SFL - SFL Corporation: Time To Sell One-Third Of My Position

2023-08-21 04:05:38 ET

Summary

• SFL Corporation reported a quarterly income of $0.13 per diluted share, down from $0.45 in the same quarter last year.
• The company signed a drilling contract in Canada with a subsidiary of Equinor ASA, estimated to be worth $100 million.
• SFL's total U.S. GAAP operating revenues consolidated were $173.8 million in the second quarter of 2023.
• I recommend selling one-third of your position between $10.85 and $11.

Introduction

SFL Corporation Ltd. ( SFL ) released its second quarter 2023 results on August 17, 2023.

Note: This article updates my May 16, 2023 article. I have followed SFL's quarterly Seeking Alpha results since Sept. 2014.

CEO Ole Hjertaker said in the conference call:

Over the last 10 years, we have changed the business model from a maritime leasing company to maritime infrastructure with long-term time charters to end users. Only around 9% of our charter revenues were from 7 bulkers and the container vessels employed on short-term charters and in the spot market.

Also, on August 14, 2023, SFL announced:

It has signed a drilling contract in Canada with a subsidiary of Equinor ASA for the harsh environment semi-submersible rig Hercules . The estimated contract value is approximately $100 million ($520 per day).

The contract is for one well plus one optional well, and is expected to commence in the second quarter of 2024. The duration for the firm contract period is approximately 200 days including transit to and from Canada. Odfjell Drilling will manage the rig on behalf of SFL under the contract.

It was good news for SFL, which spent $100 million in 1Q23 for the rig 5-Year SPS and suffered a lack of the West Hercules revenue for this period.

1 - 2Q23 Results Snapshot

SFL Corporation Ltd. reported a quarterly income of $0.13 per diluted share compared to $0.45 in the same quarter a year ago.

It was another decent quarter for SFL Corporation Ltd. The company's total U.S. GAAP operating revenues consolidated were $173.8 million in 2Q23.

Note: This figure is charter hire revenues, which is lower than the cash received as it excludes revenues from charter hire, which are not identified as operating revenues U.S. GAAP. The cash revenues received in 2Q23 were $164.56 million.

The company declared a quarterly dividend of $0.24 per share this quarter. The dividend yield is now 8.8%. Also, in 2Q23, SFL bought back ~ $10 million of its $100 million buyback program to purchase approximately 0.9% of the outstanding shares (1.1 million shares).

Adjusted EBITDA on a consolidated basis was $108.68 million (including the 49.9% owned associated companies), down from $123.57 million posted in the same quarter a year ago.

The backlog is down slightly this quarter to $3.6 Billion , including Energy.

As of June 30, 2023, and adjusted for subsequent transactions, the estimated fixed rate charter backlog3 from the Company's fleet of 73 wholly or partly owned vessels and newbuildings under construction was approximately $3.6 billion with a weighted remaining charter term of 6 years. (press release)

In the second quarter, 92% of charter revenues from all assets came from time charter contracts and only 8% from bareboats or dry leases. In addition to fixed rate charter revenues, we have 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 $25 million. (conference call)

2 - Investment Thesis

As I said before, I have been a long-term SFL shareholder for many years and have enjoyed a high and steady dividend, without interruption, through good times and uncertain times.

A great benefit for investors is that SFL is versatile and active in containers, car carriers, tankers, dry bulk, and offshore. This diversified portfolio allows SFL to adapt faster than a company focusing on a single shipping segment.

CEO Ole Hjertaker said in the press release:

Over the last decade, SFL has transformed from a financial leasing provider to a maritime infrastructure company with the majority of assets on long term time charters to end users.

On the negative side, SFL is part of the Fredricksen group. It could be willing to invest in debatable and risky endeavors, as we have experienced with the Seadrill partnership. Some investors see this relationship differently and consider that Fredricksen's involvement is a positive instead.

Thus, the investment thesis continues to be the same as my preceding article, and I recommend SFL as a long-term investment with an outstanding dividend payment of nearly 9%.

However, I suggest trading short-term SFL using at least 35% of your entire position to profit from this volatile and ever-changing industry fully.

3 - Stock Performance

I generally compare SFL to three other companies I follow on Seeking Alpha. Teekay Tankers ( TNK) , Scorpio Tankers ( STNG) , and Frontline plc ( FRO ). However, this comparison is not valid because those three companies are pure Tanker companies, and SFL is not. The SFL Tanker segment represents 17 crude oil, product, and chemical tankers for 20%, or $34.7 million, of its total Charter hire revenue in 2Q23.

This significant difference explains why SFL is still underperforming the Tankers group now, especially Teekay Tankers and Scorpio Tankers, and is down 4% on a one-year basis.

SFL Corp.: The Raw Numbers: Second Quarter Of 2023 And Financials History

Source: SFL release .

Analysis: Revenues, Earnings Details, Free Cash Flow, And Backlog Discussion

1 - Operating revenues were $164.56 million in 2Q23

1.1 - Revenues and others

SFL Corp. received a charter hire of approximately $173.8 million from the Company's vessels and rigs, including $2.2 million in profit share. The Container segment is the most important and represents 51.8% of the total revenues.

The company had $16.93 million in income for the second quarter of 2023, or $0.13 per diluted share.

Adjusted EBITDA was $108.68 million , down 12% from last year.

1.2 - The quarterly dividend was $0.24 per share in 2Q23, and the company currently has a share buyback program of $100 million.

It is still low for the company, but we see definitive progress on this side, with a yield now of 8.8%.

During the 2Q23, SFL acquired 1.1 million shares at an average price of $9.27, with a remaining 90 million shares under the buyback program.

2 - Free cash flow was $38.72 million in 2Q23

Trailing 12-month free cash flow ("ttm") is negative $123.44 million, with a free cash flow of $38.72 million in 2Q23.

CapEx went up significantly this quarter to $111.19 million .

3 - Debt analysis: Net debt is estimated at $1,874 billion in 2Q23

Note: The total cash includes $5.866 million in Investment in marketable securities and $26.505 million in Investment in sales-type, direct financing & leaseback assets, the current portion.

Technical Analysis (Short Term) And Commentary

Note: The graph has been adjusted for the dividend.

SFL forms an ascending channel pattern with resistance at $10.95 and support at $10.25. One notable sell signal now is the RSI revealing a strong overbought situation at 78.

An ascending channel is a technical analysis pattern comprising a series of higher highs and higher lows. It indicates a bullish market sentiment and a gradual upward price movement.

The overall strategy is to keep a core long-term position and use about 35% to trade LIFO while waiting for a higher final price target or enjoy a dividend yield of nearly 8.8%.

The trading strategy is to sell 35% between $10.65 and $10.85 with higher resistance at $11 and wait for a retracement between $10.3 and $10 with lower support at $9.6.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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