Earnings Labs

SFL Corporation Ltd. (SFL)

Q3 2024 Earnings Call· Wed, Nov 6, 2024

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Transcript

Ole Hjertaker

Management

Thank you, Espen. We are now announcing our 83rd dividend and continue building our unique profile as a maritime infrastructure company with a diversified fleet. We reported revenues of more than $260 million this quarter, and the EBITDA equivalent cash flow in the quarter was approximately $167 million, which is significantly up from the second quarter. Over the last 12 months, the EBITDA equivalent has been $580 million. The net income came in at around $45 million in the quarter or $0.34 per share. And we had positive contributions relating to profit share on Capesize bulkers and fuel cost savings or $4.2 million in the quarter, offset by approximately $5.6 million in negative non-cash mark-to-market and one-off items. Due to U.S. GAAP accounting rules, the revenue and expense in the quarter for the drilling rig Hercules also includes the mobilization period that started in the second quarter. Our CFO, Aksel Olesen, will give more details on this when he goes through the numbers for the quarter. Our fixed rate backlog stands at approximately $4.7 billion. And importantly, two-thirds of this is to customers with investment-grade rating, giving us a unique cash flow visibility. This backlog figure excludes revenues from the vessels trading in the short-term market and also excludes revenues on the new dual-fuel chemical carrier that will operate in a pool with Stolt Tankers. It also excludes future profit share optionality, which we have seen can contribute significantly to our net income. And in line with our commitment to return value to shareholders, we are paying a quarterly dividend of $0.27 per share or around 10% dividend yield. Most of our vessels are on 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,…

Aksel Olesen

Operator

Thank you, Trym. On this slide, we have shown our pro forma illustration of cash flows for the third 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 $263 million during the third quarter with approximately $89 million coming from our container fleet. This includes approximately $2.4 million in profit share related to fuel savings on seven of our large container vessels. The car carrier fleet generated approximately $26 million of gross charter hire in the quarter, including profit share from fuel savings. Our tanker fleet generated approximately $37 million in gross charter hire up from approximately $30 million in the previous quarter, following the delivery of three tanker vessels during the quarter. SFL has 15 dry bulk vessels, of which eight are employed on long-term charters. The vessels generated approximately $25 million in gross charter hire including approximately $1.7 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 $8.4 million in net charter hire compared to approximately $8.2 million in the second quarter. In the third quarter, our energy assets generated approximately $86 million in contract revenues compared to approximately $29 million in the second quarter. Linus is under a long-term contract with ConocoPhillips in Norway until May 2029. During the quarter, revenues from the rig was approximately $16 million compared to approximately $10 million in the second quarter as rig resumed operations in late July after finalizing its 10-year special survey. As of November 1, the rig's contract rate has been adjusted upwards to approximately $224,000 per day under the…

Sherif Elmaghrabi

Analyst

Hi. Thanks for taking my questions. Ole, historically, some container ships have done some sale and leasebacks to help with fleet management. Do you expect that to happen this year? And is that something that something that could be an opportunity for SFL?

Ole Hjertaker

Management

Well, we have a significant number of container ships in our fleet. And from time to time, we have also acquired container ships directly from liner companies. We have gone more away from doing more financial, call it, sale leasebacks, which is really a high levered financing in reality. So we have some legacy assets there. But I would say all the investments we've done over the last five, six years have been long-term time charters. And we think those deals have worked out pretty well. And I think also having an operational platform like we have built up now makes us relevant for the likes of Maersk and Hapag-Lloyd and Volkswagen and others. So we, of course, wouldn't mind do more business in that segment as we also look for opportunities in all the sectors that we focus on.

Sherif Elmaghrabi

Analyst

Thanks. And with the Hercules mobilizing to Norway, how do contracting prospects there shape up versus Canada or Namibia? And just any color you can provide on how conversations are going with potential charters?

Ole Hjertaker

Management

Well, yes. The rig recently finalized drilling for Equinor in Canada has been working there since July. And it's now being moved to Norway. It's a pretty efficient location given the distance and you call it maritime traveling distance, that's why we take it to the North Sea. There are opportunities in the North Sea. And remember, this rig has previously worked during the winter time up in the Barents Sea under ultra harsh environment. So it's a very capable rate, and it's managed by Odfjell who is, I would say, deemed to be among the top two or three operators of the most sophisticated drilling rigs out there. So we are looking for opportunities, both in the North Sea and in West Africa, primarily near term, we don't see so many opportunities in Canada, but we expect that to come back later next year or into 2026. So near term, we focus more on North Sea and West Africa. We cannot be specific on discussions and the opportunities we see, but we believe Odfjell also announced their earnings today, they had this single – a positive outlook on the market segment.

Sherif Elmaghrabi

Analyst

Okay. Thanks very much for taking my questions.

Ole Hjertaker

Management

Thank you. Espen Nilsen Gjøsund: All right. We will take our next question from Climent Molins. Climent, go ahead.

Climent Molins

Analyst

Good afternoon. Thank you for taking my questions. I wanted to follow up on Sherif's question on the Hercules. And first of all, I was wondering, do you expect to recognize any revenue on Q4 from the contract with Equinor in Canada?

Ole Hjertaker

Management

Yes, thank you. Yes, we have – I mean, the rig has been working now virtually to the end of October. So there's been a full month on higher plus were also compensated for moving the rig afterwards. So we are effectively covered for, say, two out of three months in the fourth quarter. And of course, while we wait for the next contract, we will, of course, adjust and trim expenses along with that, there will be a decent contribution from the rig also this quarter.

Climent Molins

Analyst

Makes sense. Thanks for the color. And this one is more from a modeling perspective, but should the asset remain open throughout part of 2025, could you provide some commentary on the expenses you would expect maybe on a daily basis?

Ole Hjertaker

Management

Yes. You have – when the rig is working as it has been both in Namibia and Canada now in two rounds, we have seen operating expenses in the region around $200,000 per day. That is, of course, with full marine crew, full operational crew, full drilling activities ongoing day and night with that rotation pattern. So when we – in between contracts, we can reduce operating expenses a lot, and then it's really more down to how do we – how much of the equipment do we want? And do we need to run all the time to make sure that it's ready to go that it's hot and can go straight out and drill on a new contract. So from a modeling perspective, I think if you if you put in $75,000 to $100,000 per day, you should be pretty safe. On the cost side, we will, of course, manage cost and limit that as much as we can. But our primary objective here is to get the rig out working again. So we generate positive cash flows from the rig in operations.

Climent Molins

Analyst

Makes sense. This was kind of like the worst-case scenario. That's all for me. Thank you for taking my questions.

Ole Hjertaker

Management

Thank you. Espen Nilsen Gjøsund: Next, we've received a question on the site here. You've sold a 2005-built container vessel. What are your plans for the other older container vessels in the fleet?

Ole Hjertaker

Management

Yes. Thank you. It's correct. We recently sold a 2005-built feeder vessel, 1,700 teu. And that container ship has been on a contract with Maersk now for a period. And as we have seen over time now we typically own vessels until we see that we cannot really charter these vessels longer term. And typically, we sell them on vessels that are older than 20 years. So as this now is approaching the 20-year anniversary next year, we feel that this is an opportune time to dispose of the vessel with a nice profit from that sale. We also have some other legacy older container ships in the fleet. We have seven, 4,100 teu container ships with MSC. That's really on a bareboat financing structure. Those vessels will – there is – there are purchase obligations on those vessels, basically early second quarter next year. So those vessels would also then effectively be phased out. And then we have a sister vessel of the vessel we recently announced and we now are now sold that's also coming off charter, again, with Maersk during the second quarter. And we have to assess what we do with that vessel over time. We may recharter it or we may sell it similar as we did with the one we just announced now. So we are monitoring that market, of course, very closely. A positive side effect of doing this with these older vessels is that these are also from a fuel efficiency perspective, the least efficient vessels in the portfolio. And if you look away from the seven, 4,100s and then old 1,700 that's remaining, all the other vessels are modern eco-design vessels built from 2013 other words with ECO engines, et cetera. So the effect of that is that we will actually have an improvement in our fuel efficiency ratio. Espen Nilsen Gjøsund: Thank you, Ole. Okay. 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 are in the press release or you can get in touch with us through the contact page on our web page, www.sflcorp.com. Thank you all.