Q4 2022 SFL Corporation Ltd Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A.
Yeah.
Good day, and thank you for standing by welcome to the fourth quarter 2022 that's a Feld Corporation earnings conference call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be the question and answer session to ask a question. During the session you will need to press star one on your telephone keypad. You will then hear an automatic message advising you had this race to withdraw your question. Please press star one again.
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I would now like to hand, the conference over to our speaker today or to hit that Cat. Please go ahead.
Thank you and welcome all to <unk> fourth quarter Conference call.
I will start the call by briefly going through the highlights of the quarter and following that our CFO Aksel Olesen will take us through the financials and the call will be concluded by opening up for questions. Our chief operating officer trim surely would also be present in the question and answer 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.
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 with the Securities and Exchange Commission for more detailed discussions on our risks and uncertainties, which may have a direct bearing on our operating results and our financial condition.
The total charter revenues were $208 million in the quarter, which was up 17% compared to the third quarter.
The majority of the revenues were from vessels on long term charters and around 16% from vessels employed on short term charters and in the spot market.
The EBITDA equivalent cash flow in the quarter was approximately $135 million, which is up 7% from last quarter and over the last 12 months. The EBITDA equivalent has been $504 million.
So net income came in at around $48 million in the quarter or <unk> 38 per share which was in line with the previous quarter. This included contributions from profit share arrangements and also positive mark to market on interest rate swaps and equity and bond investments. We also received a delayed charter hire payment in excess of 10 million.
From <unk> in the quarter.
The announced dividend of 24 cents per share is up <unk> up from the third quarter, which represents a dividend yield of around nine 3% based on closing price yesterday.
This is our 76 quarterly dividend and over the years, we have paid more than $2 $5 billion in total or more than $29 per share.
And we have a robust charter backlog supporting continued dividend capacity going forward.
Our fixed rate backlog has increased significantly over the last year and stands at approximately $3 6 billion from owned and managed vessels. After recent acquisitions in charters, providing continued cash flow visibility.
And importantly, the backlog figure excludes revenues from vessels traded in the short term market and also excludes future profit share Optionality, which we have seen can contribute quite significantly to her.
Income from quarter to quarter.
The harsh environment semi submersible rig Hercules was original on a long term bareboat charter to Ctrip.
It was redelivered to SSL in December and it's no managed technically and operationally by oil shale drilling.
Before mobilizing the rig for the drilling contract with Exxon in May the rig will have to complete the scheduled special periodic survey or Sps.
We're also preparing for some upgrades to the rig to make it more attractive for long term contracts.
Currently we estimate cost to approximately $80 million, including Sps costs and upgrades.
There will not be any revenues on the rig in the first quarter. While this is undergoing while operating costs will accrue.
The gross contract.
Value of the excellent charter in Canada is estimated to around $50 million with a duration of approximately 135 days, including mobilization.
The rig will then be available for new contracts from mid third quarter and there is good progress on new charter opportunities, which will be announced in due course.
The rig is one of only a handful of rigs fully equipped to drill in the harshest Arctic environment and market analysts are positive to market prospects based on recent tender activity and tight supply demand balance we.
We have seen that the international market for deepwater drilling rigs without these harsh environment features has risen quickly.
The harsh market has been lagging recent day, but we believe prospects for 2024, and 2025 is particularly promising.
This is confirmed by recent fixtures in the North Sea, where as an example, transocean announced a three year contract in Norway last autumn at a charter rate, which implies an annual EBITDA in excess of $80 million.
During the fourth quarter.
We took delivery of four vessels with long term charters. This includes the last two out of four Suezmax tankers chartered to Coke industries, a newbuild container vessel chartered to Maersk line and a car carrier charter through you core. These four vessels added $260 million to our fixed backlog. In addition to profit share option.
On fuel savings.
In January we raised a new $158 million sustainability linked unsecured bond loan.
The proceeds will be used to refinance the bond loans maturing in 2023 and for working capital purposes.
After quarter end, we have bought back notes with nominal amounts of approximately $70 million and currently there is approximately $105 million remaining on our convertible notes due in may and approximately $40 million in our Norwegian kroner denominated bond due in September .
We are also today announced the sale of our 2009 built Suezmax tanker. This vessel has been trading in the spot market for a number of years now and we are taking advantage of a strong tanker market, which is also reflected in the value.
This is in line with our strategy of selling older vessels and reinvesting in newer and more fuel efficient vessels.
Net cash proceed system estimated to approximately $23 million after repayment of associated debt and we expect a book gain of approximately $5 million this quarter.
Over the years, we have changed both fleet composition and structure and we now have 77 maritime assets in our portfolio and our backlog from owned and managed ships.
Stands at $3 6 billion.
Over the years, we have gone from a single asset class charter to one single customer to a diversified fleet and multiple counterparties and the fleet composition has varied from 100% tankers to nearly 60% offshore 10 years ago to container vessels now being the largest segment with around 50% of the backlog.
Most of the vessels are on long term charters and in the fourth quarter, 93% of charter revenues from our shipping.
Assets came from time charter contracts, and only 7% from bareboat or dry lease.
In addition to fixed rate charter revenues, we have had significant contribution to cash flow from profit share over time, both relating to charter rates and fuel savings.
Last 12 months the aggregate profit share has been around $28 million with around $7 million in the fourth quarter.
We do not have a set mix in the portfolio focus is on evaluating deal opportunities across the segments and try to do the right transactions from a risk reward perspective.
Overtime, we believe this will balance itself out, but we tried to be careful and conservative in our investments with a focus on technology and transition over time to more fuel efficient vessels.
The strength of our Counterparties and diversification is key when we assess our portfolio and quantify or contracted backlog.
And the list speaks for itself with market, leading operators like Maersk and Hapag Lloyd Conocophillips P 66, Volkswagen I know lake the Exxon to name a few realm.
Relatively few of our customers our intermediaries, where we have had.
Visibility on the use of the assets and quality of operations.
Strategically. This also gives us access to more deal flow opportunities such as the repeat business, we've had with Maersk MSC evergreen and Trafigura for example, or.
Our strategy has therefore been to maintain a strong technical and commercial operating platform in cooperation with our sister companies <unk> tankers group.
This gives us the ability to offer a wider range of services to our customers from structured finance on one hand to full service time charter, which were which were doing morals.
And with full control over vessel maintenance and performance, including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels through the life of the assets and not only be possibly owning vessels employed a bareboat, where the customers may not always have an incentive to make such improvements.
In addition, we can retain more of the residual value in the assets when we charter out on time charter basis and in the current environment with rising raw material costs and inflation driving replacement cost for vessels. This value is for the benefit of vessels and our stakeholders.
Bareboat deals this value is usually retained by the charterer through fixed price fixed price purchase options.
And with that I will give the word over to our CFO Aksel Olesen, who will take us through the financial highlights for the quarter.
Thank you Mr <unk>.
In this slide we have shown a pro forma illustration on cash flow for the fourth quarter. Please note that this is the only a guideline to 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 $208 million in the fourth quarter, including approximately $7 million of profit share approximately 84% of the revenue coming from our fixed charter rate backlog, which currently stands at three 6 billion, providing us with strong visibility on our cash flow.
Moving forward.
In the fourth quarter, the liner fleet generated gross charter hire for approximately 19 9 million, including approximately $6 5 million and profit share related to fuel savings on seven of our large container vessels and one car carrier.
At the end of the fourth quarter is the first slide in the <unk> backlog was approximately $2 4 billion with an average remaining charter term of approximately $4 five years or seven two years, if weighted by charter hire.
Our charter backlog includes approximately half a billion dollars of backlog from our seven car carriers.
In the fourth quarter as it fell had a fleet of 18 crude oil product and chemical tankers with the majority employed on long term charters.
Tanker fleet generated approximately 49 million and gross charter hire during the quarter compared to approximately $42 4 million in the previous quarter.
As they felt had two suezmax tankers and two smaller chemical tankers trading in the spot and short term market niche.
The net charter hire from this vessel was approximately $12 1 million in the fourth quarter compared to approximately $11 five in the third quarter.
Subsequent to quarter end as it felt sold a 2009 built suezmax tanker with total consideration of approximately $39 million net.
Net cash proceeds just to fill after repayment of associated debt is estimated to be approximately $23 million and they expect to record an accounting gain of approximately $5 million in the first quarter.
The company that assist in Drybulk carriers of which eight were employed on long term charters during the quarter as.
As the film generated approximately $23 7 million and gross charter hire from the Drybulk fleet, including approximately 400000 of profit share.
Seven vessels were employed in the spot and short term market and contributed approximately $9 million and net charter hire during the quarter compared to approximately 10 million from six fixed fixed vessels in the previous quarters.
As developments too harsh environment drilling rigs the 2014 build jackup rig liners in the 2000, a harsh environment semi submersible rig Hercules.
And it is currently under long term contract to Conocophillips Scandinavia until the end of year 2028.
And the rigs employed on the greater <unk> field in the North Sea.
During the fourth quarter rig generated approximately $18 6 million in contract revenues. In addition, as the cell received $10 5 million relating to catch up payments for previously reduced charter hire from CEA drill during chapter 11.
The harsh environment semi submersible rig Hercules Wilson, the bareboat charter to schedule until the end of December 'twenty twos.
Rig was redelivered to us the field during the quarter, we received approximately $7 million in charter revenue.
Our operating and G&A expenses was higher in the fourth quarter as we recorded the first full quarter of operations for alignments.
This is higher than normal operating expenses for shipping fit due to vessel deliveries during the quarter.
Other income of approximately $2 million is primarily derived from interest income from Penn National investments.
This summarizes to an adjusted EBITDA of approximately $135 million in the fourth quarter compared to $176 million in the previous quarter.
We then move on to the profit and loss statement as reported under U S. GAAP.
I've described in previous earnings calls our accounting statements are different from those of a traditional shipping company.
And that's 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 U S. GAAP operating revenues.
<unk> repayment of investment in sales type direct financing leases and leaseback assets and revenues from it that is classified as investment in associates for accounting purposes.
So for the fourth quarter report total operating revenue according to U S. GAAP for approximately $198 million, which is less than approximately $208 million of charter hire actually received for the recent adjustments.
During the quarter as it fell received $10 5 million relating to catch up payments for PUC reduced charter hire from cereal during chapter 11.
Furthermore, the comp recorded profit sharing income of approximately $6 5 million from huge savings from seven of our large container vessels and one car carrier and Additionally, approximately 400000 from our eight capesize dry bulk vessels.
Also the company recorded a two 9 million gain related to the positive mark to market effects related to equity and debt investments.
And a decrease of 400000 in credit loss provisions.
And finally, the company recorded a $1 4 million gain related to a positive mark to market effects related to interest rate swaps and at quarter end, approximately 70% of our financing was fixed rate or swapped to fixed.
Natural hedging instruments and with the recent rates and interest rates, we now see the benefits of a conservative financing strategy.
Similar to US chartering strategy, we have amped up significant diversification in our funding base, both in terms of structure and geography.
This has proven to give us more flexibility over time.
Based on our assumptions, we estimate that 1% this increase in interest rates from current levels equal to approximately <unk> <unk> per share in the over distributable cash flow per quarter and vice versa.
And then evaluating new investment opportunities with a conservative approach and assuming the interest rate costs. During the life of the project amid generally seek to fix the interest rates back to back with the fixed charter duration.
<unk> and interest rate adjustment and the charter rates.
As previously mentioned, our operating and G&A expenses was higher in the fourth quarter as we recorded the first full quarter of operations for loans, we had higher than normal operating expenses for shipping fleet duty many vessels deliveries during the quarter.
So overall and according to U S. GAAP the company reported a net profit of approximately $48 5 million or <unk> 38 cents per share.
Moving onto the balance sheet at.
At quarter end, <unk> had approximately $188 million of cash and cash equivalents.
Furthermore, the company and marketable securities of approximately 7 million person market prices at the end of the quarter.
In addition, the company had seven debt free vessels at quarter end with the combined charter free value of approximately $180 million based on average broker appraisals.
During the fourth quarter the company entered into long term financing arrangements for 214000 Teu container vessels in the Japanese lithium market. The combined amount was $240 million on the term is seven years.
<unk> also secured long term financing facilities for four newly acquired Suezmax vessels of $145 million.
In January at the felt issued a new 150 million sustainability linked unsecured bond maturity in 2007, the proceeds will be used for refinancing of existing debt facilities and working capital purposes.
As of today, approximately $105 million is Curtis standing under convertible notes due in May 23, and approximately 40 million equivalent and a recent kroner.
We're just standing under bonds due in September 23.
At the end of the quarter as Phil had four LNG do food car carriers under construction for delivery in 'twenty, three and 'twenty four.
The remaining capital expenditures related to the yard installments was approximately $210 million at quarter end.
The majority of this is expected to be financed by debt facilities in due course.
And based on the Q4 numbers the company the book equity ratio of approximately 28 countries.
Then to conclude.
The company has delivered another strong quarter with growth in both revenues and EBITDA.
<unk> declared the 76th consecutive cash dividend to increase the dividend to <unk> 74 per share. This represents a dividend yield of approximately nine 3% based on the closing share price yesterday.
The company has a strong balance sheet and liquidity position and we recently raised $150 million senior unsecured sustainability linked bond, which together with cash on balance sheet addresses that.
Maturities and the convertible notes in May and then the bonds due in September .
Our fixed charter backlog currently stands at $3 6 billion after adding $1 4 billion in 2022, which provides strong visibility on our cash flow going forward.
And finally, we have seen a strong recovery in the offshore drilling market since the beginning of the year and a too harsh environment drilling rigs are well positioned to benefit from an increased activity level in the sector.
And with that I give the word back to the operator, who will open the line quick questions.
Thank you as a reminder to ask a question you need to slowly press star one on your telephone keypad and Mike for a name to be announced to withdraw. Your question. Please press star one again, please Jim Barber will compile the Q&A roster. This will take a few moments.
Now, we'll go and take our first question.
And the first question comes from the line of Chris Wetherbee from Citi.
Your line is open please ask your question.
Excuse me. Please your line is open.
We're going to take the next question.
And the question comes from the line of Greg Lewis from <unk>. Your line is open. Please ask your question yes.
Yes, Thank you and good afternoon, everybody and thanks for taking my questions.
I did have a couple of questions around.
The rigs you mentioned.
You mentioned the $80 million of rig Capex ahead of the contract with Exxon Canada.
You mentioned upgrades.
Potentially long term market as we.
We think about the Hercules to high quality rig well when we think about these capital upgrades or are we is this like MPD is this be a pay any kind of color you could give us around the upgrades related to that rig and the cost associated with those upgrades as you bid that rig for I guess.
Longer term employment.
Yeah, absolutely yeah, thanks, and thanks for calling in.
You know what to say drilling rigs are quite expensive to run.
And.
It goes for any drilling rig, whether it's harsh environments or not.
It consists of the UK.
Two main parts.
It's the top side, where under drilling functionality and then you have the platform itself or you can say the marine piece.
Where which is really sort of stable stable into water, while under drilling operations and then you have relatively.
Relatively few drilling rigs with where the steel quality and that needs to be built from from from this from the yard side, it's going to be.
Steel quality that can withstand.
Say extreme cold and also ultra harsh weather.
Which is one of them. This rig is one of them well and it has been drilling up in the Barents Sea during winter.
Under pretty extreme conditions.
Overtime of course, both drilling equipment and and the marine part just like any shift you can say will have to be.
Rogers renewed call it painted parts changed generators need to be overhauled I mean, this is sort of needing normal procedure. The difference with a drilling rig in a normal ship is that the ship is basically like a big bathtub, but a small engine, Indiana that did push through water and a drilling rig has a lot.
More equipment and a lot more high value equipment on board.
And as a consequence as you as you go through your schedule maintenance there is more work to be done so so.
While.
We cannot give you a sort of a full breakdown on a one element by element, but I would say that you have one piece, which is just regular standard maintenance.
And then you have.
Some upgrades that are relating to.
Mentioned that this rig will will will will be able to do more than it is doing today, it's been working more as an exploration rig over the last I would say really since it was new.
While we are we are doing some upgrades where it will also qualify for more development drilling.
We can see more.
<unk>.
No.
Yes. So so if you look at sort of the and then you also have some upgrades relating to specific contracts for instance for this.
Contract in Canada.
There is around $6 million of upgrades that needs to be done and it really took to qualify for for call. It requirements in Canadian waters for this specific drilling drilling rig <unk> as an example.
So it's a mix of elements.
The good thing we hear we are working with <unk> drilling they have several several I would say sister rigs very similar spec rigs. So they have a lot of experience in this.
So in terms of procuring the equipment and the spares and equipment because status now we've been through a period, where this whole segment has been under the weather I would say since 2014 2015, when the market came down and that also that's not only for the drillers themselves, but also for any.
One involved in that value chain be it.
Parts suppliers and equipment manufacturer and everyone. So now when things are really ramping back up.
Not only have a sort of a.
Of course cost two two logs.
Make sure you can manage but also facilitating all the parts in time.
For for the drilling.
The activities that youre going to do so so that is also an important piece here to actually get everything you need in time.
Also what we are looking for looking at and this is so.
With any drilling rig or any equipment over time.
As things.
<unk> time, you have to replace equipment, sometimes geography, where the manufacturer cannot longer service it because because of from a timing perspective. So so that is also something that as states going into the overall cocktail, but the other side of this is cash flow potential on these drilling.
Rates because.
We have an example, it was a drilling rig.
Such as Ocean is that would that was announced last fall onto new agent Continental shelf three years.
Generating sort of more than $80 million in cash flow.
EBITDA cash flow per year relating to that contract. So yes, they are expensive to upgrade and maintain and take through special surveys, but theres also a very significant cash flow potential when these rigs work.
And a reasonably hot market.
Yes, no doubt about it, especially our rates are not that I want to spend all the time talking about the offshore rigs, but I think it is somewhat.
People think about SFA, Alan as we should.
Try to think about the dividend and that's obviously important to us and investors and obviously asset that will as well.
I guess in previous years when.
The rig market like you mentioned was in the six to seven year downturn.
It was the assets maybe warrant is viewed as core to the portfolio and really I guess, what I'm trying to understand is as we think about potential for.
The offshore rigs to be additive to the dividend.
Maybe a six or 12 month contract on the Hercules doesn't make it additive to the dividend, but like is that a fair way to think about it where maybe maybe if the rig is on a multiyear contract.
Generating cash flows obviously paying back the <unk>.
Actual investment will be probably in under a year.
Is there any way to think about how those how the two rigs can impact the dividend.
Or should we be thinking about cash flow from those rigs really being deployed elsewhere on maybe longer term business to then drive the dividend higher.
Any kind of color you can give around that I realize that was a long question.
Thanks for that I'll make an attempt to answer as I think.
Efficacy on both rigs you start with the line it has a long term contract.
Which is a market linked I think as you know work ourselves through 'twenty, three and we see the market expectations for 'twenty four intensified I think that's when you should expect to come into call. It the.
Distributable cash flow from the rigs in terms of kind of contributing to the dividend I think that's kind of the timeframe. We're looking at I think.
Yes.
The line is coverage reset every six months.
That's both a data and then you basically have a interesting supply demand for that type of rigs in the north sea with many rigs leading as well.
Also saying with the semi accuracy in minutes semis.
Regretting out.
If a market where you actually see now higher day rates in the North Sea.
Do you have a lower opex and you have more term business and thats really when they can see get visibility on that that you can have we can guide on a more precise.
Guidance on kind of the Castro equitable two to support the dividend, but we think India. It looks looks very interesting.
And maybe I will take that on that I mean, if you look at the expense of course.
It's an investment as you as you take it through this Sps, but we have quite significant cash flow or cash position at the end of the end of the 22, we recent day rates that the new bond loan that is effectively taking out the maturities bond maturities, we have this year and on the asset side.
We are effectively fully invested as the remaining installments on the car carriers that we have under construction will most likely be covered by debt facilities. So there may be actually be cash.
Coming out of those so so from that perspective, you know.
This is something that we have I would say been prepared for for quite a while and.
We we put down the money now and of course, you wouldn't do that if we don't think that this is accretive to <unk> and the distribution capacity long term.
And then that 100% and then just kind of pivoting more to bigger.
Bigger picture, how we should think about when you see yields and then.
Really your returns I mean, clearly interest rates have gone higher.
I don't know if the arrow of free money is over or not but it looks like at least in the medium term. There is also it looks like we've seen some crackdowns in what we'll just call. It say it in Asia around some leasing companies deploying capital across the maritime space.
Has there been any.
Okay.
Is there is there any shake out where we could see.
Yes.
Returns for SF al in a higher interest market could that actually be a positive for <unk>, just given the diversity and kind of your different pockets of money or.
Should we be thinking about that as neutral at best.
You have two side. So I mean, if you look at a more more financial call. It structured finance we have some some assets that are that are effectively structured finance type deals.
Both type deals you can say that those are becoming more.
Competitive in a way because we have seen it over time.
Investors should not only not in <unk>.
S F L, but in other call it vehicles or companies, who have that strategy. It looks like investors have more of an absolute return requirement.
The companies who might.
Call it use those call it financing services.
Could otherwise go to the bank and borrow at a floating rate, which was lower that has not come up.
From our perspective, I mean, we focus more on time charter.
Contracts, because then we have more direct interaction with the end users.
But also if you look at the way we have looked we have sort of managed interest rate risks over time, we've tried to hedge that out.
So when we do a deal restructure the financing and then we hedged interest rates generally.
So which means that when they come up for re chartering.
Yes, then we have.
You can call. It that then we have an interest rate exposure, but charter rates are also have an element of interest embedded in themselves because for anyone who wants to charter a vessel.
We'll have to take into account their financing cost at that time, So I would say on the on the longer longer perspective. We are we are more neutral on the interest rate side.
We are we do think there will be more call. It bareboat type deals, perhaps coming down the line.
But we're looking at a lot of deal opportunities as an example last year.
Within the tally after end of the end of 'twenty. Two I think we I think we did prep work on on deals worth around $23 billion in total.
Of that we ended up doing.
Less than a $1 billion.
For various reasons it could be that we didn't like the return profile risk reward maybe the counterpart didn't work for us etcetera. So so risk screening a lot of deal opportunities and tried to be disciplined.
And.
And selective when we do deals.
As a general note on our access to financing in terms of banks and call a Japanese leases etcetera, I think that that's an improved over last year I think with our name track record since we were able to achieve a extremely competitive financing them and thats all alluded to the kind of the limitations you see.
The Chinese market is you could argue it's going away more bearable type.
Our financial providers switch can you just have being competitors to us although we haven't done bareboat, so think kind of the financing market there has.
<unk> is now smaller than that potentially gives us more opportunity.
Super helpful. Thanks for the color.
Thank you.
Yeah.
Thank you.
There are no further questions I would now like to hand, the conference all the trial with Topeka.
Tucker for closing remarks.
And then I would like to thank everyone for participating in this conference call and if you do have any follow up questions. There are contact details in the press release, where you can get in touch with us through the contact pages on our website. Thank you.
That does conclude our conference for today. Thank you for participating you may now all disconnect have a nice day.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Yeah.
Okay.
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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.
Yes.
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So.
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The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Okay.
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