SFL - Q2 2024

Transcript

Sander Borgli (VP of Investor Relations)

Welcome to SFL's Second Quarter 2024 Conference call. My name is Sander Borgli. I'm Vice President for Investor Relations in SFL. Our CEO, Ole Hjertaker, will start the call with an overview of the second quarter highlights. Then, our Chief Operating Officer, Trym Sjølie, will comment on vessel performance matters, followed by our CFO, Aksel Olesen, 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 with 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 operating results and our financial condition. Then, I will leave the word over to our CEO, Ole Hjertaker, with the highlights for the second quarter.

Ole Hjertaker (CEO)

Thank you, Sander. We are now announcing our 82nd dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. We had full cash flow effect from our car carrier new builds this quarter, but charter revenues from drilling rigs were lower, partly due to U.S. GAAP accounting rules, where mobilization fees received for the transit to Canada and corresponding costs will be recognized in the third quarter. We also coincidentally had Linus out of service most of the quarter in connection with a scheduled periodic survey. We reported revenues of nearly $200 million this quarter, and the EBITDA equivalent cash flow in the quarter was approximately $131 million. Over the last 12 months, the EBITDA equivalent has been $545 million.

The net income came in at around $21 million in the quarter, or 16 cents per share. We had a positive contribution relating to profit share on Capesize bulkers of $1.6 million, and fuel cost savings of $2.8 million in the quarter. In line with our commitment to return value to shareholders, we are paying a quarterly dividend of 27 cents per share, or around 9% dividend yield. Our fixed rate backlog stands at approximately $4.9 billion, and importantly, the backlog is concentrated around long-term charters to very strong end users. This backlog figure excludes revenues from the vessels trading in the short-term market and also excludes revenue on the new dual fuel chemical carrier that will operate in a pool with Stolt-Nielsen.

It also excludes future profit share optionality, which we have seen can contribute significantly to our net income. Most of our vessels are on long-term charters, and we have, over the last 10 years, completely transformed the company's operating model, making us relevant for large end users like Maersk, Volkswagen Group, and Vitol. We continue to build the asset portfolio and have taken delivery of four vessels so far this year and expect to take delivery of another three vessels by October, and most of these new vessels have dual fuel propulsion. We have also added massively to the backlog through multiple charter extensions on existing vessels, and recently through the ordering of five large container ships in combination with 10-year charters. Our COO, Trym Sjølie, will talk more about this later.

And in order to fuel further growth and build long-term distributable, cash flow per share, we raised $100 million in a public offering a few weeks ago. And 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, we have 81 maritime assets in our portfolio, and our backlog from owned and managed shipping assets stands at $4.9 billion. The current fleet is made up of 15 dry bulk vessels, 39 container ships, 18 tankers, 2 drilling rigs, and 7 car carriers. We have a diversified fleet of assets chartered out to first-class charterers on mostly long-term charters. Container vessels is now our largest segment, with just under 50% of the backlog. We have, over the last 10 years, completely transformed the company's operating model from bareboat leases to time charters, and the majority of our customer base is large industrial end users. In the second quarter, 95% of charter revenues from all assets came from time charter contracts and only about 5% from bareboats or dry leases.

In addition to fixed-rate charter revenues, we've had significant contribution to cash flow from profit share arrangements over time, both relating to charter rates and cost savings on fuel. In Q2, profit share arrangements have contributed $4.3 million. Out of the 81 vessels and rigs, we have 11 container ships on bareboat type contracts and the rest on time charter and spot trading. In Q2, we had a total of 6,400 operating days, defined as calendar day, less technical off-hire and dry dockings. 2 vessels and 1 rig have been in dry dock in the quarter. Our overall utilization across the fleet in Q2 was 97.6%, mainly due to these dry dockings.

The charter revenue from our fleet was $199 million in Q2, which is down from Q1, mainly due to reduced revenues from our two drilling rigs. Hercules left Namibia mid-May and commenced operations in Canada in mid-July. Due to U.S. GAAP accounting rules, mobilization fees from the Canada campaign and associated costs are deferred and amortized over the drilling period. Therefore, we will accordingly record high revenues and costs in the third quarter from Hercules. Linus went in for its 10-year Special Periodic Survey mid-May and spent about 10 weeks in dock for the class survey. The rig was back on rate end of July. In the third quarter, we expect revenues to be materially higher than in the second quarter from both drilling rigs.

In July, a judgment was made in the High Court case against Allseas, ref the Green Ace charter, for $27.4 million in favor of SFL. Subsequent to this judgment, the Allseas guarantor has become subject to administration, which means there are challenging prospects for recovery of the awarded judgment. SFL are currently considering next steps. 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 making 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.

So far this year, we have increased the backlog to Maersk with new 5-year charters for 7 of our large container vessels, which is a result of close relationship and cooperation on vessel upgrades and performance enhancements. On the back of our container experience, we have also recently placed orders for 5 16,000 TEU dual fuel LNG container ships in China. These ships will be chartered out on 10-year time charters to a leading liner company. On the Hapag-Lloyd charters, the first 2 upgraded container ships have been delivered already, and the third is scheduled for delivery from the yard this month. On the tanker side, we have delivered the first of 3 LR2 newbuildings to Vitol from the yard in China. The second vessel is scheduled for delivery in about 1 week time.

We are also pleased to announce that we have just this morning taken delivery of the 33,000-ton deadweight chemical tanker, SFL Aruba, for deployment in the Stolt Tankers pool. We further aim to take delivery of the sister vessel by the end of the month for delivery to Stolt under an eight-year time charter. I'll now 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, Trym. On this slide, we are showing 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 gross charter hire of approximately $199 million during the second quarter, with approximately $90 million coming from our container fleet. This includes approximately $2.8 million in profit share related to fuel savings on seven of our large container vessels. The car carrier fleet generated approximately $26 million of charter hire, and our tanker fleet generated approximately $30 million in charter hire in line with the previous quarter. SFL has 15 variable carriers, of which eight are employed on long-term charters.

The vessels generated approximately $23 million in gross charter hire in the second quarter, including approximately $1.6 million profit share generated from our 8 Capesize vessels on long-term charters to Golden Ocean. The 7 vessels employed in the spot and short-term market contributed with approximately $8.2 million in charter revenue, compared to approximately $6.5 million in the first quarter. In the second quarter, our energy assets generated approximately $29 million in contract revenues, compared to approximately $66 million in the previous quarter. Linus is under a long-term contract with ConocoPhillips in Norway until the end of 2028. During the quarter, revenues from the rig were $10 million, compared to $19.6 million in the previous quarter, as the rig underwent its 10-year special survey.

The rig was back on contract rate at the end of July after an additional repair scope, which extended the SPS and docking scope by an additional five weeks. Hercules finalized the contract with Galp Energia in Namibia in mid-May, and then spent approximately half of the quarter in mobilization mode, recording approximately $19.4 million of revenues, compared to $46.9 million in the first quarter. The rig commenced the contract with Equinor in Canada in mid-July, and under U.S. GAAP, mobilization fees and costs are deferred and amortized over the course of the contract. SFL has accordingly recorded lower income and costs on Hercules in the second quarter. Our operating and G&A expenses for the quarter was approximately $70 million, compared to $85 million in the first quarter, mainly due to deferred operating costs of the Hercules, as per the U.S. GAAP accounting treatment just mentioned.

This summarizes to an adjusted EBITDA of approximately $131 million, compared to $152 million in the previous quarter. We then move on to the profit and loss statement as reported on U.S. GAAP. So as described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. And as our business strategy focuses on long-term charter contracts, some parts 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 revenues from entities classified as investment in associates for accounting purposes.

So for the second quarter, we report total operating revenues according to U.S. GAAP of approximately $190 million, which is less than approximately $199 million of charter hire actually received for reasons just mentioned. During the quarter, the company recorded profit share income of approximately $4.4 million from fuel savings on some of our large container vessels, our car carrier, our eight Capesize vessels on charter to Golden Ocean. Our revenue from our vessels was in line with the first quarter. Both revenues and operating expenses from our energy assets was lower during the quarter for reasons previously mentioned. So overall, and according to U.S. GAAP, the company reported a net profit of approximately $20.6 million, or $0.16 per share, compared to approximately $45 million, or $0.36 per share in the previous quarter.

Moving on to the balance sheet. At quarter end, SFL had approximately $186 million of cash and cash equivalents. During the quarter, the company arranged a $37 million JOLCO financing for a previously debt-free container vessel, Maersk Phuket, at very attractive terms and maturity matching the long-term charter. In terms of CapEx commitments, we have recently acquired 5 tankers with a total CapEx of approximately $340 million, of which approximately $244 million will be financed with senior bank financing. 2 of the vessels have already been delivered. The 3 remaining vessels are expected to be delivered during the third and fourth quarter. In addition, our harsh environment jack-up, Rig Linus, recently underwent its 10-year SPS with an estimated net remaining capital expenditure of approximately $30 million.

Due to an additional repair scope, the CapEx scope increased from with approximately $10 million to a total of approximately $40 million. Subsequent to quarter end, the company entered into agreements to build five 16,800 TEU container vessels, with scheduled delivery in 2028, at an aggregate construction cost of approximately $1 billion. The vessels are expected to be funded by a combination of cash at hand and conventional pre- and post-delivery vessel financings. Furthermore, SFL has recently secured financing commitments for a combined amount of approximately $700 million, effectively covering most secured debt financing commitments maturing over the next twelve months. And finally, the company raised $100 million in net proceeds from a U.S. public offering by issuing 8 million common shares in July. Based on the Q2 numbers, the company had a book equity ratio of approximately 27%.

To conclude, the board has declared the 82nd consecutive cash dividend of $0.37 per share, which represents a dividend yield of approximately 9%. Following recent investments and charter renewals, our fixed charter rate backlog currently stands at $4.9 billion, providing us with strong visibility on our cash flow going forward. The company has a strong balance sheet and liquidity position, and we recently raised $100 million of gross proceeds in a public offering, and have secured more than $1 billion in senior secured financing this year to address refinancing of existing vessels and new acquisitions. With that, we conclude the presentation and move on to the Q&A session.

Sander Borgli (VP of Investor Relations)

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 under Reactions in the toolbar 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 Sherif Elmaghrabi. Please unmute your speaker to ask your question.

Sherif Elmaghrabi (VP Equity Research)

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

Aksel Olesen (CFO)

Yeah, thank you. The rig is working now in Canada for Equinor, doing a really good job there. Made a big find in Namibia for Galp. So, you know, there's clearly, you know, a decent market for rigs of this caliber, but these are specialized assets. We have not concluded any follow-on work from the rig. The rig is expected to come off charter sometime during the fourth quarter. It all depends on call it the both the drilling efficiency and the scope of work that Equinor wants to do in Canada. So we are in dialogue with various oil companies and potential charters, but have not concluded anything so far, and cannot make any specific comments on that until we have something you know in place.

In terms of M&A, what we have seen has been more relating to listed companies and consolidation with a primary focus, I would think, on drill ships and not so much on semi-submersibles, which is the type of assets that the Hercules is. But we of course, following it closely, we see that charter rates are edging up on particularly for ultra-deepwater units and have seen some quite strong charters and charter rates over the last few months. So we still believe strongly in the long-term story in this segment, but you know, we cannot be specific on when we will announce a new charter for the Hercules quite yet.