SFL - Q2 2023
August 17, 2023
Transcript
Marius Furuly (SVP Energy)
Welcome to SFL's second quarter 2023 conference call. My name is Marius Furuly, I'm Vice President for Investor Relations in SFL. We have a new format for the conference call this time using Zoom, I hope this will be both as informative as usual and easier to navigate afterwards for you. Our CEO, Ole B. Hjertaker, will start the call by briefly going through the highlights of the quarter. Following that, our Chief Operating Officer, Trym Sjølie, will comment on vessel performance matters before our CFO, Aksel Olesen, will take us through the financials. The call will be concluded by opening up for questions, I will explain the procedure to do this before 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 more detailed discussion of our risks and uncertainties, which may have a direct bearing on our operating results and/or financial condition. I will leave the word over to our CEO, Ole B.
Hjertaker, with highlights for the second quarter.
Ole Hjertaker (CEO)
Thank you, Marius. The total charter revenues were $174 million in the quarter, which were down from the previous quarter, primarily due to the sale of 4 spot-traded tankers earlier this year. 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 under the spot market. The EBITDA equivalent cash flow at the quarter was approximately $109 million, in line with the previous quarter, and over the last 12 months, the EBITDA equivalent has been $480 million. The net income came in at around $17 million in the quarter or $0.13 per share.
The net income continues to be impacted by the drilling rig, Hercules, which had no revenues in the second quarter, but with full operating expenses, while finalizing its comprehensive special survey or SPS and upgrades. The SPS was finalized in mid-June, and we then started the mobilization to Canada. We have been paid the mobilization fee from Exxon for the transit, but due to US GAAP accounting rules, all of this will be recognized in the third quarter together with the mobilization costs. There was also a $6 million gain in the quarter relating to sale of the last spot-traded Suezmax tanker. This is our 78th quarterly dividend, and over the years, we have paid more than $2.6 billion in total and closing in on $30 per share. We have a robust charter backlog supporting continued dividend capacity going forward.
The announced dividend of $0.24 per share is in line with the previous quarter, represents a very strong dividend yield at current share price levels. Our fixed rate backlog continued to increase and stands at approximately $3.6 billion from owned and managed vessels after re- recent charters. This provides continued cash flow visibility going forward, with significant additional cash flow from the drilling rig, Hercules, and the new build car carriers from the third quarter onwards. Importantly, the backbook 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.
The SPS and upgrade work on a harsh environment, semi-submersible Hercules, was completed in mid-June, and the rig then moved under its own power to Canada to commence a contract with ExxonMobil Canada to drill one well, which started mid-July. The duration is estimated to approximately 135 days, including mobilization to and from Canada, and the contract has an estimated value of $50 million, implying a day rate of approximately $375,000 per day for the period. Thereafter, the rig will move to Namibia and commence a contract with a subsidiary of Galp Energia for two wells, plus an optional well testing.
Excluding optional days, the duration will be approximately 115 days, including mobilization, with an estimated contract value of another $50 million, implying a day rate of approximately $435,000 per day for that period. After Namibia, the rig will move back to Canada to commence the recently announced contract with a subsidiary of Equinor. The contract is from one well plus one optional well. The duration for the firm contract period is approximately 200 days, including transit to and from Canada, implying a day rate of approximately $520,000 per day for the period. The rig will then be open for new contracts from the fourth quarter 2024 onwards.
The secured backlog on the Hercules is now in excess of $200 million, we estimate approximately $100 million EBITDA from the rig over the next 12 months. This rig is only one of only a handful harsh environment, ultra-deepwater, semi-submersible rigs available, market analysts are positive to market prospects based on recent tender activity and the tight supply-demand balance. The harsh market prospects into 2025 is particularly promising, we now see day rates in excess of $500,000 per day, as evidenced by our recently announced contract with Equinor for next year. This is up 50% from last year, most of that goes straight to the bottom line. We continue to renew our fleet and divest the world of tankers.
We sold four tankers traded in the spot market earlier this year, and we have now sold the Landbridge Wisdom, which is the only remaining bareboat charter tanker in our fleet. This is a VLCC on a relatively low bareboat charter rate, and the charterer exercised a fixed price purchase option, you know, a short while ago, we will sell the vessel back to them later in August. The net cash gain proceeds is estimated to approximately $10 million, and book gain in the third quarter is estimated to around $2 million. In May, the board of directors has authorized the repurchase of up to an aggregate of $100 million of SFL shares.
So far, around 1.1 million shares have been repurchased at an average cost of $9.27 per share, or just over 10% of the authorized amount, and there is $90 million remaining. Further purchases may be made at our discretion in the form of open market repurchase programs, privately negotiated transactions, accelerated share repurchase programs, or a combination of these methods. The timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, alternative uses of capital, capital availability, and the company determination that share repurchases are in the best interest of our shareholders and other factors. We see this as a tool in the shareholder value toolbox and would note that the company is not obligated, under the terms of the program, to repurchase any of our common shares.
This buyback program is valid until June 30, 2024. With that, I will give the word over to our Chief Operating Officer, Trym Sjølie.
Trym Sjølie (COO)
Thank you, Ole. Over the years, we have changed both fleet composition and structure, and we now have 73 maritime assets in our portfolio, and our backlog from owned and managed shipping assets stands at $3.6 billion. The current fleet is made up of 15 dry bulk vessels, 36 container ships, 30 tankers, 2 drilling rigs, and 7 car carriers, where 3 are on the water and 4 are under construction in China. The new buildings are scheduled for delivery over the next 10 months, starting in September. We have evolved from having a single asset class chartered to one single customer to a diversified fleet and multiple counterparties. The fleet composition has varied from originally 100% tankers, via majority offshore assets 10 years ago, to container vessels now being the largest segment with just under 50% of the backlog.
We are now a maritime infrastructure company. Most of our vessels are on long-term charters, but we have, over the last 8-10 years, completely transformed the company's operating model and have moved away from finance-type bareboat charters and instead assumed full operating exposure, which makes us relevant for large industrial end users like, for example, Volkswagen, Maersk, Exxon, and others. 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.
Out of the current 73 vessels, we have 13 on variable 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 for our customers. This includes investing to minimize offhire, 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 Indicators, which will impact vessels' operational profile, including routing and speed. In Q2, we had a total of over 6,000 operating days, defined as calendar days, less technical offhire or offhire for dry docking.
Our overall utilization across the fleet is 99.4% in Q2, a number we are continuously striving to maintain as high as possible. The charter revenue from our fleet was $174 million in Q2. Our OpEx in the quarter was $38 million. One of the key metrics for SFL is the reduction of carbon emissions by improving our fleet weighted average AER, or Annual Efficiency Ratio. AER as a Carbon Intensity Indicator, is a measure of how carbon intensive our fleet is by calculating the emissions per actual capacity and distance sailed. Via the MARPOL convention, IMO have implemented requirements for reducing carbon intensity of all ships larger than 5,000 gross tons from 2023 onwards. A requirement to obtain an acceptable CII rating will be gradually stricter each year towards 2030.
Such requirements can either be met by fleet renewal, increased efficiency of existing fleet, or a combination of both. Although CII compliance is certainly challenging, SFL is well positioned to manage IMO's trajectory towards 2030. As part of our fleet renewal program, we have four LNG dual fuel car carriers under construction in China, that when entering into service, will be among the most modern and efficient ships in the car carrier market. On the energy efficiency front, we have carried out an investment program for all vessels in our fleet, including energy saving devices and technology to capture and analyze data from onboard sensors for real-time performance management and voyage optimization. Furthermore, we are cooperating closely with several of our key charterers on further vessel upgrades.
The scope includes exhaust gas scrubbers, cargo intake boost, hull modifications, new propellers and propeller fixtures, as well as enhanced anti-fouling systems. We also collaborate with key charterers on data integration for more optimal weather routing and performance management. In addition to reducing carbon emissions, we believe these investments will make our vessels more attractive in the market when the vessels are either up for redelivery or for potential charter extensions. 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 (CFO)
Thank you, Tim. On this slide, based on a pro forma illustration of cash flows for the second quarter. Please note that this is only a guideline to assess the company's performance, and is not in accordance with US GAAP, and also net of extraordinary and non-cash items. The company generated cash flow, gross charter hire, approximately $174 million in the second quarter, including approximately $2.2 million of profit share, where approximately 92% of the revenue coming from our fixed charter rate backlog. Which currently stands at $3.6 billion, providing us with strong stability on the cash flow going forward. In the second quarter, the container fleet generated gross charter hire of approximately $90 million, including approximately $2 million in profit share related to fuel savings on 7 of the large container vessels.
Our tanker fleet generated approximately $35 million in gross charter hire during the second quarter, compared to approximately $47 million in the previous quarter. Charter hire from our vessels trading in the spot market in the second quarter was $2.2 million, compared to $10 million in the first quarter, following the sale and delivery of the three remaining spot vessels during the second quarter. We do not expect any contribution from tankers trading in the spot market from Q3 onwards, as all our remaining 13 tankers are employed on long-term contracts with high quality charters. The company has 15 dry bulk carriers, of which 8 were employed on long-term charters during the quarter. The vessels generated approximately $24 million in gross charter hire in the second quarter.
Seven of these vessels were employed in the spot and short-term market, and contributed approximately $7.2 million in charter hire during the quarter, compared to approximately $4.6 million in the previous quarter. SFL owns two harsh environment drilling rigs, the jackup rig, Linus, and the semi-submersible rig, Hercules. The Linus is currently on a long-term contract with ConocoPhillips Skandinavia until the end of 2028. During the second quarter, the rig generated approximately $19 million in contract revenues, in line with the first quarter. As in the first quarter, recorded operating expenses on Hercules, which were approximately $7 million. Furthermore, there's been no revenue from the Hercules during the quarter due to special periodic survey and upgrades, which were completed in mid-June before the rig mobilized to Canada to commence the drilling contract with ExxonMobil Canada.
Although the Hercules commenced mobilization towards Canada in mid-June, we recorded no revenue in the second quarter due to US GAAP accounting standards for drilling service contracts, which recognize revenue only from the drilling commencement date. Accordingly, mobilization and demobilization revenue and costs for the Exxon contracts will therefore be amortized over the drilling days in the third quarter and recorded in the Q3 P&L. Finally, our three car carriers generated a gross charter hire of approximately $6 million during the second quarter, including approximately $200,000 in profit share related to fuel savings on one of the vessels. Our operating and G&A expenses for the quarter was $68 million, compared to $75 million in the previous quarter. This summarizes to an adjusted EBITDA of approximately $109 million in the second quarter, compared to $110 million in the previous quarter.
We then move on to the profit and loss statement as reported under the US GAAP. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. As the business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing. Therefore, a significant portion of our charter revenues are excluded from US GAAP operating revenues. This includes repayment of investment in sales type, direct financing leases, and leaseback assets, and revenues from some entities classified as investment in associates for accounting purposes. The second quarter report, total operating revenues according to US GAAP of approximately $165 million, which is less than approximately $174 million of charter hire actually received for the reasons just mentioned.
During the quarter, the company recorded profit share income of approximately $2.2 million from fuel savings from some of our large container vessels and the car carrier. While we recorded nearly a full quarter of operating expense on Hercules, we did not record any revenue on the rig due to its temporary yard stay. As just mentioned, revenue from the Hercules will due to US GAAP accounting standards, be recognized only from the drilling commencement date, and hence be reflected in our P&L in the third quarter. Furthermore, the net is also impacted by non-recurring non-cash items, including a gain from the sale of the Supramax tanker, SFL Everbright, of approximately $6.4 million. A net positive mark-to-market effect of $1.9 million, a negative mark-to-market effect from equity investments of $1 million, and a decrease of $200,000 on credit loss provisions.
Overall, and according to US GAAP, the company reported a net profit of approximately $17 million, or $0.13 per share. While reporting on the transitional quarter, it's worthwhile to mention that they expect revenue to increase from Q3 onwards, as we will record our first quarter of revenue from the Hercules rig, following the commencement of the Exxon contract in July. Also, we expect revenue effect from our 4 car carriers new buildings to be delivered during the next 2 quarters. In addition, the new 3-year charter for our 2 car carriers, SFL Composer and SFL Conductor, will commence in Q4 and Q1. We estimate EBITDA from these vessels to be approximately $47 million per year, significant increase from the existing contracts, which was approximately $9 million per year. Moving on to the balance sheet.
At quarter end, SFL had approximately $201 billion of cash and cash equivalents. Furthermore, the company had multiple securities, approximately $5.9 million, based on market prices at the end of the quarter. In June, SFL was notified about the purchase option on a VLCC on bareboat charter, which redelivery is to take place at the end of August. A $10 million positive cash effect is expected after repayment of debt, debt relating to the vessel, with a corresponding book gain of approximately $2 million to be recorded in the third quarter. In May, the company announced a $100 million share buyback program. So far, the company has acquired approximately 1.1 million shares at an average price of approximately $9.27 per share.
During the quarter, SFL refinanced the drilling rigs, Hercules and Linus, in two separate loan facilities with $150 million per rig. The refinanced Hercules and Linus loans are matured in the fourth quarter of 2025 and in the second quarter of 2026, respectively. Furthermore, the company arranged two JOLCOs for two existing vessels, the car carrier, Arabian Sea, and the container vessel, Maersk Pelepas. The financings were secured at very attractive rates, with matching maturities that match the long-term targeting contracts, and has a net positive cash flow effect of more than $80 million in the second quarter as the vessels were debt free. The outstanding capital expenditure of $194 million on our four car carriers under construction, of which the first vessel is expected to be delivered during the third quarter, has been secured through JOLCO arrangements.
During the second quarter, we drew down $33 million on a predelivery facility with respect to the two last car carriers under construction. The remaining CapEx to be paid for special periodic survey on Hercules and Hercules, which now is completed, will be funded with cash on hand. The same goes for the outstanding amount of approximately $48 million on the NOK bond maturing in September. Based on the Q2 numbers, the company has a book equity ratio for approximately 27.6%. To conclude, the board has declared a cash dividend of $0.24 per share for the quarter. This represents a dividend yield of approximately 9% based on the closing share price yesterday.
In May, the company announced a $100 million share buyback, and so far, the company has acquired approximately 1.1 million shares for a price of approximately $9.27 per share. Our fixed charter backlog currently stands at $3.6 billion, which provides us with strong stability on the cash flow going forward. The latest financing facilities concluded, the company's new building and capital expenditure program is now fully financed, materially all of the short-term debt is refinanced with new long-term loans. In summary, SFL has secured new financing arrangements so far in 2023 in excess of $1 billion. The amount is split across 12 different facilities and a wide array of products, securing and continued well-diversified funding platform for the company going forward.
Furthermore, the recent contract awards for our two car carriers on contracts is also again, with commencement in Q4 and Q1. We estimate EBITDA from these vessels approximately $47 million per year, a significant increase from the existing contracts, which is approximately $9 million per year. Finally, we announced a new contract award for a harsh environment semi-submersible drilling Hercules, confirming a tightening supply demand balance and a strong market outlook, which is now materializing in attractive day rates and a strong cash flow generation. With that, we conclude the presentation and move on to the Q&A session.
Marius Furuly (SVP Energy)
Thank you, Aksel. We will now open up 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 your question. Thank you. We will have our first question from Richard Diamond. Please unmute your speaker to ask your question.
Richard Diamond (Principal)
Yes, good afternoon, everyone. Given the lack of shipyard capacity and rising ship values, is it fair to assume that purchase options in general will represent, in the future, a significant value to SFL shareholders?
Ole Hjertaker (CEO)
Well, yes, because with the, with the, with the new building prices coming up, they're very substantial, both on the back of, of, you know, full order book at the shipyards, where they now also start to actually make a little bit of profit instead of losing a lot of money as they used to do. You also have inflation in both the raw material costs that, that goes into building the ship and, and of course, labor, you know, building it. Which means that when you own a ship, you know, typically second-hand values over time will, you know, have they'll be linked to new building prices.
You know, if we had sort of the old, the old model, where we were just a, sort of a financial leasing provider in the, in the shipping space, we would typically have to give, give away purchase options, you know, in order to do deals. That's what most people do when they are in that game. Then, of course, there is a higher probability of, of those purchase option being, exercised, and therefore pulled away from us. The good example here, we, we think, is the 2 existing car carriers we have. If they had been on 1 or more financial lease, you know, the, the charterer would have exercised those purchase options because...
Instead, now, we can recharter them at a much higher rate than we had in the, in the first charters, and that is, of course, goes straight to the shareholders. I think rising new building prices is definitely benefiting existing shareholders.
Richard Diamond (Principal)
Thank you.
Marius Furuly (SVP Energy)
Thank you, Richard. We will take our next question from Climent Molins. Please unmute your speaker to ask your question.
Climent Molins (Research Analyst)
Hi, Ole and team. Thank you for taking my questions. I wanted to start by asking about the West Linus, which is employed on a contract earning a market-adjusted rate, which, if I remember correctly, is adjusted semi-annually. How should we think about the vessel's contribution going forward, given the strengthening market environment?
Aksel Olesen (CFO)
Thank you. That, that is correct. The Linus is on a contract with ConocoPhillips until the end of 2028 on the Equinor's field on the northern side in the North Sea. As you correctly point out, the contract is adjusted semi-annually, basically end of April and end of October. The rate is around just shy of $200,000 per day. For the time being, that market is still somewhat, you know, neutral. Going forward, at least we expect the dayrate to stay in that region for the time being. We also expect over time, activity on the Norwegian continental shelf to increase, and that, that could potentially then reflect in a higher contribution from the region.
Climent Molins (Research Analyst)
Thanks for the color. I also wanted to ask about the car carriers to be delivered over the next year. Could you provide some commentary on the cash flows those vessels are expected to generate? Secondly, is the incremental debt to be drawn down to finance the vessels hedged?
Aksel Olesen (CFO)
Right. The, the cash contribution from newbuildings is considerably substantial. I would say that especially for the first two vessels coming, coming, we, we will have an additional voyage there. I think, yeah.
Ole Hjertaker (CEO)
Well, yeah, I mean, we, we do not disclose, sort of the contribution per vessel on an individual basis. As Trym was pointing out, first, you know, as you deliver it, first, we will have a, a voyage from, from Asia to Europe, where the vessels will then be delivered to Volkswagen. You know, the, the, the spot market for car carriers right now is super hot, so we will have a very, hopefully very significant, contribution on the voyage, from Asia to Europe. The market is currently quoted well in excess of $100,000 per day. With an, with an OpEx of around $6,000 per day for similar for vessels like this, you know, needless to say, there's a lot of cash flow coming there.
Then they will commence the 10-year charters at the pre-agreed charter rates, and that's also when the new charter rate will kick in on the existing vessels. We have several sort of elements coming in, but we haven't provided full breakdown of that. What we do have, and have, and give everyone access to who wants it, is our full charter backlog. where you can back out, effectively the charter rates that are being generated by the vessels, also including the new builds.
Aksel Olesen (CFO)
Exactly. So basically, if you look at the, you know, our strategies then to, to fix up, these vessels on, on long-term charters, we're gonna call, call it, a low teens returns on this. Also, the, the contribution will be accordingly. For the financing, of course, that is fully financed. That will be drawn down on the two first ones in connection with pre-delivery. The financing is form of Japanese operating leases at very attractive terms. Do not go into exact details on that, but of course, the, the margin provided is extremely attractive. The blended financing is, is going then to be fixed up on, up on delivery.
All in, considering kind of the long-dated financing is, yeah, it is, it's far more competitive than you find in a traditional banking market.
Climent Molins (Research Analyst)
Makes sense. Final question from me. Looking at the second half of the year and into 2024, it's clear that your cash flow will improve markedly. How should we think about potential dividend raises going forward? Secondly, how do you plan to balance that, so potential dividend raises with share repurchases?
Ole Hjertaker (CEO)
Yes. When we see, of course, we both as, as, you know, shareholder returning capital effectively to shareholders, direct and indirect. Our, our aim is, of course, and what everything we do is focused around, you know, building this distribution capacity to shareholders. But we, we never communicate or, and we never give sort of guidance on what the dividend will be, you know, next quarter or, or quarters after that. But typically, what we've seen in the past, usually, we, when we increase dividends, we manage to stay there. Also the board, you know, an important piece of, we'll call it the board deliberations around the dividend every quarter, is the long-term sustainability of the dividend level, sort of being discussed.
You're correct, third quarter onwards will, will have significantly more cash flow, hopefully, than first and second quarter. That's primarily due to one rig being out of service. Rig costs, you know, being incurred and paid. That rig is now back working, and then we get the new builds. We cannot guide you specifically on what the dividend, you know, might be next quarter and after, nor will we communicate specifically how much, how many shares we will buy back. We have bought back just over 1 million shares, so around 1% of the shareholding. We have an authorization to buy more than that from the board, and that will be communicated every quarter when, as we report our quarterly numbers going forward.
Climent Molins (Research Analyst)
Makes sense. That's all from me. Thank you for taking my questions.
Ole Hjertaker (CEO)
Thank you.
Aksel Olesen (CFO)
Thank you.
Marius Furuly (SVP Energy)
Thank you, Clement. Our next question comes from Arif Hamid. Please unmute.
Arif Hamid (Shareholder)
Yes, hello. First, I'd like to compliment the management team on continuing to do a good job. I have two questions and a request. Okay, the first question is, you've reduced some inventory and certainly have cash to reinvest. What areas appear attractive now, both for new builds and for used assets?
Ole Hjertaker (CEO)
Yeah, we are, we are looking. I mean, we are, you can say, call it segment agnostics. you know, so we focus across the board, in the maritime space, and, and, and which, which is also reflected in our, in our, in our vessel, you know, mix. we, we look at transaction opportunities in all these segments, you know, in parallel. you know, just, just as an example, last year, we, we screened and, and modeled out, you know, transactions, you know, with an aggregate value of around $23 billion, and, and we ended up doing only a small fraction of that. You know, that's, that's a coincidence, and, you know, so there were many reasons for why you don't do a deal.
You know, it's got to be the right counterparty with the right asset. You know, we are very mindful of, of sort of the, of, of new fuel, and, you know, and, and what we say, where, where that is driving and what kind of assets we want to own long term. The financing we think is available for, for the specific asset with the specific charter, et cetera. So, so, so that. Of course, we are greedy, kind of, and, and we want proper returns as we do deals. If we, if we hadn't been, if we hadn't wanted, if we, if we were, if we would accept really low returns, we could have done, of course, a lot, lot more.
So all this comes together, and it's all about trying to deliver long-term value for shareholders. We don't guide on specific allocation of capital between segments. Over time, you've seen that. Sometimes we were investing more in the energy space, and other times, you know, over the history of the company, we have invested more on the liner side, specifically container ships and then also car carriers. We hope to build the business, and, you know, but exactly which segment, you know, we will, we cannot, we cannot say. I would say, maybe, maybe to round up that, is that some of the segments, there are relatively fewer long-term chartering opportunities.
For instance, on the tanker side and the dry bulk side, they are not that frequent to see long-term charters, which we, which we prefer, because that gives us the cash flow visibility. But, but we, we, we find deals there as well, as you can see from our portfolio. We look across the board.
Arif Hamid (Shareholder)
Okay, there's no specific area that looks like a good trend right now?
Ole Hjertaker (CEO)
No, I think, when you talk to shipping analysts, they typically focus on just the near term, call it market cycle. There, of course, you have, like, the tanker market right now, near term, which has sort of a record low order book, which is of, on many, in many people's sort of attention right now. Of course, when we do a deal and say we look for 10-year charters, you know, you have to look through the near, near term, cycles. Because 10 years, you can, in theory, you know, build as many ships as you want in any specific segment.
Then it's more important to look for the right technology, the right counterparty, and the right structure, where we end up with a, call it a residual, call it asset exposure or value, that we think makes sense at the end of the charter, in addition to taking in the, the, the counterparty risk, et cetera, in the charter. I would say the, the, the way we have call it redone our, our business model, going from a more financial-oriented company where we did a lot of bareboat and bareboat-like structures, that is typically done with intermediaries, who then, you know, provide- who then give service to the end user.
Changing that to a more, to a more integrated, maritime, you know, logistics, you know, setup, means that we deal more directly with end users, and we think that also gives us better risk reward operationally and over time.
Arif Hamid (Shareholder)
Okay. Well, that selectivity in your acquisitions, that's part of the reason for my compliment at the beginning. Okay, my next question is, you, you talk about income, cash flow, increasing substantially in the next couple of quarters. Can you make an estimate of, of how big a jump you see in the operating income?
Aksel Olesen (CFO)
Not, I think we try to guide somewhat, don't really like to be really too specific on quarter by quarter in, in, in advance. I think what you'll see in Q3, that we'll see contribution from the Hercules in particular. As regard the accounting for that rig will be according to service contracts, we basically take that over the actually kind of, start a commencement of the drilling, just the drilling period, including mobilization, demobilization, also the costs.
Arif Hamid (Shareholder)
Mm-hmm.
Aksel Olesen (CFO)
That will also be a bit bumpy quarter to quarter going forward. Then in Q4, you'll see basically the first car carriers contribution coming in, same in, in, in Q1. It can be kind of building up, I think, into Q1, and then Q2, you'll see the full contribution from, from the rig and then, and the car carriers.
Arif Hamid (Shareholder)
Okay.
Aksel Olesen (CFO)
It looks promising, basically. I mean, everything is locked in. There's no more spot contribution on the tankers. Somewhat on the dry op, but that, that's kind of marginal. But I think, it, it looks solid. Yeah.
Ole Hjertaker (CEO)
If you look at the contract rates on the drilling rig, I mean, for, you know, the first charter is around $375,000 or so per day, then the recently announced charter is in excess of $500,000.
Aksel Olesen (CFO)
Yeah.
Ole Hjertaker (CEO)
Most of that goes straight to the bottom line.
Aksel Olesen (CFO)
Yeah.
Ole Hjertaker (CEO)
So-
Arif Hamid (Shareholder)
Okay.
Ole Hjertaker (CEO)
That will have a good effect. That, of course, is over time, I mean, well into next year.
Aksel Olesen (CFO)
Yeah.
Arif Hamid (Shareholder)
Okay. That all sounds great. What it sounds like is, in the next quarter, there might be a modest jump, but this will steadily increase, and by the middle of next year, we might be looking a lot better. Is that right?
Aksel Olesen (CFO)
I think it steadily will be, be building up, step by step.
Ole Hjertaker (CEO)
I think it's fair to say that I think third quarter will be significantly up from the second quarter, because in the second quarter, we had that drilling rig out of service, so 0 revenues, but then with costs.
Aksel Olesen (CFO)
Yeah.
Ole Hjertaker (CEO)
What is now.
Arif Hamid (Shareholder)
Then you have some costs, you have some costs you're sitting on for the next quarter, right?
Ole Hjertaker (CEO)
Yeah. We still have some costs into next quarter, but then we also have the revenues from the rig.
Arif Hamid (Shareholder)
Yeah, I know, that's what I'm saying is you, you have costs that you couldn't book in this quarter, so you're going to book them next quarter, so the revenues won't be as good.
Aksel Olesen (CFO)
Yeah. It's only 14, approximately 14, 15 days from the second quarter that are being transferred into the third quarter.
Arif Hamid (Shareholder)
Oh, okay.
Aksel Olesen (CFO)
Not too much. Yeah.
Arif Hamid (Shareholder)
Okay, that all sounds great. Okay, I have one, request, and that is, I know when you do a deal, you don't usually disclose the details, but what would, would be very helpful would be to know what the change in the cash position of the company is once the deal has closed, or, or what the new cash position of the company is. So if you could consider giving that information out when you, when you announce a deal, that would be helpful.
Aksel Olesen (CFO)
Absolutely. I think what we do today is we, we do it on a quarterly basis. I think one of our strengths as a company is to turn around quickly and close transactions, and sometimes we use cash and balances just to close out the transaction. Then in order to find optimal and the best possibly priced financing, we do the financing later. That will be quite accurate, actually, to report at that closing. I think we try to be very kind of open on a quarterly basis, and I think that's what's feasible for a company like SFL.
Ole Hjertaker (CEO)
Yeah.
Arif Hamid (Shareholder)
Okay, sounds very good. What I just wanted to say is, last time, at the last quarterly announcement, or, or presentation, the sound was terrible, and here on Zoom, it's fine. Thank you very much for that.
Aksel Olesen (CFO)
Yeah.
Arif Hamid (Shareholder)
Thank you for, for taking my questions. Bye-bye.
Aksel Olesen (CFO)
Thank you.
Ole Hjertaker (CEO)
Thank you.
Marius Furuly (SVP Energy)
Thank you. Thank you, Ari. Our, our next question comes from the line of Christian Wetherbee. Please unmute to ask your question.
Christian Wetherbee (Former Senior Research Analyst)
... Yeah. Hey, thanks, guys. Thanks for taking the question. I actually had a question on the container side. Curious to get a sense of what you're hearing from your customers, just as it pertains to overall demand in the market. I know obviously, charters are gonna give you some insulation from fluctuations in the spot market, but just general thoughts on peak in terms of utilization of the vessels, and then, you know, anything that you can kind of think about in terms of that market. We've seen spot rates on some of the Transpac business begin to inflect a bit higher.
Curious if there's any discussion of potential stabilization in that business over a longer term perspective, or if you think this is a bit of a blip before we were to see more capacity come online out of the new building programs across the industry over the course of the next several quarters?
Trym Sjølie (COO)
It's, it's difficult to be very precise on what charters see because. In our discussions, and from the utilization of our fleet, we see that the utilization is high, there is no waiting on any of our ships. On the container side, all our charters are looking to invest in our ships together with us. That has to do with the type of ships that we have as well. Of course, not all sizes are the same, but of course, in the sort of, big feeders to large sorts of sort of 10-15,000 TEU ships, seems to be really the sort of bread and butter for the lines.
From our discussions, there is definitely no, no panic or any sort of big worry that we hear about. They all seem to be looking forward, not any negative rates. Box rates have fallen, that is an issue. The, the volumes, at least from what we see here, are very healthy. I think what the, what the container lines are looking at, really, I mean, they are not really so focused on ships. What they are focused on is logistics, and they are not really shipping companies anymore. They are looking at lowest cost for a container carrier, and to get the carbon emissions and the costs down. And we believe that owners that can help them do that are in a good position.
That is becoming really more, more and more important, and especially from the likes of Maersk and Hapag-Lloyd that are big with us, we see that that's their focus, really.
Christian Wetherbee (Former Senior Research Analyst)
Okay. That's very helpful. I appreciate the color and time. Thank you very much.
Trym Sjølie (COO)
Thank you, Christian.
Arif Hamid (Shareholder)
I have one more question, if I could briefly ask?
Aksel Olesen (CFO)
Jump in, Arif.
Arif Hamid (Shareholder)
It has to do with a change in law in, in Bermuda corporate law. I'm just wondering if that's gonna affect the company at all.
Aksel Olesen (CFO)
I assume you're referring to the OECD kind of global taxation, or is it-
Arif Hamid (Shareholder)
I read, I read just recently that they're proposing a change. It could be what you just said, but I'm not sure. It's definitely about corporate taxation.
Aksel Olesen (CFO)
Yeah, no, sure, that, I think that's a global initiative and certain call it kind of thresholds to meet that. I don't think we, we are kind of at that threshold yet. I think, see many shipping companies are also under different tonnage tax structures, so that, that's of course, a possibility. Some of our fleet is already under that in Cyprus, so management and the board is evaluating and following that closely.
Arif Hamid (Shareholder)
Okay. Thank you.
Marius Furuly (SVP Energy)
Thank you again, Arif. 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 webpage, www.sflcorp.com. Thank you very much.
Trym Sjølie (COO)
Thank you.