SFL - SFL Corporation Ltd. (SFL) Q3 2023 Earnings Call Transcript
2023-11-14 14:27:09 ET
SFL Corporation Ltd. (SFL)
Q3 2023 Earnings Conference Call
November 08, 2023 08:30 AM ET
Company Participants
Ole Hjertaker - Chief Executive Officer
Trym Sjølie - Chief Operating Officer
Aksel Olesen - Chief Financial Officer
Conference Call Participants
Richard Diamond - Castlewood Capital
Presentation
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.
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. Three vessels have been dry-docked in the quarter. And our overall utilization across the shipping fleet was 99% in Q3 and 80.5% for the drilling rigs. For the rigs as well explained operating days are days on rate or in transit covered by mobilization fees, less days or fire and days spent in port not on drilling rig.
One of the key ESG targets for SFL is the reduction of carbon emissions on our fleet. Such reduction can either be met by fleet renewal in more efficient ships and with greener fuels, increased efficiency of existing fleet or a combination of both. And as part of our fleet renewal program, we have four LNG dual-fuel carriers under construction in China, of which one was delivered during the quarter so three left. These vessels are among the most modern and efficient ships in the car carrier market. The hull has been improved and optimized with the new hull form with S Bow as can be seen in the picture. And the LNG fuel system is of a high-pressure type and the vessels are adapted for both ship-to-ship and port to ship LNG bunkering. In LNG mode, we expect a 25% lower carbon footprint per vehicle carried compared to a standard 6,500 CEU conventional PGDC.
The vessels are also fitted with the short connection for zero emissions operation in port. And in addition to being able to carry EVs, the ships will also be able to carry hydrogen fuel cell vehicles. The first ship Emden is on first voyage from Asia to Europe under Hyundai Glovis and she will be delivered to Volkswagen in about one week's time.
And with that, I will 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 have shown our pro forma illustration of cash flows for the third quarter. Please note, that this is only guideline to assess the company's performance and is not in accordance with US GAAP and also net of extraordinary and non-cash items.
The company generated gross charter hire of approximately $214 million in the third quarter, including approximately $2.6 million of profit share with approximately 94% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.4 billion providing us with strong visibility on the cash flows going forward.
In the third quarter the container fleet, generated gross charter hire of approximately $91 million including approximately $2.6 million in profit share related to fuel savings on seven of our large container vessels.
During the quarter, we took delivery of the first of our four dual-fuel LNG car carriers. With four car carriers on charter at the end of the quarter, our gross charter hire increased approximately $9 million in the third quarter compared to approximately $6 million in the second quarter.
Our tanker fleet generated approximately $30 million in gross charter hire during the third quarter, compared to approximately $35 million in the previous quarter. During the quarter two Suezmax tankers were off-hire for a total of 46 days in connection with scheduled periodic dry dockings.
These costs are expensed directly per shipping fleet and OpEx for the tankers in the quarters was therefore higher than normal. The company has 15 dry bulk car carriers, which eight were employed on long-term charters during the quarter.
The vessels generated approximately $20 million in gross charter higher in the third quarter seven of these vessels were employed in the spot and short-term market and contributed approximately $6.2 million in net charter hire during the quarter compared to approximately $7.2 million in the previous quarter.
SFL owns two harsh environment drilling rigs the jack-up rig Linus and the semisubmersible rig Hercules. During the third quarter the rigs generated approximately $64 million in contract revenues compared to approximately $90 million in the second quarter. The Linus is currently under long-term contract to ConocoPhillips Scandinavia until the end of 2028.
In the third quarter the rig generated approximately $16.6 million in contract revenues, which is down from the approximately $90 million in the second quarter as the rig was off-hire for approximately 16 days relating to an unscheduled repair of the top drive.
Due to the repair works the OpEx for the rig was also $2 million higher than budgeted for during the quarter. Hercules completed the drilling contract for ExxonMobil in Canada in September and has now been mobilized to Namibia which is expected to commence the contract with Galp Energia shortly.
During the quarter the rig recorded approximately $48 million in contract revenues, as the mobilization fees paid by ExxonMobil and associated costs is recognized through the actual drilling period pursuant to US GAAP. The same principle has been applied for the mobilization fees due after the drilling contract was completed.
Our operating and G&A expenses for the quarter was $86 million, compared to $68 million in the previous quarter, primarily due to Hercules being back in operation scheduled dry dockings and downtown and repair on the lines. This summarizes the adjusted EBITDA for approximately $130 million in the third quarter compared to $109 million in the previous quarter.
We then move on to the profit and loss statement as reported on the US GAAP. As we have 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, a large part of our activities are classified as capital leasing. Therefore, a significant portion of our charter revenues are excluded from US 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.
The third quarter report total operating revenues according to US GAAP of approximately $205 million, which is less than approximately $240 million of charter hire actually received for the reasons just mentioned. During the quarter, the company recorded profit share income of approximately $2.6 million from fuel savings on some of our large container vessels and a car carrier.
As previously mentioned, the Hercules was back in operation during the third quarter and contributed with $48 million in contract revenue. Furthermore, this net result was impacted by non-recurring and non-cash items including a gain from the sale of the VLCC Landbridge Wisdom for approximately $2 million. A net positive mark-to-market effect from – approximately $2.3 million, a positive mark-to-market effect from equity investments of $300,000 and a decrease of $300,000 on credit loss provisions.
With the corporate taxes and the tolling taxes in Canada, the company also recorded approximately $2.3 million of taxes in the third quarter related to the Hercules. SFL also expects to pay similar types of customer taxes in Namibia. So overall, and according to US GAAP, the company reported a net profit of approximately $29.3 million or $0.23 per share compared to approximately $17 million or $0.13 per share in the previous quarter.
In terms of near-term outlook, we expect lower revenues for Hercules in the fourth quarter due to a long mobilization period from Canada to Namibia, where the rig is due to commence the contract to Gulf Energy shortly.
As mentioned previously, revenue from the Hercules were due to US GAAP accounting standards, we recognized only from the drilling commencement date and has mobilization fees will be allocated throughout in respective quarters of drilling operations.
For our car carriers, revenues are set to increase as we had three newbuildings delivering from Q4 to Q2, with the second vessel being delivered from the [indiscernible] China second half of November. Following the handover to Volkswagen of the first and second newbuilding during Q4 and Q2, the SFL conductor and SFL Composer will continue the charters to Volkswagen for another two years plus optional years with an estimated EBITDA contribution of $23.5 million per vessel per year.
Moving on to the balance sheet. At quarter end, SFL had approximately $118 million of cash and cash equivalents. Furthermore, the comp and marketable securities approximately $6.2 million vessel market prices at the end of the quarter. During the quarter, the company fully redeemed unlock bond, of which $49 million was outstanding with cash on balance sheet. The outstanding capital expenditure of approximately $136 million on our three car carriers under construction has been fully financed by $194 million of net sea JOLCO [ph] financing yet to be drawn. During the quarter, the company redelivered the [indiscernible] system following our declaration of a purchase option. The sale had a $10 million positive cash effect, after repayment of secured debt relating to the vessel, and the corresponding book gain of approximately $2 million has been recorded in the third quarter. So based on Q3 numbers, the company had a book equity ratio of approximately 28.4%.
Then to conclude, the company delivered another strong quarter with growth in both revenues and EBITDA. The Board has declared a 79th consecutive cash dividend, to increase the dividend to $0.25 per share. This represents a dividend yield of approximately 9%, based on the closing share price last Friday.
The company has a strong balance sheet and liquidity position. So far in 2023, the company secured new financing arrangements of more than $1 billion and we recently repaid unlock bonds, with cash on balance sheet. Furthermore, our three new buildings are fully financed with attractive long-term financing, which will free up additional liquidity up on delivery.
Our fixed charge rate backlog currently stands at $3.4 billion, which provides us with strong visibility on our cash flow going forward. And finally, with the Hercules now back in operation and delivery of newbuilding car carriers together, with new contracts for existing vessels this strong revenue generation in the quarters to come assesses delivered and new charters commencing.
And with that, let me conclude the presentation and move on to the Q&A session.
Question-and-Answer Session
A - Unidentified Company Representative
Thank you, Aksel. We will now open up for a Q&A session. For those of you who are following this presentation through Zoom, please use the raise hand function to ask a question. When your name is called out, please unmute your speaker to ask your question. Thank you.
Unidentified Analyst
Hi, guys. Can you hear me.
Ole Hjertaker
Absolutely
Unidentified Analyst
Thank you. I couldn't find the raise hand function. So, I figured I'd just hop in. This is Greg Lewis [ph] . How are you?
Ole Hjertaker
Hi, Greg.
Unidentified Analyst
I had a few questions. I was hoping we could walk through. It was good to see the dividend increase. And I guess, two things one is, as you think about managing the trajectory of the dividend over the next I don't know one to two years, how should we think about balancing potential dividend growth and the drilling rigs just because, it seems -- it's clearly a very cyclical industry. We're clearly in a strong part of the cycle and those assets look like they're in a probable of the Hercules looks like it's going to be able to generate a lot of cash here over the next two to three years, but maybe not as it's definitely a more volatile asset than say your car carriers or container ships. So just trying to understand, how you think about uses of cash from the Hercules as we recontract this over the next couple of years?
Ole Hjertaker
Yes. I appreciate that. I mean the Hercules as you mentioned, we just spent quite a bit of money on that rig in the first and second quarter of the year when it was out of service. And now it's really only got started. So the charter rate in Canada, that was fixed more than a year ago. So it was at a lower rate. So that charter rate should be mounting now, as it is expected to start drilling in Namibia, already next week. And the charter rate in Namibia is based on the -- if we include both mobilization to and from Namibia under drilling rate, should be well above the drilling rate we had or the rate we had in Canada.
And then it's going back to Canada later next year, for an even higher rate. And in fact, the drilling rate we have on Hercules, it's the highest drilling rate I would say in this cycle today. So this rig is a very capable unit and customers are clearly willing to pay for the services.
Of nature, that market is a shorter-term charter market. So this is not a market where you normally get sort of 8, 10, 15-year charters. It's typically shorter charters and we have deliberately not been so keen on fixing it long term because we see this market really building and you don't really want to fix something at the low end of the cycle. We think this is a cycle that has legs. And therefore, we're holding back a little bit before we want to - what we say look for really long-term charters on that unit.
I think if we were to look at long-term charters for the unit you would have to accept lower rates than what we are fixing it at currently. So that's one asset. Of course, it's a big asset. But also, if you look at the history of that drilling rig, I mean, this is a drilling that used to be on charter to sea drill. Sea drill ended up in two Chapter 11. We were offered in the last round a very -- in our minds a very poor call it treatment in the restructuring. We decided to take it back. And I think we can be honest and say, it's been a really good decision from the company side to do that, because returns we've had on this rate now with the rates we see is spectacularly better than the alternative would have been. But that is the history and the setting around that rate.
If you look at some of the other assets look at the car carriers that, I think it's sort of a segment. We used to have two vessels then we ordered the four vessels and we bought another vessel and then we have this quite spectacular both the transportation, if you could call it that on two of these vessels where we make more than 10% of construction costs just moving the vessel from Asia to Europe. So you have a lot of other bits and pieces here that's also generating a lot of cash flow.
And then we have the re-chartering of the two older vessels to Volkswagen where we increased the dividend by times five compared to where it was originally simply because we own those assets and we negotiated it and Volkswagen seem to be quite happy with the service we provide them. So the rig is one piece but there are also other elements in our portfolio that is also adding. And of course, our mindset is yes our principal objective in SFL is to return cash to shareholders.
I mean, that's why we're here. Otherwise there would not be any point in having a company like SFL, if we don't really do that over time. And it's been 79 quarters now and we've been always made money operationally every single quarter based on our distribution. So I think yes -- I think that, we are really just at the starting point in our minds so where we in terms of cash flow from some of these assets. So hopefully, there is more dividend potential also going forward.
Unidentified Analyst
Yeah. Super helpful. Thank you for that. I did want to ask kind of a bigger picture question. Clearly, across the more conventional shipping space where it's definitely a market that you continue to look at and have assets and as SOFR has gone up, spreads have gone up. How has that changed the potential opportunities for SFL i.e. I'm talking to some ship owners and they're looking at 8%, 9% or even higher borrowing costs. Has that created more opportunities for SFL i.e. is the transactions team busy here as we sit here in November relative to maybe where they were earlier this year? Or is it hey, the market's been good for a couple of years and it's kind of steady as she goes?
Ole Hjertaker
Yeah. It's a good question. I mean if you go back to 2022, we screened or did really work on more than $20 billion of potential deal flow and we ended up doing one in the end for various reasons. I think this year has been -- the volume has been lower in aggregate. And I think with the rising interest rate market, it's also I would say the way we see it, it's a time lag from where the underlying metrics and interest rates is one, asset replacement cost is another, maybe to a certain degree operating expenses to the extent there has been call it a little inflation in those metrics. It takes a little time for that to filter through in a customer's willingness to pay off for those services.
So that's why I think 2023 has been I would say the more interesting deal flow opportunities has been I would say on a gross number, a little lower than 22%, but I think this is going to pick up again. But I think the ones -- I mean if you look at the ones you offer more financing structures, maybe for them there is more deal flow opportunity right now, simply because funding cost is higher. And therefore, the alternative cost of doing like a bareboat type lease is relatively smaller. But we have strategically moved a little away from the bareboat type offering because what we have seen is that for those kind of deals, you typically do that with intermediaries. You don't do a bareboat deal with an end user.
And therefore, there is a risk element here that I think is underappreciated, right now most of the shipping segments are booming, strong markets, nobody talks about it. But we've been through this over 20 years now. We've seen some cycle over the years. So our focus is to do deals with strong counterparties and users, focus on getting the right deals done and don't be nervous, if there is a quarter when you do that many deals. The deal flow is out there. There is a continued need for transportation assets and logistics solutions on the water, but they just don't be desperate to do a deal because that's when you do the wrong deals, maybe that's a short answer to that.
We are constantly screening deal opportunities. We are looking at opportunities. We cannot communicate specifically what we look at, but there are deals that could potentially be done. But we try to be disciplined. It's got to be the right type of asset. We have to focus on the right as we call it residual value exposure i.e. what kind of residual risk are we willing to take on after a deal, what's the financing structure? And maybe importantly, who's the counterparty?
Is this a counterparty strong enough and an underlying volatile market, is this counterparty someone who can honor their obligation also in a down cycle, because that's what we've seen over the years is that anybody can do a deal in an upcycle market, you just pay a little more than the next guy. The problem is, how do you manage the down cycles. And that's I think that's something that we hope our history brings along is that, yes, markets are volatile, but we managed through some pretty rough cycles. And hopefully, we're set up to deal even better with cycles going forward.
Unidentified Analyst
Okay. Great. And then I just have one other question on the balance sheet. I noticed that we saw I guess sequentially some of the long-term lease liability went into short-term lease liabilities. Is that just going to unwind? Or should we think about that being either renewed or extended over the next call? I don't know couple of quarters.
Aksel Olesen
It's Aksel here. So I think you should look at us like our ordinary traditional debt on the vessels that there are opportunities to basically roll this going forward as well. We haven't finally concluded if we can do in New York or do that bit additional bank financing, but both options are likely, so could just assume rolling that on the same level.
Unidentified Analyst
Okay. Perfect. Thank you for that. Thanks, everybody.
Aksel Olesen
Thank you.
Ole Hjertaker
Thank you.
Unidentified Company Representative
[Operator Instructions] And the next question will come from Richard Diamond. Please unmute and speak.
Richard Diamond
Great quarter, great job building cash flow. Ole, you and the team have incredible deal flow at SFL. What do you think are the most interesting areas looking out to the fourth quarter and next year?
Ole Hjertaker
Yes. Thanks for that Richard, and thanks for the kind words. We are focusing across the Board, our preference are for deals that are I would say logistics sort of oriented i.e. where we go into a logistics chain with counterparties. So car carriers for instance is a segment that we've been spending quite a bit of time on. We've grown a lot in that segment. We still think there could be interesting opportunities on the container side. Yes, the market is volatile. And yes, I can say, it's not the super cycle we saw a year or two ago. But there's still underlying demand for transportation capacity. And certainly with modern high-end assets the more fuel efficient that is reducing both call it the energy footprint or emissions footprint per loaded box where that matters.
And that's also where we have concentrated our investments. We've also seen some of the opportunities on the tanker side. So I would say there are opportunities across the Board here. The only segment you can say, we don't have in our portfolio that would be natural would be LNG in particular. But our dilemma there has been one it's sort of the investment level in that segment and the charter rates where you don't really amortize down so much of the investment, which means that we have been a little conservative in our willingness to take on residual exposure in that segment. But otherwise, we are active across the Board and looking at opportunities and I think we have quite good access to deal flow.
Richard Diamond
Thank you.
Ole Hjertaker
Yes. Thank you.
Aksel Olesen
Thank you.
Unidentified Company Representative
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 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 very much.
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SFL Corporation Ltd. (SFL) Q3 2023 Earnings Call Transcript