SFL Corp Ltd. Q2 FY2024 Earnings Call

Welcome to SFL's Second Quarter 2024 Conference Call. My name is Sander Borgli. I'm Vice President for Investor Relations in SFL. Our CEO, Ole Hjertaker, will start the call with an overview of the second quarter highlights. Then our Chief Operating Officer, Trym Sjølie, will comment on vessel performance matters; followed by our CFO, Aksel Olesen, who will take us through the financials. The conference call will be concluded by opening up for questions, and I will explain the procedure to do so prior to 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 U.S. 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 the highlights for the second quarter.

Thank you, Sander. We are now announcing our 82nd dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. We had full cash flow effect from our car carrier new builds this quarter, but charter revenues from drilling rigs were lower, partly due to U.S. GAAP accounting rules where mobilization fees received for the transit to Canada and corresponding costs will be recognized in the third quarter. We also had Linus out of service for most of the quarter in connection with a scheduled periodic survey. We reported revenues of nearly $200 million this quarter and the EBITDA equivalent cash flow in the quarter was approximately $131 million. Over the last 12 months, the EBITDA equivalent has been $545 million. The net income came in at around $21 million in the quarter, or $0.16 per share. We had a positive contribution relating to profit share on Capesize bulkers of $1.6 million and fuel cost savings of $2.8 million in the quarter. In line with our commitment to return value to shareholders, we are paying a quarterly dividend of $0.27 per share or around 9% dividend yield. Our fixed rate backlog stands at approximately $4.9 billion and importantly, the backlog is concentrated around long-term charters to very strong end users, and this backlog figure excludes revenues from the vessels trading in the short-term market and also excludes revenue from the new dual-fuel chemical carrier that will operate in a pool with Stolt-Nielsen. It also excludes future profit share optionality, which we have seen can contribute significantly to our net income. Most of our vessels are on long-term charters and we have completely transformed the company's operating model over the last 10 years, making us relevant for large end users like Maersk, Volkswagen Group, and Vitol. We continue to build our asset portfolio and have taken delivery of four vessels so far this year, expecting to take delivery of another three vessels by October. Most of these new vessels have dual-fuel propulsion. We have added significantly to the backlog through multiple charter extensions on existing vessels and recently by ordering five large containerships with 10-year charters. Our COO, Trym Sjølie, will talk more about this later. In order to fuel further growth and build long-term distributable cash flow per share, we raised $100 million in a public offering a few weeks ago. With that, I will give the word over to our Chief Operating Officer, Trym Sjølie.

Thank you, Ole. Including vessels to be delivered, we have 81 maritime assets in our portfolio, and our backlog from owned and managed shipping assets stands at $4.9 billion. The current fleet consists of 15 dry bulk vessels, 39 containerships, 18 tankers, two drilling rigs, and seven car carriers. We have a diversified fleet of assets chartered out to first-class charterers on mostly long-term charters. Container vessels is now our largest segment, representing just under 50% of the backlog. Over the last 10 years, we have transformed the company's operating model from variable policies to time charters, and most of our customer base is large industrial end users. In the second quarter, 95% of charter revenues from all assets came from time charter contracts, and only about 5% from bareboats or dry leases. In addition to fixed rate charter revenues, we have had significant contributions to cash flow from profit share arrangements over time, both relating to charter rates and cost savings on fuel. In Q2, profit split arrangements contributed $4.3 million. Out of the 81 vessels and rigs, we have 11 containerships on bareboat contracts, with the rest on time charter and spot trading. In Q2, we had a total of 6,400 operating days defined as calendar days less technical, fire, and dry dockings. Two vessels and one rig were in dry dock during the quarter. Our overall utilization across the fleet in Q2 was 97.6%, primarily due to these dry dockings. The charter revenue from our fleet was $199 million in Q2, down from Q1, mainly due to reduced revenues from our two drilling rigs. Hercules left Namibia in mid-May and commenced operations in Canada in mid-July. Due to U.S. GAAP accounting rules, mobilization fees from the Canada campaign and associated costs are deferred and amortized over the drilling period. We will accordingly record high revenues and costs in the third quarter from Hercules. Linus went in for its 10-year special periodic survey in mid-May and spent about 10 weeks in dock for the class survey. The rig was back on rate at the end of July. In the third quarter, we expect revenues to be materially higher than in the second quarter from both drilling rigs. In July, a judgment was made in the High Court case against Allseas, Loadstar, and Green Ace charter for US$27.4 million in favor of SFL. Subsequent to this judgment, the Allseas guarantor has come under administration, which means there are challenging prospects for recovery of the awarded judgment. SFL is currently considering next steps. Our OpEx philosophy focuses on continuously investing in our fleet to optimize the vessel’s performance and maintain a high level of service to our customers. This includes investing to minimize downtime as well as making investments to increase cargo carrying capacity and reduce energy consumption. Such investments, in cooperation with our charterers, are important ways to grow our relationships and increase backlog from existing vessels. So far this year, we have increased the backlog with Maersk through new five-year charters for seven of our larger container vessels, resulting from close relationships and cooperation on vessel upgrades and performance enhancements. Based on our container experience, we have also recently placed orders for 516,000 CEU dual-fuel LNG containerships in China. These ships will be chartered out on 10-year time charters to a leading liner company. On the Hapag-Lloyd charters, the first two upgraded container ships have already been delivered, with the third scheduled for delivery from the yard this month. On the tanker side, we have delivered the first of three LR2 new buildings to Vital from the yard in China. The second vessel is scheduled for delivery in about one week's time. We are also pleased to announce that we have just this morning taken delivery of the 33,000-ton deadweight chemical tanker SFL Aruba for deployment in the tankers pool. We further aim to take delivery of the sister vessel by the end of the month for delivery to the pool under an eight-year time charter. I will now give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.

Thank you, Trym. On this slide, we are shown our pro forma illustration of cash flows for the second quarter. Please note that this is only a guideline for assessing the company's performance and is not in accordance with U.S. GAAP and is also net of extraordinary and non-cash items. The company generated gross charter hire of approximately $199 million during the second quarter, with approximately $90 million coming from our container fleet. This includes approximately $2.8 million in profit share related to fuel savings on seven of our large container vessels. The car carrier fleet generated approximately $26 million of charter hire, while our tanker fleet generated approximately $30 million in charter hire, in line with the previous quarter. SFL has 15 dry bulk carriers, of which eight are employed on long-term charters. The vessels generated approximately $23 million in gross charter hire in the second quarter, including approximately $1.6 million profit share from our eight Capesize vessels on long-term charters to Golden Ocean. The seven vessels employed in the spot and short-term market contributed approximately $8.2 million in charter revenue compared to approximately $6.5 million in the first quarter. In the second quarter, our energy assets generated approximately $29 million in contract revenues, compared to approximately $66 million in the previous quarter. Linus is under a long-term contract with ConocoPhillips in Norway until the end of 2028. During the quarter, revenues from the rig were $10 million compared to $19.6 million in the previous quarter, as the rig underwent its ten-year special survey. The rig was back on contract by the end of July after an additional repair scope, which extended the SPS and docking by about five weeks. Hercules finalized the contract with Galp Energia in Namibia in mid-May and spent approximately half of the quarter in mobilization mode, recording approximately $19.4 million of revenues compared to $46.9 million in the first quarter. The rig commenced the contract with Equinor in Canada in mid-July, and under U.S. GAAP, mobilization fees and costs are deferred and amortized over the period of the contract. SFL has recorded lower income and costs from Hercules in the second quarter. Our operating and G&A expenses for the quarter were approximately $70 million compared to $85 million in the first quarter, primarily due to deferred operating costs from Hercules as mentioned earlier. This results in an adjusted EBITDA of approximately $131 million compared to $152 million in the previous quarter. Moving on to the profit and loss statement as reported according to U.S. GAAP. As described in previous earnings calls, our accounting statements differ from those of a traditional shipping company. Our business strategy focuses on long-term charter contracts, and some of our activities are classified as capital leasing. Therefore, a portion of our charter revenues are excluded from U.S. GAAP operating revenues. This includes repayment of investments in sales-type, direct financing leases, leaseback assets, and revenues from entities classified as investments in associates for accounting purposes. So, for the second quarter report, total operating revenues according to U.S. GAAP were approximately $190 million, which is less than the approximately $199 million of charter hire actually received for the reasons just mentioned. During the quarter, the company recorded $4.4 million from profit share income related to fuel savings on our large container vessels and from our car carriers and eight Capesize vessels on charter to Golden Ocean. Our revenue from our vessels was in line with the first quarter; however, both revenues and operating expenses from our energy assets were lower during the quarter for the reasons previously mentioned. Overall, according to U.S. GAAP, the company reported a net profit of approximately $20.6 million or $0.16 per share, compared to approximately $45 million or $0.36 per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately $186 million in cash and cash equivalents. During the quarter, the company arranged a $37 million JOLCO financing for the previously debt-free container vessel Maersk Phuket at very attractive terms and maturity matching the long-term charter. In terms of CapEx commitments, we have recently acquired five tankers with a total CapEx of approximately $340 million, of which approximately $244 million will be financed with senior bank financing. Two of the vessels have already been delivered, while the three remaining vessels are expected to be delivered during the third and fourth quarters. Additionally, our harsh environment jack-up rig Linus recently underwent its 10-year SPS, with an estimated remaining capital expenditure of approximately $30 million. Due to an additional repair scope, the CapEx scope has increased from approximately $10 million to a total of approximately $48 million. Subsequent to quarter end, the company entered into agreements to build five 16,800 TEU container vessels with scheduled delivery in 2028 at an aggregate construction cost of approximately $1 billion. The vessels are expected to be funded by a combination of cash on hand and conventional pre- and post-delivery vessel financing. Furthermore, SFL has recently secured financing commitments for a combined amount of approximately $700 million, effectively covering most secure debt financing commitments maturing over the next 12 months. Finally, the company raised $100 million in net proceeds from a U.S. public offering by issuing 8 million common shares in July. Based on the Q2 numbers, the company had a book equity ratio of approximately 27%. To conclude, the Board has declared the 82nd consecutive cash dividend of $0.27 per share, representing a dividend yield of approximately 9%. Following recent investments and charter renewals, our fixed charter rate backlog currently stands at $4.9 billion, providing us with strong visibility on our cash flow going forward. The company has a strong balance sheet and liquidity position. We recently raised $100 million in gross proceeds from a public offering and secured more than $1 billion in senior secured financing this year to address refinancing of existing vessels and new acquisitions.

Thank you, Aksel. We will now open the floor for questions. Thank you. Our first question will come from Sherif Elmaghrabi. Please unmute your speaker to ask your question.

Hi. Thanks for taking my question. So first on the Hercules, that rig is now getting a little closer to the end of its existing contracts and given recent consolidation within the offshore space, are operators becoming more interested in the rig? Or would you say they're still focused on their own backlog at the moment?

Yes. Thank you. The rig is currently working in Canada for Equinor and doing a really good job there. It made a significant find in Namibia for Galp. There’s clearly a decent market for rigs of this caliber, but these are specialized assets. We have not concluded any follow-on work from the rig. The rig is expected to come off charter sometime during the fourth quarter. It all depends on, let’s say, both the drilling efficiency and the scope of work that Equinor wants to pursue in Canada. We are in dialogue with various oil companies and potential charters but have not concluded anything as of now and cannot provide any specific comments until we have something formalized. In terms of M&A, what we have seen has been more related to listed companies and consolidation, primarily focused on drill ships and not so much on semi-submersibles, which is the type of asset that Hercules is. However, we are following it closely. We see that charter rates are edging up, particularly for ultra-deepwater units, and have seen some quite strong charters and charter rates over the last few months. We still firmly believe in the long-term prospects for this segment but we cannot provide a specific timeline for when we will announce a new charter for Hercules.

Thank you. As there are no further questions from the audience, I want to express my appreciation to everyone for participating in this conference call. If you have any follow-up questions for the management, you can find contact details in the press release or reach out to us through the contact pages on our website www.sflcorp.com. Thank you.