SFL - Q1 2024

Transcript

Sander Borgli (VP of Investor Relations)

Welcome to SFL's first quarter 2024 conference call. My name is Sander Borgli. I'm Vice President for Investor Relations in SFL. Our CEO, Ole B. Hjertaker, will start the call with an overview of the first quarter highlights. Then our Chief Operating Officer, Trym Sjølie, will comment on vessel performance matters, followed by our CFO, Aksel C. 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 see our filings with this exchange for more details on our operating results and our financial condition. Then, I will now turn the call over to our CEO, Ole Hjertaker, with highlights for the first quarter.

Ole B. Hjertaker (CEO)

Thank you, Sander. We are now announcing our 81st dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. The total charter revenues were $236 million in the quarter, which is up 13% from the previous quarter, primarily due to the delivery of our new car carriers and also increased revenues on the drilling rig, Hercules. The EBITDA equivalent cash flow in the quarter was approximately $152 million, which was also significantly higher than the previous quarter, and over the last twelve months, the EBITDA equivalent has been $523 million. The net income came in at around $45 million in the quarter, at or 36 cents per share.

We had a positive contribution of $2.2 million relating to profit share on Capesize bulkers, and $3.3 million relating to fuel cost savings, and also some minor one-off items, including $1.8 million mark-to-market gain on interest rate swaps. In line with the improved results and commitment to return value to our shareholders, we are again increasing our quarterly dividend, and this time to $0.27 per share. We have paid dividends every quarter since our inception in 2004, and this has accumulated to more than $30 per share or more than $2.7 billion in total. We have a robust and increasing charter backlog, supporting continued dividend capacity. Going forward, [it] stands at $6 billion, and importantly, the backlog is concentrated around long-term charters to very strong end users.

I would note that the backlog figure excludes revenues from the vessels trading in the short-term market and also excludes revenues on the new dual fuel chemical carriers 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. We have recently announced several new acquisitions and charters. In March, we announced the acquisition of three new 110,000 deadweight ton LR2 product tankers for an aggregate purchase price of approximately $230 million, in combination with long-term time charters to a world-leading energy and commodities company. The vessels are currently under construction in China and have conventional propulsion system with the latest eco-design features.

We expect to take delivery of the vessels between June and October this year, and the charter period will be minimum five years, plus up to three years of extension options. This adds around $200 million to our fixed rate, the backlog, excluding the optional years. The charterer will have options to purchase the vessels after year 5 and 8, subject to a profit share mechanism with SFL. In April, we announced an agreement to acquire 2 33,000 deadweight ton chemical carriers with LNG dual fuel propulsion system. The vessels are built in 2022 and 2023 and fitted with stainless steel cargo tanks, and the aggregate purchase price is approximately $114 million.

We expect to take delivery of the vessels in July and have arranged long-term employment for the vessels with affiliates of Stolt Tankers, a subsidiary of the world leader in chemical logistics. Stolt vessels will be employed for a minimum of eight years, where one vessel will be on a fixed rate time charter, and one vessel will be employed in a pool with similar-sized vessels. The fixed rate vessel has extension option to a profit share mechanism with SFL. We have a very close business relationship with Maersk Line and have 17 vessels on long-term charters to them now. We recently agreed to extend charters for three 10,600 TEU vessels until 2030, and Maersk also exercised the 1-year pre-agreed extension options on three other vessels, ranging from 8,700-9,500 TEU....

In addition to this, we have also fixed our 1,700 feeder Green Ace on a short-term charter to Maersk until late 2024. In aggregate, this adds approximately $250 million to our charter backlog, and in addition, we have a profit share relating to scrubber benefits on some of the vessels that is expected to add additional revenues for us over time. In April, we raised a new $150 million senior unsecured sustainability-linked bond loan in the Nordic market. Maturity will be in the second quarter of 2028, and the coupon is 8.25%. Proceeds are for refinancing existing debt and for general corporate purposes.

As part of the use of this facility, we have repaid a Norwegian kroner-denominated bond loan due in June 2024, with the equivalent of $81 million outstanding at the end of the first quarter. With that, I will give the word over to our Chief Operating Officer, Trym Sjølie.

Trym Sjølie (COO)

Thank you, Ole. Including vessels to be delivered this year, we have 76 maritime assets in our portfolio, and our backlog from owned and managed shipping assets stands at $3.6 billion. The current 315 new ships that's chartered out to first-class charterers are mostly long-term charters. Container under type variable charters and instead that assumed full operating. This meant for large and just like dry and wet segments. The two new dual-fuel chemical tankers on time charter to Stolt and Pool with Stolt Tankers is a recent example of this. In the third 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've had significant contribution to cash flow from profit share arrangements over time, both relating to charter rates and cost savings on fuel.

In Q1, profit split arrangements have contributed about $5.5 million. Out of the 76 vessels, we have 11 on bareboat contracts and 65 on time charter and spots. Our operation is quite complex, with vessels across multiple sectors, and we have our own commercial operation out of Oslo, and operational management out of Singapore and Stavanger. In Q1, we had a total of almost 6,500 operating days, defined as calendar day, less technical off-hire, and dry dockings. One vessel has been in dry dock in the quarter. Our overall utilization across the fleet in Q1 was 99.5%. The charter revenue from our fleet was $236 million in Q1, and OpEx for the fleet was $81 million.

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. Such investments and cooperation with our charterers is important as a way to grow our relationship and increase backlog from existing vessels. As part of our fleet upgrade program, we are working with our main container charterers, Maersk and Hapag-Lloyd, to increase energy efficiency of our container fleet. With Maersk, we are making investments across the long-term chartered fleet for various energy efficiency measures, including hull and propeller modifications when the vessels are in dry dock. These modifications ensure the vessels remain attractive to charterers over time.

As Ole mentioned, we just entered into new five year time charters of 3 10,600 TEU container ships with Maersk, in which energy efficiency was an important consideration. For the six Hapag-Lloyd vessels, we are investing in energy-saving devices, improved hull form with new bulbous bow, new propellers and fittings, antifouling paint, and exhaust gas scrubbers. Furthermore, we are boosting the cargo intake up to nominally 15,400 TEU by increased deadweight and modification to lashing bridges and lashing gears. Two of the vessels have already been upgraded and delivered to Hapag-Lloyd, and we estimate that fuel consumption and emissions per TEU carried is down by approximately 20%. 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 C. Olesen (CFO)

Thank you, Trym. On this slide, there are shown pro forma illustration of cash flow quarterly. This is guideline to assist the company's performance, and it's not in accordance with U.S. GAAP and also net of extraordinary and non-cash items. The company generated gross charter hire of approximately $236 million in the first quarter, with approximately 93% of revenue coming from our fixed charter rate backlog, which currently stands at $3.6 billion, providing us with strong visibility on our cash flow going forward. In the first quarter, the container fleet generated gross charter hire of approximately $90 million, including approximately $3 million in profit share related to fuel savings on some of our large container vessels....

With seven car carriers on charter following the delivery of our two remaining dual fuel LNG car carriers during the quarter, gross charter hire increased to approximately $25 million in the first quarter, compared to approximately $22 million in the fourth quarter. Our tankers on long-term charters generated approximately $30 million in gross charter hire during the first quarter, in line with the previous quarter. The company has 15 dry bulk car carriers, dry bulk carriers, of which eight were employed on long-term charters. The vessels generated approximately $24 million in gross charter hire in the first quarter, including approximately $2 million profit share generated from our eight Capesize vessels on charter to Golden Ocean. Seven of these vessels were employed in the spot and short-term market and contributed approximately $6.5 million in net charter hire, compared to approximately $7.3 million in the previous quarter.

SFL owns two modern harsh environment drilling rigs: the large jackup, Linus, and the semi-submersible ultra deepwater rig, Hercules. During the first quarter, the rigs similarly and final contract in the quarter. During the quarter, Linus' revenue was approximately $19.6 million, compared to approximately $19 million in the previous quarter. The rig is currently at the yard in Norway for ten-year special survey with a net CapEx approximately $13 million. In connection with the SPS, we expect the rig to be off-hire for approximately five weeks. In the first quarter, Hercules was on Namibia, and according to this, half of the quarter was spent in mobilization mode. The rig is currently mobilizing to Canada for a contract with Equinor, and on the U.S. GAAP. Mobilization fees are just the content cost on Hercules in the second quarter.

Our operating and G&A expenses for the quarter was $85 million, compared to $80 million in the fourth quarter, as the Hercules went on contract for the full quarter. This summarizes to an adjusted EBITDA of approximately $152 million, compared to $132 million in the previous quarter. We then move on to the profit and loss statement as reported on the U.S. GAAP. As we had described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. As our business strategy focuses on long-term charter contracts, a large part 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 investment in sales type, direct financing leases and leaseback assets, and revenue from entities classified as investment in associates for accounting purposes.

The first quarter report total operating revenues according to US GAAP of approximately $229 million, which is less than approximately $236 million of charter hire actually received for reasons just mentioned. During the quarter, the company recorded profit share income of approximately $5.5 million from fuel savings from some 4 large container vessels, a car carrier, and our 8 Capesize dry bulk vessels on charter to Golden Ocean. On the financial items, we had positive non-cash mark-to-market effects from swaps of approximately $1.8 million, negative mark-to-market effects from equity investments of approximately $400,000, and an increase of approximately $100,000 on credit loss provisions. Furthermore, we had an increase in tax linked to operations of the Hercules in Namibia.

So overall, and according to US GAAP, the company reported a net profit of approximately $45.3 million, or $0.36 per share, compared to approximately $31.4 million, or $0.25 per share in the quarter. At quarter end, SFL had approximately $168 million of cash and cash equivalents. Furthermore, the company marketable securities of approximately $5.1 million, in addition to debt-free vessels with an estimated market value of more than $100 million. In terms of CapEx commitments, we recently acquired five tankers with total CapEx of approximately $340 million, for which we expect approximately $240 million to be financed with senior bank financing. In addition, our harsh environment jack-up rig, Linus, is scheduled to undergo its ten-year SPS, with an estimated net capital expenditure of approximately $30 million.

Subsequent to quarter end, the company successfully placed a new sustainability-linked bond of $150 million, addressing the 2024 NOK bond maturity, in addition to proceeds for general corporate purposes. Furthermore, the company has arranged a 37 million NOK financing for previously debt-free container vessel Maersk Bogor at very attractive terms and maturity matching the long-term charter. So based on Q1 numbers, the company had a book equity ratio of approximately 28%. Then to conclude, the company has delivered another strong quarter with growth in both revenues and EBITDA. The board has declared the 81st consecutive cash dividend and has increased the dividend to $0.27 per share, which represents a dividend yield of approximately 8%. Our fixed charter rate backlog currently stands at $3.6 billion, which provides us with strong visibility on the cash flow going forward.

Sander Borgli (VP of Investor Relations)

With that, we conclude the presentation and-

... and move on to the Q&A session. Thank you, Aksel. We will now open for a question and answer 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 a question. Thank you. And we'll have our first question from Climent Molins. Please unmute your speaker to ask a question.

Climent Molins (Research Analyst Associate)

Good afternoon, Ole and team. Thank you for taking my questions. I wanted to start by asking about the recent chemical tanker acquisitions. Adding a long-term contract on one of them is aligned with your usual structure, but could you provide some insight on the reasoning for employing one of them in Stolt-Nielsen's pool?

Ole B. Hjertaker (CEO)

Absolutely. Stolt-Nielsen is the leader of the chemical logistics. They are operating these vessels in the market, but they have a very high proportion of contracts of affreightment, i.e., you know, call it volume contracts, with their customers. There is therefore visibility on charter revenues relating to those vessels. And the reasoning for doing a combination of the two in reality is that we have then the support on the one vessel with a fixed rate, and then we have the market call it opportunity and exposure on the other vessel. And right now, the market or the near-term market, based on the COA coverage, is significantly higher than the fixed rate charter on the one vessel.

So the balance looks to be very good in the near term. From time to time, you know, we have taken some market exposure, but different as for that, we also have profit share relating to earnings in you know for some assets, and also on the fuel saving on other assets. So this is from a portfolio perspective, as we see it, you know a good way to participate in this market. And we believe there are... There are reasons to believe that this market will remain quite firm going forward, also based on the very low order book in this specific segment.

Also, these vessels have a dual fuel, LNG dual fuel propulsion, which we believe will, you know, make them increasingly attractive also for the large, you know, chemical companies that are the customers of Stolt-Nielsen, where these vessels will be employed.

Climent Molins (Research Analyst Associate)

Makes sense. Thanks for the call.

Ole B. Hjertaker (CEO)

Thank you.

Climent Molins (Research Analyst Associate)

I also wanted to ask about the two offshore. Regarding the Hercules, could you provide some commentary on what's the bid for long-term contracts? And secondly, on the Linus, revenue increased quarter-over-quarter. Is that attributable to the index link component of the contract?

Ole B. Hjertaker (CEO)

Yeah, I mean, to start with, with the Hercules, Hercules is now mobilizing from Namibia, on its way to Canada to start drilling for Equinor. So we expect that to start in Canada in early July. So it will be in transit and, you know, in the meantime, it started to transit just a week or so ago. That, you know, so, and that contract on the fourth quarter, and also the scope of work that is needed and the time to drill the wells. But we believe, you know, during the fourth quarter is a realistic time when that rig will be released.

From a period charter perspective, we are, of course, monitoring the market, looking at opportunities that are out there. But we cannot be specific on employment for the rig, you know, going forward. But we naturally look at all the opportunities that makes good sense for a rig of this caliber. You know, there are very few harsh environment deepwater rigs in the market. It's a relatively tight market. So we believe having this asset there could prove to be very interesting over time. If you look at the Linus, you know, that the charter rate there is now increasing.

It's coming up from just over $200,000 per day, and will now go to around $220,000 per day for us, from May onwards. The charter is linked to a market index with an adjustment of 10%. This adjustment is really to balance the fact that this rig does not have any, call it, commercial off-hire between contracts that you normally see with rigs that go from contract to contract. In the second quarter, this rig will be in a dry dock for a 10-year special survey. It just arrived at the shipyard yesterday.

We expect the work to take around five weeks, so we expect the rig to be back out again at the very end of the month. That rig has a long-term charter, so it will go, then go back to the charter to ConocoPhillips, that runs until the end of 2028. We also believe that there could be more work potential at the Ekofisk field. Conoco and their license partner had their license extended from 2028 to 2048 just over a year ago. And we hope that, you know, and we believe Linus will continue to do a good job for Conoco. And then that there could be opportunities for extended deployment beyond 2028.

But we are still, you know, quite some time away from any commercial discussions around the, you know, future deployment of that rig.

Climent Molins (Research Analyst Associate)

Thanks for the call. That's all from me. I'll pass it over. Thank you for taking my questions.

Ole B. Hjertaker (CEO)

Thank you.

Sander Borgli (VP of Investor Relations)

Thank you. We will take our next question from Gregory Lewis. Please unmute your speaker to ask your question.

Gregory Lewis (Managing Director)

Hey, good afternoon, and thank you for taking my questions. Yeah, Ole, I was hoping you could talk a little to, you know, how we should be thinking about the dividend, you know, and just returning cash to shareholders. I mean, you know, I guess this is another increase. I think there's been three consecutive increases. You know, clearly as we look at, you know, not even cash flows, but just net income, you know, there's definitely opportunity. You know, room to increase that, the dividend even more.

Just kind of curious at how the board maybe is thinking about this, realizing that, you know, it was good to see, but, you know, just looking at something like backlog, you know, the backlog looks like it was up, you know, more than, you know, roughly 10% sequentially. So just kind of, you know, any kind of colors you can give it, how you're thinking about the dividend, just realizing that it looks like, you know, that there is real depth in the long-term charter market for a lot of your assets.

Aksel C. Olesen (CFO)

Thank you, Greg. It's Aksel here. Yeah, it's a good observation. It's a very solid quarter, increased net income, and so that, of course, good. We have more contract backlog being added. I think from the board's perspective, you know, taking a view quarter by quarter on something is long-term and sustainable over time, and, you know, been increasing the dividend now, as I say, I think at least three consecutive quarters, taking that step by step. So I think kind of that's the approach for now, being kind of somewhat conservative, realizing there's a lot of kind of capacity. We...

I would say at the same time, you know, there's also kind of significant investment opportunities in the market to further grow the company and kind of to increase the dividend over time. So, you know, have to kind of see the totality of, of kind of how, how much you increase the dividend quarter by quarter.

Gregory Lewis (Managing Director)

Okay. And then I was hoping for some, you know, more color on the Hercules. I mean, that rig is obviously moving to Canada. I believe there's some options on the back of the firm work. How, when does the customer have to exercise those options? And really what I'm wondering is, you know, I'm kind of curious on the timeframe around that, simply because, you know, there's gonna be obviously multiple opportunities to fix that rig for work. You know, and realizing customer windows, you know, for drilling rigs right now is becoming a little more urgent. So, I'm kind of curious around that.

Ole B. Hjertaker (CEO)

Yeah. So, the drilling scope in Canada is two wells with some testing opportunity around it. The reason why we cannot be too specific on exact number of days is simply that, you know, it all depends on the drilling efficiency, which is a combination of, of course, you know, the way the rig is handling the whole drilling operation up on the drilling floor, you could say, but also is linked to the rock down where the rig is actually drilling. So, it's we have to be a little bit vague in terms of the exact, you know, scope and time it will take.

We expect the rig to be employed for definitely, you know, for the third quarter and probably for a good chunk into the fourth quarter, probably most of fourth quarter. But still, you know, it's we cannot be 100% specific. That said, as you have pointed out, I mean, yes, there are other drilling opportunities. And the rig has been... You know, was very successful when it was drilling in Canada for Exxon. It went to Namibia, drilled 2 wells for Galp, was a major success for Galp. I think they found more than, you know, they estimated to more than 10 billion barrels of oil. It's massive.

So we of course are very happy with sort of being assisting and having the equipment that helped them do that. And of course, that we think will hopefully trigger more drilling activity also in that area. This rig has the capability to drill also in benign water, but we believe that given that it has the capacity to drill wells in sort of ultra-harsh environment, very deep water, it's winterized, so it has a lot of features that we believe very few other rigs have, and very few rigs that are available, you know, from late 2024 and into 2025.

So we are naturally monitoring this market closely, but can only really comment and be specific when we have secured you know additional work for the rig.

Gregory Lewis (Managing Director)

... Okay, great. And then I did wanna squeeze another question in just around-

Ole B. Hjertaker (CEO)

Well

Gregory Lewis (Managing Director)

... you know, around the acquisition opportunities that you were able to take advantage of in the tanker market, you know, earlier this year. It's interesting, right? Like, we've kind of gone through a period where, you know, it seems like on the container market, there's always opportunities, or maybe not always, but more often than not, there are opportunities for long-term contracts. You know, as you guys, as the company looks kind of at the landscape in the tanker market, which, you know, in the last couple of years has been more short-term in nature. You know, are we really seeing increasing depth in the term charter market in tankers?

And really, you know, I think the question that I'm getting from some investors is, could we see? Were these kind of one-offs or is there gonna be that we continue to see? You know, and not necessarily from SFL, but just real, like, long-term charters returning to the tanker market.

Ole B. Hjertaker (CEO)

If you look at the, call it regular, call it crude oil tanker market and product tanker market, that market is dominated by more spot-oriented players, who do voyage charters. You know, we have players like Frontline on the crude oil side, you have Scorpio Tankers on the product side, and, you know, and other players in the various segments who are more active and who do more sort of day-to-day, you know, movement of oil. We're picking up one oil here and, and other cargo there, typically. So what we have been looking for is, opportunities to do more long-term employment with, with very strong counterparties, and, and effectively contribute and be part of a logistics chain more than a tramp owner, of an asset. I think the chemical market is also a good example of this.

It has more, you know, it has more resemblance really to a liner-type market than, you know, a spot traded tanker market, where we have logistics operations and moving sometimes very complex mixes of cargoes on board one vessel at a time, going from various terminals and going more in a system. So we're quite excited with that deal with Stolt, also because they are market leaders in that segment. And we are, you know, in a way, participating a bit also in the market there, given that we have one in a pool, and with other similar type vessels. So it's a market we are definitely looking at. We are, you know, evaluating opportunities there, but, you know, we are segment agnostics.

It's all about finding the right type of asset, a strong enough counterparty, and the right structure of the deal that makes sense for us and that we think can effectively contribute to boost the dividend capacity. 'Cause that's our ultimate objective here, is how do we build long-term sustainable dividends? And we believe both these deals, those deals that we have announced, is doing that. And of course, also very happy with the multiple extensions and also the long, really new charter with Maersk on vessels that have been on charter to Maersk for several years already, at high rates, that we believe are, you know, reflecting, you know, one, you know, that the market is quite robust. And two, these vessels are doing a really good service for Maersk.

You know, we pride ourselves of being someone we believe have premium operations on the vessels. We try to focus on, you know, optimizing fuel consumption, you know, which is helping both us in terms of reducing emissions, and also helps the customer, of course, in both reducing emissions and reducing fuel cost in the logistics. So, you know, that's also something where we believe there could be further opportunities, you know, going forward.

Gregory Lewis (Managing Director)

Perfect. Super helpful. Thank you very much.

Ole B. Hjertaker (CEO)

Thanks.

Sander Borgli (VP of Investor Relations)

Thank you. For those of you who are following this presentation through Zoom, please use the Raise Hand function under Reactions to ask a question. 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 web page, www.sflcorp.com. Thank you.