SFL Corporation Ltd. (NYSE:SFL) Q4 2023 Earnings Call Transcript
SFL Corporation Ltd. (NYSE:SFL) Q4 2023 Earnings Call Transcript February 14, 2024
SFL Corporation Ltd. beats earnings expectations. Reported EPS is $0.25, expectations were $0.13. SFL Corporation Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Sander Borgli: Welcome to SFL's Fourth Quarter 2023 Conference Call. My name is Sander Borgli, and I'm an Analyst in SFL. Our CEO, Ole Hjertaker, will kick off the call with an overview of the fourth 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 highlights for the fourth quarter.
Ole Hjertaker: Thank you, Sander. We are now celebrating our 80th dividend, and have a unique profile as a maritime infrastructure company with a diversified fleet. The total charter revenues were $209 million in the quarter, and EBITDA was $132 million, which were in line with the third quarter. Over the last 12 months, the EBITDA equivalent has been $481 million. The net income came in at around $31 million in the quarter, or $0.25 per share. The net income was impacted by some one-off items in the quarter, including negative mark-to-market on hedging instruments and accounting effects on Hercules, which our CFO, Aksel Olesen, will explain in more details later in the presentation. In line with the improved results and commitment to return value to our shareholders, we are, again, increasing our quarterly dividend this time to $0.26 per share.
We have now paid dividends every quarter since our inception in 2004, and this has accumulated to more than $30 per share, or nearly $2.7 billion in total. Our fixed rate backlog stands at approximately $3.2 billion. And importantly, this backlog is concentrated around long-term charters to very strong end users. And 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. And with that, I will give a word over to our Chief Operating Officer, Trym Sjølie.
Trym Sjølie: Thank you, Ole. We have 73 maritime assets in our portfolio, and our backlog from owned and managed shipping assets stand at $3.2 billion. The current fleet is made up of 15 dry bulk vessels, 36 container ships, 13 tankers, 2 drilling rigs and 7 car carriers, where 6 are on the water and 1 still under construction in China. The latest newbuilding is scheduled for delivery in March 20 24. We have evolved from having a single asset class charter to one single customer to a diversified fleet and multiple counterparties. And the fleet composition has varied from originally, 100% tankers via majority offshore assets ten years ago, two container vessels, now being the largest segment, with just under 50% of the backlog.
Most of our vessels are on long-term charters, but we have, over the last eight to ten years, completely transformed the company's operating model and have moved away from financing type bareboat charters, and instead assume through operating exposure, which makes us relevant for large industrial end users like Maersk, K Line, Hapag-Lloyd and others. In the fourth quarter, 95% of charter revenues from all assets came from time charter contracts, and only 5% 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. Out of our current 73 vessels, we have 13 on bareboat type contracts, and 60 on time charter and spot trading.
Our operation is quite complex with vessels across multiple sectors. We have our own commercial operation out of Oslo and 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. In Q4, we had a total of over 6,400 operating days, defined as calendar day, less technical off-hire and dry dockings.
Two vessels have been in dry dock in the quarter. Our overall utilization across the shipping fleet was 99.7% in Q4, and 99% for the drilling rigs. The charter revenue from our fleet was $209 million in Q4, and OpEx for the fleet was $76 million. Among 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. As part of our fleet rejuvenation program, we are working with our main container charterers, Maersk and Hapag-Lloyd to increase energy efficiency of our container fleet. For the six Hapag-Lloyd vessels, we are investing in energy-saving devices, improved hull form with new bulbous bow, new propellers and fittings, supreme anti-fouling paint and exhaust gas scrubbers.
Furthermore, we are boosting the cargo intake, up to nominally 15,400 TEU by increased deadweight and modifications to lashing bridges and lashing gears. We estimate that fuel consumption and emissions per TEU carried is down by approximately 20%. We have also had similar work done on vessels to Maersk, whether energy-saving is in the same region or better. 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 a pro forma illustration of cash flows for the fourth 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 $209 million in the fourth quarter, with approximately 93% of the revenue coming from a fixed charter rate backlog, which currently stands at $3.2 billion, providing us a strong visibility on our cash flow going forward. In the fourth quarter, the container fleet generated gross charter hire of approximately $92 million, including approximately $3.4 million in profit share related to fuel savings on some of – seven of our large container assets.
With five car carriers on charter, following the delivery of our second dual-fuel LNG car carrier in November, gross charter hire increased approximately $22 million in the fourth quarter, compared to approximately $9 million in the third quarter. Our tankers, our 15 tankers on long-term charters generated approximately $30 million in gross charter hire during the fourth quarter in line with the previous quarter. The company has 15 dry bulk carriers of which eight were employed on long-term charters. The vessels generated approximately $21 million in gross charter hire in the fourth quarter. Seven of these vessels were employed in the spot and short-term market, and contributed with approximately $7.3 million in the charter hire compared to approximately $6.2 million in the previous quarter.
SFL owns two modern harsh environment drilling rigs, the large jack-up rig Linus and the semisubmersible ultra deepwater rig Hercules. During the fourth quarter, the rigs generated approximately $44.9 million in contract revenues compared to approximately $64.1 million in the third quarter. Linus is under long-term contract of ConocoPhillips on the greater Ekofisk field in Norway until the end of 2028. During the quarter, Linus revenue was approximately $19 million compared to approximately $16.6 million in the previous quarter. Hercules completed a drilling contract with ExxonMobil in Canada in September and commenced a contract with Galp Energia in Namibia in mid-November after a short stay in Las Palmas for preparations. During the quarter, Hercules revenue was approximately $25.9 million compared to approximately $47.5 million in the previous quarter.
The reduction in contract revenue for the Hercules relates to fewer contract days in the quarter as the rig spent about half of the quarter in mobilization mode. The U.S. GAAP mobilization revenue and costs are deferred and recorded over estimated contract duration. Accordingly, we expect to record additional net mobilization revenue for approximately $3.6 million in the first quarter, in addition to ordinary operating revenue under the contract. Our operating and G&A expenses for the quarter was $80 million compared to $86 million in the third quarter as we had fewer drydockings and lower rig operating expenses in the quarter. This summarizes to an adjusted EBITDA of approximately $132 million in the fourth quarter compared to $130 million in the previous quarter.
Then move on to the profit and loss statements. For the fourth quarter, reported total operating revenues according to U.S. GAAP of approximately $209.6 million, which is in line with the $209.5 million of charge hire actually received. During the quarter, the company recorded profit share income of approximately $3.4 million from fuel savings for some of our large container vessels and a car carrier. The increase in operating revenue is primarily driven by revenue from commencement of new charters for car carriers. Also, we booked an extra $8.3 million of accrued income on two car carriers as the vessels charter extensions and the U.S. GAAP are subject to averaging the previous charter rate and the higher charter rate until the end of the extensions.
We expect an additional positive effect of approximately $1.1 million in the first quarter before we will record approximately $800,000 lower earnings versus actual received higher per quarter until the end of the extended charter. On the financial items, we had negative non-cash mark-to-market effects from derivatives of approximately $5.1 million. Negative market effects from equity investments of approximately $1.4 million and an increase of approximately $300,000 on credit loss provisions. So overall and according to U.S. GAAP, the company reported a net profit of approximately $31.4 million, or $0.25 per share, compared to approximately $29.3 million or $0.23 per share in the previous quarter. Moving on to the balance sheet. At quarter end, as well as approximately $165 million of cash and cash equivalents.
Furthermore, the company multiple securities are approximately $5.1 million in addition to eight debt free vesselswith an estimated market value of more than $100 million following the debt repayment of approximately $20 million related to our five Supramax dry bulk vessels. In terms of CapEx commitments, we have $77 million of remaining CapEx at quarter end on two car carriers under construction. The vessels are fully financed by individual Yoco financingarrangements and the combined net cash proceeds upon delivery from the yard is estimated to approximately $45 million. Furthermore, our harsh environment like the rig Linus is scheduled to undergo its tenure special periodic survey in the second quarter of 2024. With an estimated net capital expenditure of approximately $30 million, which will be funded with cash account.
Based on the Q4 numbers, the company had a book equity ratio of approximately 28%. Then, to conclude, the company has delivered another strong quarter and the board has declared the 80th consecutive cash dividend, which has been increased to $0.26 per share. Our fixed charter rate backlog currently stands at $3.2 billion, which provides us with strong visibility on a cash flow going forward. The company has a strong balance sheet and a liquidity position with $165 million of cash at quarter end and a significant investment capacity. And finally, with the Hercules on back to back contracts with Galp and Equinor in 2024, and delivery of our new building car carriers together with new contracts for our existing vessels with strong revenue generations in the quarters to come.
And with that, we conclude the presentation and move on to the Q&A session.
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