Earnings Call Transcript - SFL Q4 2024

Espen Nilsen Gjøsund, VP of Investor Relations

My name is Espen Gjosund. I'm Vice President of Investor Relations in SFL. Our CEO, Ole Hjertaker, will start the call with an overview of the fourth quarter highlights. Then our Chief Operating Officer, Trym Sjolie, 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 out 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 operating results and our financial condition. Then I will leave the word over to our CEO, Ole Hjertaker, with highlights for the fourth quarter.

Ole Hjertaker, CEO

Thank you, Espen. Our EBITDA for the quarter came in at $132 million, which is significantly up from the second quarter. Over the last 12 months, the EBITDA equivalent has been $581 million. The net income came in at around $20 million in the quarter or $0.15 per share, and we had positive contributions relating to profit share on capesize bulkers and fuel cost savings of $2.5 million. Our fixed rate backlog stands at approximately $4.3 billion. Importantly, two-thirds of this is to customers with investment-grade ratings, giving us unique cash flow visibility and resilience. This backlog figure excludes revenues from vessels trading in the short-term market and also excludes revenue from the new dual fuel chemical carrier that operates in various tankers. It also excludes future profit share optionality which we have seen can contribute significantly to our net income. In line with our commitment to return value to shareholders, we are paying a quarterly dividend of $0.27 per share, which represents roughly a 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, Volkswagen Group, and others. During the year, we renewed and extended multiple existing charters and took delivery of nine new vessels in 2024. Maersk ordered five new large container vessels last year, which added $1.2 billion to our fixed-rate charter backlog. We are also in the process of upgrading several other vessels, and our Chief Operating Officer, Trym Sjolie, will talk more about that later. It has also been a busy year from a financing perspective, where we have effectively addressed virtually all short-term asset debt maturities, matching funding with charter tenor. In total, we raised $1.3 billion in financing, including $220 million in senior unsecured bonds in 2024. Subsequent to year-end, we raised a new $150 million senior unsecured bond loan in the Nordic market with maturity in 2030. We have had a dispute with Seadrill regarding the condition of the drilling rig Hercules when it was redelivered to us in December 2022. Last week, there was a ruling in Oslo District Court, where Seadrill was ordered to pay us approximately $48 million in compensation, including interest and legal costs. It was a comprehensive case with more than 80,000 pages of documentation and a ruling of over 112 pages. This ruling is subject to appeal for both sides within a month of the judgment. We have so far not included any potential proceeds as an asset on the balance sheet, and the legal costs have been expensed over time in our general administrative expenses. Separately, there is a case set to commence later in 2025 regarding certain parts delivered to us by Seadrill in connection with a special survey of Hercules in 2022. We disagree on the actual ownership of some of the parts before they were delivered to us and therefore also the compensation claimed by Seadrill. This will likely take several months before this case is heard and there is a final ruling. With that, I will pass the word to our Chief Operating Officer, Trym Sjolie.

Trym Sjølie, Chief Operating Officer

Thank you, Ole. Our fleet currently consists of eight maritime assets. This includes vessels, rigs, and contracted new buildings. In 2024, we took delivery from the shipyard of two LNG dual-fuel PCTCs and three LR2 tankers, as well as purchased two dual-fuel LNG 33,000 deadweight tons stainless steel chemical tankers. Last year, we also placed orders for five 16,700 TEU container ships in China. We also increased the backlog with Maersk with new five-year charters for seven of our large container vessels, which is a result of a close relationship and cooperation on vessel upgrades and performance enhancements. The first two vessels out of these seven have already been upgraded and delivered to Maersk in Q1 this year. Regarding divestments, we have sold one of our old 1,700 TEU containerships, the Green ACE, that was delivered to buyers in Q4. Additionally, Golden Ocean, the charterer of our eight Capesize bulk carriers, recently declared their purchase option for the eight vessels. We expect the vessels to be delivered to Golden Ocean early Q3 this year. Our backlog from owned and managed shipping assets currently stands at $4.3 billion, and the fleet is made up of 15 dry bulk vessels, 38 containerships, 18 tankers, two drilling rigs, and seven car carriers. We have a diversified fleet of assets chartered out to first-class customers on mostly long-term charters, and the majority of our customer base consists of large industrial end users. Container vessels remain our largest segment, with almost 68% of the backlog. As Ole mentioned previously, we have increasingly invested in vessel maintenance and upgrades. Due to tightening regulatory requirements from the IMO and especially the EU to reduce emissions from shipping, continuous improvement is necessary. Such improvements and investments in assets are also critical for our customers, putting us in a better position to grow organically by either providing new vessels to their service or by extending our current fleet. Particularly, we see that container operators are keen to develop partnership models with large upgrade projects, including cargo boost, energy-saving devices, propeller modifications, and changes to the hull form like new bulbous bows. We have identified significant benefits from these investments in terms of cost savings for our customers and lower emissions. In the fourth quarter, 96% of charter revenues came from time charter contracts and only 4% from bare boats or dry leases. In addition to fixed-rate charter revenues, we have benefited significantly from profit share arrangements over time, both relating to charter rates and cost savings on fuel. In Q4, profit split arrangements contributed about $1.8 million, which is lower than a typical quarter due to lower fuel cost spread between heavy fuel oil and very low sulfur fuel oil. The charter revenue from our fleet was about $232 million in Q4, with almost 6,800 operating days defined as calendar days less technical or fire and dry dockings. Eight vessels were in dry dock during the quarter, including major technical fire and dry dockings. Our overall utilization across the shipping fleet in Q4 was 98.3%, mainly due to 108 days spent in dry dock. For the rigs, the availability was about 67%, mainly due to the idle period for the Hercules rig. The Hercules rig was contracted with Equinor Canada until mid-November, including demobilization time to Norway. The rig is currently warm stacked and being marketed for opportunities later in 2025 and 2026. During the fourth quarter, the rig recorded revenue of $34 million and costs of approximately $26 million. Going forward, we expect the stacking cost of the rig to be considerably lower than those in Q4. The Linus rig recorded its first full operational quarter after its special periodic survey in May to July last year and achieved Q4 revenue of $20.2 million. The rig market index rate increased by 2.3% in Q4, with costs of $13 million compared to $11.8 million in the previous quarter. Subsequent to quarter-end, we received a notification from our insurers that we will receive close to $5 million to partly cover the expenses incurred for the spot can repairs during the rig's yard stay last summer. I will now hand it over to our CFO, Aksel Olesen, to go through the financial highlights of the quarter.

Aksel Olesen, CFO

Thank you, Mr. Sjolie. On this slide, we provide our pro forma illustration of cash flows for the fourth quarter. Please note that this is a guideline of 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 $232 million during the fourth quarter, with approximately $85 million coming from our container fleet, which was down from the previous quarter due to scheduled dry dockings and efficiency upgrades on some of our large container vessels. This includes about $1.7 million in profit share related to fuel savings on seven of our large container vessels. In the fourth quarter, the company sold the 2005-built feeder container vessel Green Ace for approximately $10.8 million and booked a gain of approximately $5.4 million. Subsequent to quarter-end, the company has agreed to sell the sister vessel Asian Ace for approximately $9.5 million with expected delivery to the buyer in the second quarter of 2025 after the expiry of the current charter. The vessel is debt-free, and a gain of approximately $4 million is expected to be recorded in the second quarter. The car carrier fleet generated about $26 million of gross charter hire in the quarter, including profit share from fuel savings. Our tanker fleet generated approximately $42 million in gross charter hire, up from about $37 million in the previous quarter, as all five tankers acquired in 2024 have now been delivered. SFL operates dry bulk vessels, of which eight are employed on long-term charters. The vessels generated approximately $23 million in gross charter hire in the fourth quarter, including about $900,000 in 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 approximately $7.4 million in net charter revenue compared to approximately $8.4 million in the third quarter. Subsequent to quarter-end, Golden Ocean exercised its purchase option for eight vessels for $112 million in aggregate. The vessels will be delivered to Golden Ocean during the third quarter of 2025, and the net cash proceeds after repayment of debt are estimated to be approximately $50 million. In the fourth quarter, our energy assets generated approximately $55 million in contract revenues compared to approximately $86 million in the third quarter as the Hercules finished its contract with Equinor in Canada in mid-October. Linus is under a long-term contract with ConocoPhillips in Norway until May 2029, and during the quarter, revenues from the rig were approximately $20 million compared to approximately $16 million in the third quarter. Our operating and G&A expenses for the quarter were approximately $104 million compared to approximately $99 million in the third quarter, mainly due to scheduled dry dockings and the delivery of new vessels. This summarizes to an adjusted EBITDA of approximately $132 million compared to $167 million in the previous quarter. Moving on to the profit and loss statement reported in accordance with U.S. GAAP. For the fourth quarter, we report total operating revenues according to U.S. GAAP of approximately $229 million compared to approximately $255 million in the previous quarter. The operating revenue decrease is primarily driven by the Hercules concluding its contract with Equinor in Canada in mid-October. During the quarter, the company recorded profit share income of approximately $2.6 million from fuel savings from some of our large container vessels, our car carrier, and our eight Capesize dry bulk vessels on charter to Golden Ocean. We had an increase in vessel operating expenses mainly due to scheduled dry dockings and new vessel deliveries. Furthermore, results were impacted by nonrecurring and non-cash items including a gain of approximately $5.4 million in connection with the sale of the Green Ace, a negative mark-to-market effect from financial derivatives of approximately $2 million, negative mark-to-market effects from equity investments of approximately $500,000, and a decrease of approximately $100,000 on credit loss provisions. Overall, according to U.S. GAAP, the company reported a net profit of approximately $20 million or $0.15 per share compared to approximately $44.5 million or $0.34 per share in the previous quarter. Moving on to the balance sheet, at quarter-end, SFL had about $135 million of cash and cash equivalents. The company also had marketable securities of approximately $4.6 million in addition to debt-free vessels with an estimated market value of approximately $75 million. The company has recently concluded financing arrangements of approximately $1 billion, with about $280 million being drawn down during the quarter. During the fourth quarter, the company paid the second installment of about 5% relating to the new building order for five 16,800 TEU container vessels, with scheduled delivery in 2028. The remaining balance is due closer to delivery, and we expect this to be financed by pre- and post-delivery loan facilities. Subsequent to quarter-end, the company successfully placed a new sustainability-linked bond of $150 million in the Nordic market in anticipation of new investments and general corporate purposes. Based on the Q4 numbers, the company had a book equity ratio of approximately 28%. The Board has declared the 84th consecutive cash dividend of $0.27 per share, representing a dividend yield of around 10%. The company has a strong balance sheet and liquidity position, and we have effectively addressed the majority of all short-term asset debt maturities, matching funding with charter tenors. In total, we raised about $1.3 billion in financing, including $220 million in senior unsecured bonds. Subsequent to quarter-end, we raised the new $150 million senior secured bond in the Nordic market with a maturity in 2030. Our fixed charge rate backlog currently stands at roughly $4.3 billion after adding approximately $2 billion during 2024. Two-thirds of the backlog is with customers rated investment grade, giving us strong visibility on our cash flow going forward. With that, I will hand it back to the operator, who will open the line for questions.

Espen Nilsen Gjøsund, VP of Investor Relations

Thank you, Aksel. We will have our first question from Gregory Lewis.

Gregory Lewis, Analyst

I had a few questions today. The first is around the semisubmersible rig, the Hercules. Clearly, the rig got back to work and had a good year in 2024. I believe it's currently warm stacked outside of Norway. I was hoping you could address a couple of questions regarding the Hercules. One is how should we think about the operating expense cost as that rig is warm stacked off Norway? And as we look to budget for 2025, how are you thinking about that expense for 2025, just given some of the prospects you see for that rig as we move into better weather in the North Sea during the summer?

Ole Hjertaker, CEO

Thanks, Greg. The rig just concluded a very successful drilling campaign in Canada for Equinor. This is a rig that is one of a handful capable of drilling both in ultra-deepwater and in shallow waters. It has drilled in the Arctic before and can do it again. The market is a little slow at the beginning of 2025. We believe there will be more prospects in the second half of the year and onwards. Market analysts say that 2026 looks very promising. Currently, we are keeping the rig idle. The reason it is in its location is that it's very close to where it has a true edge. We are taking the opportunity while it is idle to perform some upgrades that will make it more attractive in the long run. We've invested over $100 million into the rig in early 2023. We believe position-wise, the rig is very attractive, but we anticipate a soft first half of the year. Our expectation is that the rig will be back in operation later in the year.

Gregory Lewis, Analyst

Thanks. I also wanted to acknowledge the consistency of the dividend as we review the dividend payments in 2023, which were funded at around 40% of free cash flow. It has decreased to a high 30% of operating cash flow payout. Considering that the decision on the dividend is aimed at long-term prospects, how should we view the stability of that dividend? What factors could lead to a change in the dividend amount?

Ole Hjertaker, CEO

You're correct in saying that the dividend is set on a quarter-over-quarter basis. We cannot guide specifically what the next quarter's dividend will be. Generally, the discussions about dividends are more focused on long-term prospects. If you look at the operating model of the company, we have transitioned significantly to an operating model with more than 70 vessels and two-thirds of our backlog with investment-grade counterparties. This represents a fundamental change in the business model. Yes, we have some legacy assets that are part of our operations, but the overall business has a stable cash flow foundation. There's noise in revenue structures due to the accounting rules around mobilizing rigs; however, the core business is quite stable and predictable. Our investments and upgrades align with this stability, and as such, the overall long-term potential influences dividend considerations.

Gregory Lewis, Analyst

This is super helpful. I wanted to discuss tariffs. As we’ve built this container ship portfolio and even the car carrier portfolio, I've received some questions around force majeure, particularly in light of any changes we might see with tariffs. How do you see those potential impacts for existing charters?

Ole Hjertaker, CEO

Looking at the car carriers we have, particularly with the Volkswagen Group, they are a very strong counterparty. If any issues arise, they will absorb that due to their strong economic capacity. Additionally, while there is trade volume between the U.S. and Europe, it's not solely one-sided as the U.S. produces a variety of vehicles. As for the container trade, tariffs could present some pressures, but changes in trade patterns since the 2018-2019 trade war have reshaped the dynamics. Currently, there are strong counter-parties in our market, reducing direct risk exposure for us. We monitor these developments closely but remain confident that our strong counter-parties can manage their charter obligations.

Espen Nilsen Gjøsund, VP of Investor Relations

Next, we'll take our question from Climent Molins.

Climent Molins, Analyst

You announced Golden Ocean will be exercising their purchase options on eight capesizes. As you think about redeploying the net proceeds, should we expect a focus on dry bulk investments? Or are you willing to reduce your exposure to that sector?

Ole Hjertaker, CEO

Generally, we are segment agnostic. It’s about doing the right deals with the appropriate structure, counterparties, and economics. We would love to engage more in the dry bulk space if we can devise the right strategy around it. We’ve done some deals in tankers. However, we are not currently present in the LNG segment due to too many players chasing deals there, making the economics less attractive. Our allocation of capital is determined case by case based on the market conditions, always aiming for the best possible return.

Climent Molins, Analyst

That’s helpful. I wanted to ask about the Seadrill ruling. Can you provide any details regarding the $48 million ruling? If it is appealed, when should we expect an update?

Aksel Olesen, CFO

The ruling itself is public. The appeal can be filed until the 5th of March. We will then know if it is appealed, and that would be moved to the second circuit, which could take up to another 12 months before the case is scheduled. So patience will be required.

Espen Nilsen Gjøsund, VP of Investor Relations

Next question comes from an unknown analyst.

Unknown Analyst, Analyst

Are there any significant upgrades or CapEx required for the Hercules if it were to work in offshore Norway?

Ole Hjertaker, CEO

No significant upgrades are required. The rig has operated in Norway previously under different management. Looking back, when we took in the Linus rig, we switched management efficiently as it made sense. While there are always some investments to be made, they are manageable. Typically, oil companies are willing to cover effective investments needed when bringing rigs into Norway.

Espen Nilsen Gjøsund, VP of Investor Relations

We have received a question regarding which shipping segment you see as most potential or profitable in the next 2-3 years.

Aksel Olesen, CFO

It's a challenging question because our focus is on long-term charters rather than the spot market. Our deals are usually 5, 7, or 10-year charters, which means short-term fluctuations don't affect us significantly. Historically, shipping segments like dry bulk show promise due to a low order book and reduced shipbuilding capacity. The demand side remains strong, particularly in Asia. We're insulated from fluctuations in the spot market because of our long-term focus.

Espen Nilsen Gjøsund, VP of Investor Relations

Thank you, Ole. We also have another question here. What's your view regarding the huge delivery backlog of container ships in the coming years? Do you think it will affect your profitability in '26 and '27?

Trym Sjølie, Chief Operating Officer

Regarding the backlog of containerships and any effect on SFL in 2027, we do not believe there will be a major impact. Our container fleet is mainly chartered until around 2029-2030, and we expect continued strong interest in good, large container assets from all operators. While there is a significant order book, demand remains solid for our current backlog.

Espen Nilsen Gjøsund, VP of Investor Relations

Thank you, everyone, for participating in this conference call. If you have any follow-up questions to the management, there are contact details in the press release, or you can get in touch with us through the contact pages on our website, www.sflcorp.com. Thank you, everyone.