SFL Corporation Ltd

NYSE:SFL

Earnings Call Transcript 2024-Q1

[Sander Borgli, executive]

Welcome to SPL's First 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 first 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 these 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 conditions.

Then I will leave the word over to our CEO, Ole Hjertaker, with highlights for the first quarter.

[Ole Hjertaker, executive]

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 12 months, the EBITDA equivalent has been $523 million.

The net income came in at around $45 million in the quarter or $0.36 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. And we have a robust and increasing charter backlog supporting continued dividend capacity going forward.

Our fixed rate backlog stands at approximately $3.6 billion. And importantly, the backlog is concentrated around long-term charters to very strong end users. And 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. And 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 3 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 5 years plus up to 3 years of extension options. This adds around $200 million to our fixed-rate 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-leading chemical logistics company, Stolt-Nielsen. Both vessels will be employed for a minimum of 8 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 options of up to 3 years in addition to purchase options after year 5 and 8, subject 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 3 10,600 TEU vessels until 2030, and Maersk also exercised the 1-year pre-agreed extension options on 3 other vessels ranging from 8,700 to 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 related 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.

And with that, I will give the word over to our Chief Operating Officer, Trym Sjølie.

[Trym Sjølie, executive]

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 fleet is made up of 15 dry bulk vessels, 34 container ships, 18 tankers, 2 drilling rigs and 7 car carriers.

We have a diversified fleet of assets charted out to first-class charters on mostly long-term charters. Container vessels is now our largest segment with just under 50% of the backlog.

We have, over the last 8 to 10 years, completely transformed the company's operating model and have moved away from financing-type bareboat charters and instead assume full operating exposure. This makes us relevant for large industrial end users like -- both in the dry and wet segments. The 2 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. And 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 of all 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 charters 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 from the vessels that are in dry dock. These modifications ensure the vessels remain attractive to charters over time.

And as Ole mentioned, we just entered into a new 5-year time charters of 3 10,600 TEU containerships with Maersk, in which energy efficiency was an important consideration.

Of the 6 Hapag-Lloyd vessels, we are investing in energy-saving devices, improved hull form with new bulbous bow, new propellers and fittings, anti-fouling 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. 2 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%.

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, executive]

Thank you, Trym. On this slide, we have shown a pro forma illustration of cash flows for the first quarter. Please note that this is only a guideline. This is the company's performance and is not in accordance with U.S. GAAP, and also net of extraordinary and noncash 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 the cash flow going forward.

In the first quarter, the container fleet generated gross charter hire of approximately $19 million, including approximately $3 million in profit share related to fuel savings on some of our large container vessels.

With 7 car carriers on charter following the delivery of our 2 remaining dual-fuel LNG car carriers during the quarter, gross charter hire increased 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 8 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 8 Capesize vessels which chartered to Golden Ocean. 7 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 2 modern harsh environment drilling rigs: the [ large ] jack-up, Linus; and the semi-submersible, ultra-deepwater rig, Hercules. During the first quarter, the rigs generated approximately $66.5 million in contract revenues compared to approximately $45 million in the fourth 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 its 10-year special periodic survey, with an estimated net capital expenditure of approximately $13 million. In connection with SPS, we expect the rig to be off-hire for approximately 5 weeks.

In the first quarter, Hercules was in the contract with Galp Energia and Namibia, recording approximately $47 million of revenue compared to $26 million in the previous quarter and 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 organization fees and costs are deferred and amortized over the course of the contract. SFL is accordingly expecting to record lower income and 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' 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 have 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 an investment in [ sources ] for accounting purposes.

For the first quarter report total operating revenues according to U.S. GAAP of approximately $229 million, which is less than approximately $236 million of charter hire actually received for the reasons just mentioned.

During the quarter, the company recorded profit share income of approximately $5.5 million from fuel savings from some of our large container vessels, our car carrier and our 8 Capesize dry bulk vessels on charter to Golden Ocean.

On the financial items, we had a positive noncash 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 U.S. 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 previous quarter.

So moving on to the balance sheet. At quarter end, SFL had approximately $168 million of cash and cash equivalents. Furthermore, the company have marketable securities of approximately $5.1 million in additional debt-free vessels, with an estimated market value of more than $100 million.

In terms of CapEx commitments, we recently acquired 5 tankers with total CapEx of approximately $340 million, of 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 senior 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 a range of $37 million [indiscernible] financing for a previously debt-free container vessel, Maersk Phuket, at very attractive terms and maturity matching the long-term charter. So based on Q1 numbers, the company has a book-to-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 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 a strong visibility on the cash flow going forward.

And with that, we conclude the presentation and move on to the Q&A session.

[Sander Borgli, executive]

[Operator Instructions] And we'll have our first question from Climent Molins.

[Climent Molins, analyst]

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 Hjertaker, executive]

Absolutely. So Nielsen is the leader of chemical logistics. They are operating these vessels in the market, but they have a very high proportion of contract of affreightments, i.e., 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 2 in reality, is that we have then the support of -- 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, we have taken some market exposure. But if you look at it on an overall basis, the vast proportion of the charter rates that we received are fixed rate. But on top of that, we also have profit share relating to earnings and for some assets and also on the fuel saving on other assets. So this is from a portfolio perspective, as we see it, a good way to participate in this market, and we believe 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 dual-fuel LNG, dual-fuel propulsion, which we believe will be an increasingly attractive also for the large chemical companies that are the customers of Stolt-Nielsen where these vessels will be employed.

[Climent Molins, analyst]

Makes sense. I also wanted to ask about the 2 [indiscernible]. 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-linked component of the contract?

[Ole Hjertaker, executive]

Yes. I mean, to start 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 in the meantime, it started to transit just a week or so ago.

That -- so -- and that contract runs until the fourth quarter. Exact timing is not 100% clear yet. This depends on when the redrilling commences and also the scope of work that is needed and the time to drill the wells. But we believe 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. We're looking at opportunities that are out there. But we cannot be specific on employment for the rig going forward. But we naturally look at all the opportunities that is -- that makes good sense for a rig of this caliber. 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, the charter rate there is now increasing. We -- it's coming up from just over $200,000 per day, and we'll now go to around $220,000 per day for us from May onwards. That charter is linked to index -- market index with an adjustment of 10%. And 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 is -- 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 5 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 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, and we believe Linus will continue to do a good job for Conoco and then there could be opportunities for extended deployment beyond 2028. But we are still quite some time away from any commercial discussions around future employment of that rig.

[Operator]

We will take our next question from Gregory Lewis.

[Gregory Lewis, analyst]

I was hoping you could talk a little to how we should be thinking about the dividend and just returning cash to shareholders. I mean, I guess this is another increase. I think there's been 3 consecutive increases. Clearly, as we look at not even cash flows, but just net income, there is definitely room to increase that, the dividend even more.

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

[Aksel Olesen, executive]

Thank you, Greg. It's Aksel here. Yes, it's a good observation. It's a very solid quarter. Increased net income, and so that's, of course, good. We have more contract backlog being added.

I think from the Board's perspective, taking our view quarter-by-quarter on something is long-term and sustainable over time and kind of been increasing the dividend now, as I say, I think, at least 3 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.

I would say, at the same time, 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 we have to kind of see the totality of kind of how much you increase the dividend quarter-by-quarter, yes.

[Gregory Lewis, analyst]

Okay. And then I was hoping for some 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 do we -- how -- when does the customer have to exercise those options, and really what I'm wondering is, I'm kind of curious on the time frame around that simply because there's going to be obviously multiple opportunities to fix that rig for work and realizing customer windows for drilling rigs right now is becoming a little more urgent. So I'm kind of curious around that.

[Ole Hjertaker, executive]

Yes. So the drilling scope in Canada is 2 wells, with some testing opportunity around it. The reason why we cannot be too specific on exact number of days is simply that it all depends on the drilling efficiency, which is a combination of, of course, the way the rig is handling the whole drilling operation up on the drilling floor, you can 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 scope and time it will take. We expect the rig to be employed definitely for the third quarter and probably for a good chunk into the fourth quarter, probably most of the fourth quarter. But still, it's -- we cannot be 100% specific.

That said, as you have pointed out, I mean, yes, there are other drilling opportunities. I mean the rig has been -- 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 that fund more than -- 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 help them then 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 a very few rigs that are available from late '24 and into 2025. So we are naturally monitoring this market closely, but can only really comment and be specific when we have secured additional work for the rig.

[Gregory Lewis, analyst]

Okay. Great. And then I did want to squeeze another question in just around the acquisition opportunities that you were able to take advantage of in the tanker market earlier this year. It's interesting, right? Like we've kind of gone through a period where 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.

As you guys -- as the company looks kind of at the landscape in the tanker market, which in the last couple of years has been more short term in nature, are we really seeing increasing depth in the term charter market in tankers and really, I think the question that I'm getting from some investors is could we see -- were these kind of one-offs? Or is there going to be -- should we be surprised if we continue to see, and not necessarily from SFL, but just real -- like long-term charters returning to the tanker market?

[Ole Hjertaker, executive]

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 that do voyage charters. We have players like Frontline on the crude oil side, you have Scorpio Tankers on the product side and other players in the various segments who are more active and who do more sort of day-to-day movement of oil, picking up one oil here and other cargo there, typically.

So what we have been looking for is opportunities to do more long-term employment with very strong counterparties and effectively contribute and be part of a logistics chain more than a [ transport ] owner of an asset.

I think the chemical market is also a good example of this, it has more resemblance really to a liner-type market than a spot-traded tanker market where we have logistics operations and moving sometimes very complex mixes of cargoes on board one vessel at the time going from various terminals and going more in a system.

So we're quite excited with that deal we did with Stolt, also because they are market leaders in that segment. And we are, in a way, participating a bit also in the market there, given that we have won in a pool and with other similar type vessels. So it's a market we are definitely looking at. We are evaluating opportunities there. But we are segment agnostics. It's all about finding the right type of asset, with 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.

Because 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 reflecting, one, that the market is quite robust; and two, these vessels are doing a really good service from us. And that is -- we pride ourselves of being someone, we believe, had premium operations on the vessels.

We try to focus on optimizing fuel consumption, which is helping both us in terms of reducing emissions and also helps the customer, of course, in both reducing emissions and reducing fuel costs in the logistics. So that's also something we -- where we believe there could be further opportunities going forward.

[Sander Borgli, executive]

[Operator Instructions] 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 further -- 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.