since inception of the Company in 2004, approximately $28 per share or approximately $2.4 billion in aggregate has been returned to shareholders through dividends. SFL has successfully committed to close to 700 million towards accretive investments so far this year. In the process, we have expanded our relationship with some of our key clients by investing in modern Eco-Design container ships, at the same time, disposed of older, less efficient vessels, demonstrating our commitment to further improve our carbon footprint pursuant to our ESG strategy. Following the recent investments, our backlog from our shipping assets now stands at 2.7 billion, providing strong visibility on future cash flow, debt service, and continued distribution capacity. A 373 million of cash at quarter-end, as well as well-positioned to execute or new equity investments in the time to come. And with that, I give the word back to the Operator who will open the line for questions.

Thank you [Operator Instructions] We're now taking the first question from the line of Randy Giveans of Jefferies. Please go ahead.

Gentlemen. How's it going?

Hi there.

So I guess a first couple of questions around the new container ship acquisition, 14,000 TEU vessels. Can you give the age of the ships? Are they scrubber equipped? Some more details? I know you're not going to give the purchase price, but just trying to get some other details around that. And then looking at residual upside after the current charters end in 23 and 24.

Yeah, absolutely. The vessels, our sister vessels to four 14,000 TEU vessels that we have today on charter to Evergreen. These are very fuel-efficient vessels. In fact, one of our vessels was the first vessel with 51-meter beam, i.e. the very biggest you can take through the Panama Canal. So our vessel was the first of that size to go through the Canal and actually use that corridor to serve the U.S. East Coast market. We know there these are very versatile vessels with very good deadweight capacity and fuel-efficient build, and 2013 and into 2014. They don't have scrubbers. This is something we discussed with the current charter Evergreen. In the end, when you charter out a vessel, it's your customer who pays for the fuel. If we were to make such investment, it would of course be if we got either a compensation for that investment through linked to their fuel savings or a profit share, like we've done with Maersk on several vessels, where we have a base increase for the investment and then we get the cut of the profits that comes out of that. We have not made such agreements with Evergreen. Of course, therefore, we cannot justify making that investment now and of course, when we look at the new charter position, this is something we would obviously discuss with a new potential charter for these vessels, if it makes a commercial sense for us. Right now, we know that the shipyards are all sold out for vessels of this size and category from quality shipyards. Well, '24 is basically as well sold out and we hear that even '25 may be challenging certainly for a series of vessels. We've also seen other operators out there forward fixing already vessels with chartering positions similar to ours. So we see that the results are good demand on the potential on the customer side. But exact timing of this is something we would have to look at. Again, it's all about trying to create the best, call it economic outcome for us, from a risk-reward perspective, obviously.

Got it. Okay. Looking at your dry bulk asset, clearly those are outperforming most of your others now, profit sharing, fully getting from Golden Ocean. The convertible maturity, it handles Seadrill mostly in the past now. All of those things together, how do you view the dividend current at $0.15, chances you re-up that back to the $0.25 it was before the recent cut. And then how do you view your dry bulk fleet from here as well?

Yes. Thanks. It's a very valid question, of course. On the dry bulk side, we're of course very excited to see the dry bulk market being very robust and has been increasing over the last few months. Of course, if you look at the economic side of that, and certainly from a reporting side, the cost of the new, call it accounting principles for shipping assets with low to discharge principal, you have effectively a delay in the revenue recognitions when the market is strengthening and then, the corresponding, call it detail, if the market is softening. The $1.25 million we got in profit share from Golden Ocean, on top of the base rate, so this is just icing on the cake as we like to say it. We would of course like to see more icing on the cake. Based on the forward market, it could be significantly more than what's reported this quarter. But it has a delay effect, as I mentioned. Of course, the profit share is in the end, actual performance for the vessels. Also, if you look at our acquisitions recently, we've done several deals that are delivering in the third quarter. Some vessels are already delivered, several are to be delivered over the next very few weeks. So we will see cash flow production from these assets already in the quarter. I think as we come to the finalization of the third quarter and we look at the numbers at that time, that would be a more prudent time to look at also the distribution at the time and needless to say, we were focused as always on distribution per share, long-term distributable capacity per share. So, of course, it's an objective to build dividend going forward. But exact timing and amounts, et cetera, it's something the Board has always reserve the right. We have never in the history of SFL given specific forward guiding on dividends. But typically, we've been correcting dividends down very, very seldom. Usually, it's been stable and increasing. So let's hope we can get back to our good old pattern also on that side.

Yeah. Sounds good. That's it for me. I'll turn out.

Thank you.

We're now taking our next question from the line of Gregory Lewis at BTIG. Please go ahead.

Hey, thank you and good afternoon, Ole and team and I hope you're doing well. I guess Ole, I would like to ask, Randy is right, a big question around the dividend. I guess I'll ask it a different way. If we were to rewind the clock a little bit, the first dividend move down looked like it was driven by the ongoing issues around Seadrill, and then the second knockdown of the dividend was really around COVID. So realizing that there's a lot more than just Seadrill and COVID that drive the decision around the dividend, are those two things hurdles or events we should be thinking about as we try to think about when we could see a return in growth to the dividend, or is it more, hey, those two things happened, what moved on and it's more just about doing some more of these transactions which we announced today around the car carriers to boost the cash flow?

Yeah. Difficult to be very specific on that. I mean, of course, when we made the adjustments, one was due to general huge market uncertainty surrounding the whole COVID, which had much wider sort of impact than just on the drilling side. Then you had the meltdown on the rig side, where residual loss in the process of filing for Chapter 11 when we felt that it was very prudent to take down the dividend given the heightened uncertainty around that. We have some more visibility now with Seadrill, given what we noted in the report with one rig where we have an agreement that will run through next year, but it's not entirely out of the woods. Hopefully, over the next couple of months now, we will have more clarity there as well. But at the same time, we also see a very good performance in some of the other asset classes, like the dry bulk vessels that was mentioned. We've been doing more business with these new transactions and of course, hope to execute on additional deal opportunities going forward. I think the best way to phrase it is probably that the Board is assessing call it the dividend with the perspective of what they believe is long-term sustainable in a more normalized world. This quarter, the dividend was kept stable. Next quarter, management can hope that there is continued good performance, and also better visibility, and also cash flow coming in from these new assets that will build that long-term distribution capacity. But again, we cannot make typical comments on what the dividend could be because again, this is a right to Board reserves to have the appropriate flexibility.

100%. I also realizing that you are limited in what and how you can talk about the relationship with Seadrill and the rigs but I guess I'll ask it this way. It's out, it's been reported in the news that a couple other drilling companies are potentially looking at acquiring Seadrill. Is it right to think that if Company A acquires Seadrill, they by default even though Ship Finance is the owner of those rigs, or is that something where then Ship Finance, I'm generally just looking for color around the relationship contract or agreement. How would something like that work if Seadrill were in fact to be acquired?

Just to clarify your question, I think your question is that our rigs automatically are a part of the sale if Seadrill is acquired, or if is it [Indiscernible] of it.

Yeah, that's exactly right.

Exactly, so it's really up to the Board or acquired to make a separate proposal to the [Indiscernible] in that respect and up to the Board to validate that proposal if there should be potential deals on the table. So there's no kind of automatic [Indiscernible] also relates to those assets because those are assets of SFL and operating separately. We also know the [Indiscernible] said this, that we have two attractive harsh-environment assets which also seem to be the most precise asset itself if you look at this asset, so we will just have to see how things develop.

Okay. As I think about that, I'm really interested in the Conoco contract with the jack-up. I mean, is there any change of control, you know what I mean? Is that something where Conoco as the, I guess, customer of that rig. Is there any approval process for them or is that something, I'm just kind of curious, do they have any input into the potential whatever saying and potentially where that rig goes in the event that Seadrill decides to have its Company deeply sold?

I cannot talk for the [Indiscernible] which is its history both lean that is also working for Conoco. But the concept on our rig and our relationship with Seadrill and Conoco is that under agreement at the cell house. That's basically terms possessed in right into that contract, not to be unreasonably withheld pro from Conoco. I think if you look and the operations of the rig, it's more part of the infrastructure of the Ekofisk field, which has a long lifetime. So we believe there's interest from Conoco to keep that rig and they will have to be addressed if and when such situation occurs.

Okay. Thank you very much for that. Have a great day.

Thank you.

And we are taking our next question from the line of Liam Burke at B. Riley.

Yes, thank you. On the press release, you have a capital requirement of 670 million on the acquired vessels plus new builds. Understanding you're taking delivery on third quarter on the existing vessels and then the new build delivery is 2024. Could you give us a sense of timing of how that outlay of 670 million would go?

Yes. Absolutely. I mean, we have the new buildings, all the new buildings free with capital, CapEx. I mean, there's some called freely refunding. Then the bulk maturity on delivery on the five vessels that some have been delivered and some are in the process of being delivered. I mean, financing has been secured. Basically, with the combination of cold cash at hand and also senior bank financing at very attractive terms. So that's all secured. We've experienced a tremendous interest from financing institution based on the high quality of assets, but also high-quality counterparties on the other side. That's, of course, it's very encouraging to see and basically, addressed in full.

Okay. You mentioned you've got additional deals that you're looking at. Would that be primarily in the container space or are you looking across the board to your entire fleet?

Now, we are segment diagnostic. So we look at opportunities across-the-board in several shipping call it sectors. We think this is a really important distinction from many other maritime companies who are focused on one single segment and therefore, it's looked into investing there. What we have seen over time is that typically it's at the peak of the markets that the equity market is open and when banks will lead you the most money. Therefore, if you are in one single segment, you're almost program to invest the bulk of your capital may be at the sub-optimal time. What we try to look at, we look at multiple segments at the time and we evaluate risk rewards and mark dynamics within the segments and we compare them to each other. You can say it's a coincidence, mainly over the last couple of months, we've done mainly container ships and car carriers, which both liner type assets, but still very different market dynamics where one segment has boomed a lot and the other has strengthened, but differently than the container side. At the same time, we also see many opportunities in other sectors where there has been less activity. We're about to say we are optimistic and our mindset is that we look at diversified in both asset types and counterparties. Therefore, we're not only focused on the container side.

Great. Thank you very much.

Thank you.

Thank you. There are no further questions on the line. Please continue.

Thank you. Then I would like to thank everyone for participating in our second-quarter conference call and also thank the SFL team on board the vessels and onshore for their continuing efforts a in time with continued operational disruption caused by the COVID-19 situation. If you have any follow-up questions, there are contact details in the press release or you can get in touch with us through the contact pages in our web page www.sflcorp.com. Thank you.

That concludes our conference for today. Thank you for participating. You may all disconnect.