SFL Corporation Ltd

NYSE:SFL

Earnings Call Analysis

SFL's Strong Q3 Performance and Outlook

SFL Corporation's Q3 results showed a 23% increase in charter revenues to $214 million, largely due to the Hercules drilling rig's return to service. The quarter's net income hit around $29 million, with the company continuing its dividend tradition now at $0.25 per share. The fixed rate backlog is robust at approximately $3.4 billion, signaling stability and strong relationships with entities like Volkswagen and Maersk, the latter adding $13 million to the backlog. The recent $50 million contract with a daily rate of around $435,000, and an upcoming contract expecting a $520,000 per day rate, reflect a healthy demand for high-specification rigs. Investments in new debt funding negate the current need for refinancing. Operational shifts make SFL a maritime infrastructure provider, with 94% of revenues from time charters and a significant profit share exceeding $16 million in the past year.

Robust Financial Performance

In the third quarter of 2023, SFL Corporation Ltd. reported a notable increase in charter revenues, reaching $214 million, which signifies a 23% rise from the previous quarter. This was largely due to the return of the drilling rig Hercules to active service. The quarter's EBITDA topped approximately $130 million, contributing to a 12-month EBITDA of $485 million. Moreover, net income stood at about $29 million, or $0.23 per share, influenced by some non-recurring items such as vessel sale gains and mark-to-market effects, but tempered by maintenance costs and operational expenditures. Reflecting the positive financial results and commitment to shareholder value, the company boosted its dividend to $0.25 per share.

Expanding Charter Backlog and Fleet

SFL's robust fixed rate charter backlog, amounting to approximately $3.4 billion, is predominantly concentrated around long-term charters with strong end users, underscoring the company's evolution over the past decade from maritime leasing to maritime infrastructure provider. Noteworthy is the exclusion of short-term market revenues and future profit share possibilities from this backlog figure. The recent addition of new dual-fuel car carriers, including a vessel delivered to the Volkswagen Group on a 10-year charter, along with two existing vessels extended for an additional three years, are set to enhance the backlog and EBITDA further.

Lucrative Short-Term Market Engagements

Leveraging the 'red piping hot' short-term market, SFL secured highly profitable interim charter agreements from Asia to Europe, expected to generate around $8.5 million in EBITDA per vessel over just two months, reflecting the strategic advantage of the company's diversified fleet.

Strategic Partnerships and Debt Management

A tight-knit relationship with Maersk Line, featuring 17 vessels on long-term charters, underscores SFL's strategic footprint in shipping. Maersk's extension of a charter until mid-2025, at a higher rate, infuses an additional $13 million into SFL's charter backlog. Financial prudence is evident in the repayment of a bond loan from 2018 without current plans for new financing, which speaks to the solid state of SFL's liquidity and capital management strategy.

Future Operations and Contract Prospects

The Hercules drilling rig showcases SFL's assets utility, with a $50 million contract estimated in Namibia and a subsequent Equinor contract in Canada slated with day rates of approximately $520,000. Post-Equinor, the rig is expected to be open for new contracts from Q4 2024, reflecting the long-term prospects of SFL in a market with a positive outlook and constrained harsh-environment rig availability.

Fleet Diversification & Operating Model Transformation

SFL's portfolio now boasts 73 maritime assets, including a variety of vessels such as bulk carriers, container ships, and tankers, with container vessels constituting just under half of the backlog. This diversification furnishes the company with multiple revenue streams and minimizes dependency on any single asset class, highlighting a strategic transformation over the past decade from specialized charters towards a multifaceted maritime infrastructure operation.

Operational Excellence and Environmental Adaptation

With 94% of charter revenues derived from time-based contracts, SFL has benefitted from more than $16 million in profit shares related to charter rates and fuel savings over the last year. Their complex operational structure requiring management from offices in Oslo, Singapore, and other locations is indicative of the scale and depth of their business. Investments in fleet optimization and service quality are highlighted, preparing for incoming regulations like the IMO carbon intensity indicator and the EU Emissions Trading System (ETS), and underscoring the company's proactive stance on industry developments and environmental impact.

Earnings Call Transcript 2023-Q3

[Unknown Analyst]

Welcome to SFL's Third Quarter 2023 Conference Call. My name is [indiscernible] I'm an analyst in SFL. Our CEO, Ole Hjertaker, will start the call by briefly going through the highlights of the quarter. Following that, our Chief Operating Officer, Trym Sjolie 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, and I will explain the procedure to do so before the Q&A session.

Before we begin our presentation, I would like this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statements.

Forward-looking statements are not guarantees of future performance. These statements are based on our current plans and expectations and are inherently subject to risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual results to differ include, but are not limited to conditions in the shipping, offshore and credit markets. You should therefore not place undue reliance on these forward-looking statements. Please refer to our filings within the Securities and Exchange Commission for a more detailed discussion of risks and uncertainties which may have a direct bearing on our operating results and our financial condition. Then I will leave the word over to our CEO, Ole Hjertaker, with highlights for the third quarter.

[Ole Hjertaker, executive]

Thank you, [indiscernible]. The charter revenues were $214 million in the quarter, which is up 23% from the previous quarter, primarily due to the drilling rig Hercules now back in service. The EBITDA equivalent cash flow in the quarter was approximately $130 million, which was also higher than the second quarter. And over the last 12 months, the EBITDA equivalent cash flow has been $485 million in total. .

The net income came in at around $29 million in the quarter or $0.23 per share. The net income was impacted by some one-off items in the quarter, including gains on a vessel sale in the third quarter and some mark-to-market effects. This was offset by 2 tankers that were dried up in the quarter and an unscheduled of fire of around 14 days on the jackup rig lines due to repair works on the top drive with associated higher OpEx in the quarter. In line with the improved results and commitment to return value to our shareholders, we are also increasing our quarterly dividend to $0.25 per share. We have not paid dividends every quarter since our inception in 2004, and this has accumulated to $30 per share or more than $2.6 billion in total. And we have a robust charter backlog supporting continued dividend capacity going forward.

Our fixed rate backlog stands at approximately $3.4 billion. And importantly, the backlog is concentrated around long-term charters to very strong end users. This transition has been gradual as we have changed the business model from a maritime leasing company to maritime infrastructure provider over the last 10 years. This includes switching from primarily bareboat charters or financing arrangements to long-term time charters to end users. And I would note that the backlog figure excludes revenues from the vessels traded in the short-term market and also excludes future profit share optionality, which we have seen can contribute significantly to our net income.

In September, we took delivery of the first of our 4 dual fuel car carrier newbuilds. The vessel named [indiscernible] will go on charter to Volkswagen Group for 10 years together with a sister vessel, and we will deliver the vessels to Volkswagen in Europe.

The short-term market is red piping hot right now, and we have secured a very attractive interim charter from the shipyard in Asia to Europe generating around $8.5 million in EBITDA per vessel over a period of only 2 months. In addition to the new builds, we also have 2 existing vessels on charter to Volkswagen that have been extended for additionally 3 years firm plus extension options generating approximately $23.5 million in EBITDA per vessel per year.

We have a very close business relationship with Maersk Line with 17 vessels on long-term charters. Maersk Line recently exercised an option to extend the time charter for a 9,500 TEU vessel until mid-2025. This is at a higher rate than the current charter rate, adding $13 million to the charter backlog. In addition, we have a profit share relating to scrubber benefits on that vessel, where our share currently is [ 78% ].

In the third quarter, we also fully repaid a Norwegian kroner-denominated bond loan issued in 2018, where there was [indiscernible] million remaining at maturity. This was paid down from our cash balance. This loan was originally the equivalent of approximately $85 million, and the rest had already been repurchased opportunistically in the market. We have recently raised significant amounts in the new debt funding at very attractive terms in Asia and don't see a need to refinance the recently repaid bond loan with new financing in the near term. And after the extensive SPS and upgrade works to our harsh environment semisubmersible Hercules in the first half of 2023, the rig has been in Canada and drilled a well for Exxon Mobil. This was finalized in September and since then, the rig has mobilized to Namibia with a stopover in Las Palmas and is scheduled to start drilling for [indiscernible] in Namibia next week. This is for 2 wells plus an optional well testing estimated to take around 4 months, including mobilization. When we calculate average day rates, we include mobilization of the rig from Las Palmas and back again, and this is compensated by the customer. This started in early October, and the estimated contract value is approximately $50 million, implying a day rate of approximately [ 435,000 ] per day for the period.

After Namibia the rig will move back to Canada to commence our contract with Equinor. The contract is for 1 well plus 1 optional well. And the duration for the firm contract period is 6 to 7 months, including transit to and from Canada, implying a day rate of approximately $520,000 per day for the period. The rig will then be opened for new contracts from the fourth quarter 2024 onwards. This rig is 1 of only a handful of harsh environment ultra-deepwater semisubmersible rigs available and market analysts are positive to long-term market prospects based on recent tender activity and a tighter supply-demand balance. And with that, I will give the word over to our Chief Operating Officer, Trym Sjolie.

[Trym Sjølie, executive]

Thank you, Ole. Over the years, we have changed both our fleet composition and structure, and we are now a maritime infrastructure company with 73 maritime assets in our portfolio and our backlog from owned and mine shipping assets stands at $3.4 billion. The current fleet is made up of 15 dry bulk vessels, 36 container ships, 13 tankers, 2 drilling rigs and 7 car carriers, where 4 are on the water and 3 are under construction in China. The remaining newbuildings are scheduled for delivery over the next 7 months starting in November. .

We have involved from having a single asset class charter to 1 single customer to a diversified fleet and multiple counterparties. And 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.

Most of our vessels are on long-term charters that we have, over the last 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 Volkswagen, Maersk, [indiscernible] and others.

In the third quarter, 94% of charter revenues from all assets came from time charter contracts and only 6% from bare boats 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. Last 12 months, the aggregate profit share has been more than $16 million. Out of the current 73 vessels, we have 13 on variable type contracts and 60 on time charter and spot. Our operation is quite complex with vessels across multiple sectors, and we have our own commercial operation out of Oslo as well as operational management out of Singapore and [indiscernible].

Our OpEx for [indiscernible] to continuously invest in our fleet to optimize the vessel's performance and maintain a high level of service to our customers. This includes investing to minimize off-hire as well as investments to increase cargo carrying capacity and reducing energy consumption. This has become increasingly important with the implementation of IMO carbon intensity indicator, which will impact vessels operational profile, including routing and speed. EU ETS is also another issue becoming live from next year.

In Q3, we had a total of over 6,300 operating days, defined as calendar days [indiscernible] technical or fire and dry dockings. Three vessels have been dry-docked in the quarter. And our overall utilization across the shipping fleet was 99% in Q3 and 80.5% for the drilling rigs. For the rigs, as well explained, operating days are days on rate or in transit covered by mobilization fees, less days off hire and days spent in port, not on drilling rate.

One of the key ESG targets for SFL is the reduction of carbon emissions on our fleet. Such a reduction can either be met by fleet renewal in more efficient ships and with greener fuels increased efficiency of existing fleet or a combination of both. And as part of our fleet renewal program, we have 4 LNG dual-fuel carriers under construction in China, of which 1 was delivered during the quarter, so 3 left. These vessels are among the most modern and efficient ships in the car carrier market. The hull has been improved and optimized with the new [indiscernible], as can be seen in the picture. And the LNG fuel system is of a high-pressure type and the vessels are adapted for both ship-to-ship and port to ship LNG bunkering.

In LNG mode, we expect a 25% lower carbon footprint per vehicle carried compared to a standard 6500 CEU conventional [indiscernible].

The vessels are also fitted with the short connection for 0 emissions operation in port. And in addition to being able to carry EVs, the ships will also be able to carry hydrogen fuel cell vehicles. The first shift [indiscernible] is on her first voyage from Asia to Europe under [indiscernible], and she will be delivered to Volkswagen in about 1 week's time. 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 our pro forma illustration of cash flows for the third quarter. Please note that this is only guideline assess 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 $214 million in the third quarter including approximately $2.6 million of profit share with approximately 94% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.4 billion, providing us with strong visibility on the cash flows going forward.

In the third quarter, the container fleet generated gross charter hire of approximately $91 million, including approximately $2.6 million in profit share related to fuel savings on 7 of our large container vessels. During the quarter, we took delivery of the first of our 4 dual fuel LNG car carriers. With 4 car carriers on charter at the end of the quarter, our gross charter hire increased approximately $9 million in the third quarter compared to approximately $6 million in the second quarter. Our tanker suite generated approximately $30 million in gross charter hire during the third quarter compared to approximately $35 million in the previous quarter.

During the quarter, 2 Suezmax tankers were off-hire for a total of 46 days in connection with scheduled periodic dry dockings. These costs are expensed directly per shipping fleet and OpEx for the tankers in the quarters was therefore higher than normal. The company has 5 dry bulk car carriers [indiscernible] on long-term charters during the quarter. The vessels generated approximately $20 million in gross charter higher in the third quarter. 7 of these [indiscernible] were employed in the spot and short-term market and contributed approximately $6.2 million in net charter hire during the quarter compared to approximately $7.2 million in the previous quarter.

SFL owns 2 harsh environment driven rigs, the Jakobi Lines and the semisubmersible rig Hercules. During the third quarter, the rigs generated approximately $64 million in contract revenues compared to approximately $90 million in the second quarter. The [indiscernible] is currently under long-term contract to ComcoPhilip Scandinavia until the end of 2028. In the third quarter, the rig generated approximately $16.6 million in contract revenues, which is down from the approximately $90 million in the second quarter [indiscernible] off-hire for approximately 16 days relating to an unscheduled repair of the top trial. Due to the repair works, the OpEx for the rig was also $2 million higher than budgeted for during the quarter.

Hercules completed the drilling contract for ExxonMobil in Canada in September and has now been mobilized to Namibia, which is expected to commence the contract with Galp Energia shortly. During the quarter, the rig recorded approximately $48 million in contract revenues as the mobilization fees paid by ExxonMobil and associated costs is recognized through the actual drilling period pursuant to U.S. GAAP. The same principle has been applied for the mobilization fees due after the drilling contract was completed.

Our operating and G&A expenses for the quarter was $86 million compared to $68 million in the previous quarter, primarily due to Hercules being back in operation, scheduled dry dockings and downtown and repair on the lines. This summarizes the adjusted EBITDA for approximately $130 million in the third quarter compared to $109 million in the previous quarter.

We then move on to the profit and loss [indiscernible] 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. And as our 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 entities classified as investment in associates for accounting purposes.

The third quarter report total operating revenues according to U.S. GAAP of approximately $205 million, which is less than approximately $240 million of charter hire actually received for reasons just mentioned. During the quarter, the company recorded profit share income of approximately $2.6 million from fuel savings on some of our large container vessels and a car carrier.

As previously mentioned, the Hercules was back in operation during the third quarter and contributed with $48 million in contract revenue. Furthermore, this net result was impacted by nonrecurring and noncash items, including a gain from the sale of the VCC in the [indiscernible] for approximately $2 million.

A net positive mark-to-market effect from [indiscernible] approximately $2.3 million, a positive mark-to-market effect from equity investments of $300,000 and a decrease of $300,000 on credit loss provisions. With the corporate taxes and [indiscernible] taxes in Canada, the company also recorded approximately $2.3 million of taxes in the third quarter related to the Hercules. SFL also expects to pay similar types of customer taxes in Namibia.

So overall, and according to U.S. GAAP, the company reported a net profit of approximately [indiscernible] or $0.23 per share compared to approximately $17 million or $0.13 per share in the previous quarter.

In terms of near-term outlook, we expect lower revenues for Hercules in the fourth quarter due to a long mobilization period from Canada to Namibia, where the rig is due to commence the contract to Gulf Energy shortly.

As mentioned previously, revenue from the Hercules were due to U.S. GAAP accounting standards, we recognized only from the drilling commencement date and has compensation fees will be allocated throughout in respective quarters of drilling operations.

For our car carriers, revenues are set to increase as we had 3 newbuildings delivering from Q4 to Q2, with the second result being delivered from [indiscernible] China second half of November. Following the handover to Volkswagen of the first and second newbuilding during Q4 and Q2, the SFL conductor and as well Composer will continue the charters to Volkswagen for another 2 years plus optional years with an estimated EBITDA contribution of $23.5 million per vessel per year.

Moving on to the balance sheet. At quarter end, SFL had approximately $118 million of cash and cash equivalents. Furthermore, the comp and marketable securities of approximately $6.2 million vessel market prices at the end of the quarter. During the quarter, the company fully redeemed unlock bond of which $49 million was outstanding with cash on balance sheet. The outstanding capital expenditure of approximately $136 million on our 3 car carriers under construction has been fully financed by $194 million of net [indiscernible] financing yet to be drawn.

During the quarter, the company redelivered the [indiscernible] system following our declaration of a purchase option. The sale had a $10 million positive cash effect after repayment of secured debt relating to the vessel and the corresponding book gain of approximately $2 million has been recorded in the third quarter. So based on Q3 numbers, the company had a book equity ratio of approximately 28.4%.

Then to conclude, the company delivered another strong quarter with growth in both revenues and EBITDA. The Board has declared a 79th consecutive cash dividend to increase the dividend to $0.25 per share. This represents a dividend yield of approximately 9% based on the closing share price last Friday. The company has a strong balance sheet and liquidity position. So far in 2023, the company secured new financing arrangements of more than $1 billion, and we recently repaid [indiscernible] bonds with cash on balance sheet. Furthermore, our 3 new buildings are fully financed with attractive long-term financing, which will free up additional liquidity up on delivery. Our fixed charge rate backlog currently stands at $3.4 billion, which provides us with strong visibility on our cash flow going forward.

And finally, with the Hercules now back in operation and delivery of newbuilding car carriers together with new contracts for existing vessels, this strong revenue generation in the quarters to come, assesses delivered and new charters commencing. And with that, let me conclude the presentation and move on to the Q&A session.

[Unknown Analyst]

Thank you, Aksel. We will now open up to our Q&A session. [Operator Instructions]

[Gregory Lewis, analyst]

I couldn't find the raise hand function. So I figured I'd just hop in. This is Greg from [indiscernible]. I had a few questions. I was hoping we could walk through. It was good to see the dividend increase. And I guess 2 things, one is as you think about managing the trajectory of the dividend over the next, I don't know, 1 to 2 years, how should we think about balancing potential dividend growth and the drilling rigs just because it seems -- it's clearly a very cyclical industry. We're clearly in a strong part of the cycle, and those assets look like they're in a probable of the Hercules looks like it's going to be able to generate a lot of cash here over the next 2 to 3 years, but maybe not as it's definitely a more volatile asset than, say, your car carriers or container ships. So just trying to understand how you think about uses of cash from the Hercules as we recontract this over the next couple of years?

[Ole Hjertaker, executive]

Yes. I appreciate that. I mean the Hercules, as you mentioned, we just spent quite a bit of money on that rig in the first and second quarter of the year, when it was out of service. And now it's really only got started. So the charter rate in Canada, that was fixed more than a year ago. So it was at a lower rate. So that charter rate should be mounting now, as it is expected to start drilling in Namibia already next week. And the charter rate in Namibia is based on the -- if we include both mobilization to and from Namibia under drilling rate should be well above the drilling rate we had or the rate we had in Canada. And then it's going back to Canada later next year for an even higher rate. And in fact, the drilling rate we have on Hercules, it's the highest drilling rate, I would say, in this cycle today.

So this rig is a very capable unit and customers are clearly willing to pay for the services. Of nature, that market is a shorter-term charter market. So this is not a market where you normally get sort of 8-, 10-, 15-year charters. It's typically shorter charters, and we have deliberately not been so keen on fixing it long term because we see this market really building, and you don't really want to fix something at the low end of the cycle. We think this is a cycle that has legs. And therefore, we're holding back a little bit before we want to -- what we say look for really long-term charters on that unit.

I think if we were to look at long-term charters for the unit, you would have to accept lower rates than what we are fixing it at currently. So that's 1 asset. Of course, it's a big asset. But also if you look at the history of that drilling rig, I mean this is a drilling that used to be on charter to [indiscernible] ended up in 2 Chapter 11. We were offered in the last round, a very -- in our minds, a very poor, call it, treatment in the restructuring. We decided to take it back. And I think we can be honest and say it's been a really good decision from the company side to do that because returns we've had on this rate now with the rates we see is spectacularly better than the alternative would have been. But that is the history and the setting around that rate.

If you look at some of the other assets, look at the car carriers, that, I think it's sort of a segment. We used to have 2 vessels, then we ordered 4 vessels, and we bought another vessel, and then we have this quite spectacular, both the transportation , if you could call it that, on 2 of these vessels where we make more than 10% of construction costs just moving the vessel from Asia to Europe. So you have a lot of other bits and pieces here that's also generating a lot of cash flow. And then we have the rechartering of the 2 older vessels to Volkswagen where we increased the dividend by times 5 compared to where it was originally simply because we own those assets and we negotiated it and Volkswagen seem to be quite happy with the service we provide them.

So the rig is 1 piece, but there are also other elements in our portfolio that is also adding. And of course, our mindset is, yes, our principal objective in SFL is to return cash to shareholders. I mean that's why we're here. Otherwise, there would not be any point in having a company like [indiscernible] we don't really do that over time. And it's been 79 quarters now, and we've been always made money operationally every single quarter based on our distribution. So I think, yes, -- I think that we are really just at the starting point in our minds, so where we in terms of cash flow from some of these assets. So hopefully, there is more dividend potential also going forward.

[Gregory Lewis, analyst]

Yes. Super helpful. I did want to ask kind of a bigger picture question. Clearly across the more conventional shipping space where it's definitely a market that you continue to look at and have assets and as [indiscernible] has gone up, [indiscernible] are going up. How has that changed the potential opportunities for SFL, i.e., I'm talking to some shipowners and they're looking at [indiscernible] or even higher borrowing costs. Has that created more opportunities for SFL is the transactions team busy year as we sit here in November relative to maybe where they were earlier this year? Or is it, hey, the market's been good for a couple of years, and it's kind of steady as she goes?

[Ole Hjertaker, executive]

Yes. It's a good question. I mean if you go back to '22, we screened or did really work on more than $20 billion of potential deal flow, and we ended up doing one in the end for various reasons. I think this year has been -- the volume has been lower in aggregate. And I think with the rising interest rate market, it's also, I would say, the way we see it, it's a time lag from where the underlying metrics and interest rates is one, asset replacement cost is another maybe to a certain degree, operating expenses, to the extent there has been, call it, a little inflation in those metrics. It takes a little time for that to filter through in a customer's willingness to pay off for those services.

So that's why I think '23 has been, I would say, -- the more interesting deal flow opportunities has been, I would say, on a gross number a little lower than 22%, but I think this is going to pick up again.

But I think the ones -- I mean, if you look at the ones you offer more financing structures, maybe for them, there is more deal flow opportunity right now simply because funding cost is higher. And therefore, the alternative cost of doing like a bareboat type lease is relatively smaller. But we have strategically moved a little away from the bareboat type offering because what we have seen is that for those kind of deals, you typically do that with intermediaries. You don't do a bareboat deal with an end user. And therefore, there is a risk element here that I think is underappreciated right now, most of the shipping segments are booming, strong markets, nobody talks about it. But we've been through this over 20 years now. We've seen some cycle over the years. So our focus is to do deals with strong counterparties and users focus on getting the right deals done and don't be nervous if there is a quarter when you do that many deals. The deal flow is out there. There is a continued need for transportation assets and logistics solutions on the water, but they just don't be desperate to do a deal because that's when you do the wrong deals, maybe that's a short answer to that.

We are constantly screening deal opportunities. We are looking at opportunities. We cannot communicate specifically what we look at, but there are deals that could potentially be done. But we try to be disciplined. It's got to be the right type of asset. We have to focus on the right, as we call it, residual value exposure, i.e., what kind of residual risk are we willing to take on after a deal, what's the financing structure? And maybe importantly, who's the counterparty? Is this a counterparty strong enough and an underlying volatile market, is this counterparty, someone who can honor their obligation also in a down cycle because that's what we've seen over the years is that anybody can do a deal in an upcycle market, you just pay a little more than the next guy. The problem is how do you manage the down cycles. And that's, I think, that's something that we hope our history brings along is that yes, markets are volatile, but we managed through some pretty rough cycles. And hopefully, we're set up to deal even better with cycles going forward.

[Gregory Lewis, analyst]

Okay. Great. And then I just have 1 other question on the balance sheet. I noticed that we saw, I guess, sequentially, some of the long-term lease liability went into short-term lease liabilities. Is that just going to unwind? Or should we think about that being either renewed or extended over the next call? I don't know [indiscernible] .

[Aksel Olesen, executive]

It's Aksel here. So I think you should look at that as all our -- like our ordinary traditional debt on the vessels that there are opportunities to basically just assume rolling that on the same level yes.

[Unknown Analyst]

[Operator Instructions]. And the next question will come from Richard Diamond .

[Richard Diamond, analyst]

Great quarter, great job building cash flow. Ole, you and the team have incredible deal flow at SFL. What do you think are the most interesting areas looking out to the fourth quarter and next year?

[Ole Hjertaker, executive]

Yes. Thanks for that, Richard, and thanks for the kind words. We are focusing across the Board, our preference are for deals that are, I would say, logistics sort of oriented, i.e., where we go into a logistics chain with counterparties. So car carriers, for instance, is a segment that we've been spending quite a bit of time on. We've grown on a lot in that segment. We still think there could be interesting opportunities on the container side. Yes, the market is volatile. And yes, I can say it's not the super cycle we saw a year or 2 ago. But there's still underlying demand for transportation capacity. And certainly, with modern high-end assets, the more fuel efficient that is reducing both, call it, the energy footprint or emissions footprint per loaded box where that matters. And that's also where we have concentrated our investments.

We've also seen some of the opportunities on the tanker side. So I would say there are opportunities across the Board here. The only segment you can say we don't have in our portfolio that would be natural would be LNG in particular. But our dilemma there has been, one, it's sort of the investment level in that segment and the charter rates where you don't really amortize down so much of the investment, which means that we have been a little conservative in our willingness to take on residual exposure in that segment. But otherwise, we are active across the Board and looking at opportunities, and I think we have quite good access to deal flow.

[Unknown Analyst]

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 very much.