SFL Corporation Ltd. Q1 2023 Earnings Call
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Good day and thank you for sending by. I'm Marco, the Q1 2023 SSL Corporation earnings conference call. At this time all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask a question, you will need to press star 1 1 on your telephone.
I would like to end the conference. So to the whole, I guess, CEO . Please go ahead.
Thank you.
Thank you.
And welcome to us of the surface
Go for it, Cole.
All by briefly going through the highlights of the quarter.
Silence.
I'll probably use for that interruption. Welcome to SFF's first quarter conference call.
I will start the call by briefly going through the highlights of the quarter. Following that, our CFO , Axel Wilson, will take us through the financials and the call will be concluded by opening up for questions. Our Chief Operating Officer, Trim Sherman, will also be present for the Q&A session.
Thank you.
Yeah.
Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements with the meaning of the US Private Securities Litigation Reform Act of 1995.
such as expects, anticipates, intents, estimates or symbols.
Expressions are intended to...
to identify these four looking statements.
Fogoloki statements are not guarantees of future performance.
These statements are based on our current plans of expectations and are inherent subjects to risks and uncertainties that could cause future activities and results of reparations to be materially different from those that foreseen the forward-looking statements.
important factors that could cause actual results to differ
include but are not limited to conditions to do shipping offshore in the credit markets.
You should therefore not place undue reliance on these companies.
Please.
Please refer to our filings for the security and access commission for more detailed discussions over risks and uncertainties which may have a direct bearing on our operating results and our financial condition.
Thank you.
The total charter revenues were 182 million in the quarter, which were down from the previous quarter primarily due to one rig out of service and lower dry book rates in the first quarter.
The previous quarter also included a 10 million one-off payment relating to the seed drill restructuring.
The vast majority of revenues were from vessels on long-term charters and around 14% from vessels employed on short-term charters and in the stock market.
After the sale of the spot traded tankers the long-term charter ratio will increase further.
The EBITDA equivalent cash flow in the quarter was approximately $110 million and over the last 12 months the EBITDA equivalent has been $495 million in total.
The net income came in at around 6 million dollars in the quarter, or 5 cents per share. This was significantly lower than the fourth quarter and primarily caused by the drilling rig Hercules which had no revenues in the quarter but with full operating expenses while undergoing a scheduled comprehensive special survey and upgrades.
There were also some mark-to-market effects relating to interest and currency swaps after refinancing bonds in the quarter. The announced dividend of 24 cents per share is in line with the fourth quarter and represents a dividend yield of around 11% based on closing price on Friday.
This is our 77th quarterly dividend and over the years we have paid more than $2.6 billion in total and more than $29 per share. And we have a robust charter backlog supporting continued dividend capacity going forward.
Our fixed rate backlog continued to increase and stands at approximately 3.7 billion from owned and managed vessels after recent charters, providing continued cash flow visibility going forward.
And importantly, 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.
We are very pleased to report extended charges with Volkswagen for our two car carriers, SFL Conductor and SFL Compulsor.
which are currently so-called front-runners for the dual-fuel new builds to be delivered later this year to Volkswagen. We are very happy with the performance and we have agreed to extend the charters for a minimum period of three years adding approximately 155 million dollars to the charter backlog.
Operating and financial expenses are not affected, so EBITDA contributions increase fourfold and net cash flow per share after financing increases from around 6 cents per year to around 36 cents on these vessels alone.
The extension and new charter rate will be effective from the time the two new dual-fuel vessels are delivered on their respective 10-year charters to Volkswagen, currently estimated to the third quarter and the fourth quarter this year.
We have also recently announced a new shorter contract for Hercules in Namibia, back to back with the contract for Exxon in Canada. The new contract is with a subsidiary of Gulf and Agia for two wells plus an optional well testing.
This contract adds more than $50 million to the backlog and the rig will then be open for new contracts from the second quarter 2024 onwards.
The quarter was very busy on the financing side with more than $1 billion in new financings, including our new-build dual-fuel car care program, sustainability-linked notes and refinancing over drilling rigs. And from thatcheaphore out front, folks, thank you for connecting with me today.
With this funding, virtually all the near-term financing and capital expenditure requirements have been secured at very attractive terms. And we continue to renew our fleet and divest of all the tankers treading in the sports market.
At second-hand prices have increased recently on these assets, along with limited long-term chartering opportunities for older assets, we have decided to sell the two Suez-Max tankers built 2009 and 2010 and the two chemical carriers built 2008.
This is in line with the strategy of selling older vessels and reinvesting in newer and more fuel-efficient vessels.
The Suismech tanker Gloracrome was delivered to new owners in March and the Everbride was delivered in April . And the Chemical Tanker SFLVSER was delivered in April and SFLLBET expected to be delivered in June .
Following the sale of these four vessels, we will not have any tanker's vessels trading in the short-term market.
Furthermore, the board of directors of the company has authorized the repurchase of up to an aggregate of $100 million of SFL shares.
Purchases may be made at our discretion in the form of open market repurchase programs, privately negotiated transactions, accelerated share repurchase program or a combination of these methods.
The timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, alternative uses of capital, capital availability and the company's determination that share repurchases are in the best interest of its shareholders and other factors. You see this as a tool in the shareholder value toolbox.
and would note that the company is not obligated under the terms of the program to repurchase any of its common share. The buyback program is valid until 30 June 2024.
Over the years we have changed both fleet composition and structure and we now have 74 maritime assets in our portfolio and our backlog from owned and managed shipping assets have increased to $3.7 billion.
Over the years we have gone from a single asset class charter to one single customer, to a diversified fleet and multiple counter parties, 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 just under 50% of the backlog. Most of the vessels are on long term charters.
And in the fourth quarter, 93% of charter revenues from shipping assets came from time charter contracts and only 70% on bare boards 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 more than $28 million, with around $5 million in the first quarter.
The strength of our counterparties and diversification is key when we assess a portfolio on quality of our contracted backlog.
And the list speaks for itself and market-dealing operators like Volkswagen, Mercedes-Benz, Hupagloy, Conoco Phillips, P66 and now lately Exxon and Golf to name a few.
Relatively few of our customers are intermediaries where we have less visibility on the use of the assets and quality of operations.
gives us access to more deal flow opportunities, such as to repeat this business with several of our blue chip customers, like Volkswagen now recently.
Our strategy has therefore been to maintain a strong technical and commercial operating platform in cooperation with our system companies and the seat-trackers group.
This gives us the ability to offer a wider range of services to our customers, from structured financing to full service time-charters.
And with full control over vessel maintenance and performance, including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels throughout the life of the assets, and not only be passively owning vessels employed on bare-bought 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 the time charter basis. And in the current environment, with rising raw material costs and inflation driving replacement costs for vessels, this value is for the benefit of SFL and of stakeholders. For bear-bought deals, or deals where the charter had purchase options, the SFL is a
This value is usually retained by the charterer through fixed price purchase options. And in light of the significant capital expenditure on the drilling rig Hercules, I would like to comment some more on the rig and market opportunities.
As you know, SFL owns two harsh environment drilling rigs, the 2014 built jackup rig Linus and the 2008 built semi-submersible ultra-deepwatering Hercules.
which originally were chartered to CEDRILL on bearable terms. But we took them back in connection with CEDRILL's last Chapter 11 bankruptcy process.
The Linus remains on its long-term contract with ConocoPhillips, Scandinavia until 2028 and is managed by Oudfel Technology on our behalf.
Hercules was redelivered to us in December and is currently out of service in connection with a scheduled Special Periodic Survey or SPS, an upgrade works in Norway and is managed by Odfjell Drilling.
There were no revenues on the rig in the first and most of the second quarter while operating costs accrue.
We estimate the total cost of the SPS and upgrades to approximately 100 million dollars and the SPS is expected to be completed in June .
It has taken longer and become more expensive than originally estimated, partly due to the condition of the rig at time of re-delivery. We are reclaiming some of the expenses from C-Drills, but this is expected to take time as it involves the court process in Norway.
Irrespective of that, when the work is finished on the rig, the rig will move to Canada under its own power and commence a contract with ExxonMobil Canada to drill one well. The duration is estimated to approximately 135 days including mobilization.
the contract has an estimated value of around 50 million dollars.
Thereafter, the RIG will move to Namibia and commence a contract with a subsidiary of GULP Energia for two wells plus an optional well testing.
Excluding optional days, the duration will be approximately 115 days including immobilization with an estimated contract value of another 50 million dollars.
The rig will then be open for new contracts from the second quarter 2024 onwards. This rig is one of only a handful harsh environment ultra deepwater semi-submersible rigs available.
And market analysts are positive to market prospects based on recent tender activity and the tight supply-demand balance.
There is also a realization in the market that there has been a fundamental underinvestment in the segment for a number of years.
The harsh market prospects for 24 and 25 is particularly promising, where we have seen several contracts in excess of $400,000 per day plus mobilization fees that may increase net rate further.
Depending on geographic location, this may imply annual EVDA contribution in excess of 80 million dollars when the rigs are working. And further rate increases will go directly to net cash flow.
The graph on this slide illustrates the effect of the reduced activity level from 2015 and the impact on day rates.
We are now back to the tight supply demand characteristics we saw until 2015, but based on a significantly lower recount than at the last peak.
And should market rates come back to the 600,000 per day level, the old company have been used to be paying in the past.
As we can see on the right side on the slide, EPTA for the rig would be closer to $150 million per year instead.
And with that I will give the word over to our CFO Oksil Urlesen who will take us through the financial highlights for the quarter.
Thank you Mr. Järkakih. On this slide there is a wonderful formal illustration of cash flows for the first quarter. Please note that it is only a guideline to assess the company's performance and is not in accordance with US GAAPs. An alternate of extraordinary and uncash items.
The company report generated gross charter higher of approximately 182 million in the first quarter, including approximately 5 million of profit share with approximately 86% of the revenue coming from a fixed chart rate backlog, which currently stands at 3.7 billion, while also strong visibility on a cash flow score.
Our Tanki feed generated approximately 47 million in gross charter higher during the first quarter compared to approximately 49 million in the previous quarter.
During the quarter, SFL had two SUSMEX tankers and two smaller chemical tankers trading in spoke and short term short term markets.
The net charter hire from these households was approximately 10 million.
These four vessels were sold during the quarter and only one vessel is yet to be delivered to its new owners.
The company has 15 driveable carriers which 8 were employed on long-term charters during the quarter. The vessels generated approximately 20 million in gross charter hire in the first quarter.
Seven of the vessels were employed in the spot and short-term market and contributed approximately 4.6 million net short to higher during the quarter.
It develops two harsh environmental risks, the jack-up rig blindness and the semi-submersible rig hurt.
The line-ness is current on the long-term contract with ConcoPhillips Scandinavia until the end of 2020. During the first quarter the RIC generated approximately 19 million in contract revenues in line with the fourth quarter when adjusted for approximately 10 million catcher payments.
for previously reduced chart height from C drill during chapter 11, which was received in the fourth quarter.
The harsh environment semi-submersible ring hercus was previously unbearable charted in magnetic mysterious jet great tellin'
For the first time since redelivery to SFL in December 2022, we record a full quarter of operating expenses on her list, which are approx. ten million.
We also expect to record similar levels of operating expenses for the rig in the second quarter. Furthermore, there has been no revenue from the Hercules during the quarter, as the rig is currently undergoing its special periodic survey on NUCPRIS before mobilizing for a drilling contract with Exxon Canada expected to happen at the end of the second quarter.
Our operating and G&A expenses for the quarter was 75 million and that also includes the operating cost of the hurdles.
This summarizes an adjusted dividend of approximately 110 million in the fourth quarter, in the first quarter compared to 135 million in the previous quarter.
This result is done predominantly due to temporary art-stay of the hercus rig and of 10 million lumps of mycedium linus in the previous quarter.
We then move on to the profit and loss statement that is reported on the US caps. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shifting company.
And as our business strategy focuses on long term charter contracts, a large part of our activities are classified as capital listings.
Therefore, a significant portion of our charter revenues are excluded from US GAAP offers in revenues. This includes repayment of investment in sales type, direct financing leases and these type assets.
and revenues from entities classified as investments in associates for accounting purposes. Through the first quarter, report total operating revenues according to US GAAP of approximately 173 million, which is less than approximately 182 million of charter hires actually received for reasons just mentioned.
During the quarter, the company recorded profit share income of approximately 5 million from fuel savings and some of the large multinationals and the car carriers.
As mentioned, we record a full quarter of operating expenses on Hercules and we did not record any revenue on the rig due to its temporary yard stay.
Expect the RIC to be recording its full first quarter of revenue in the third quarter.
During the quarter, the company recorded a gain from the sale of the Sjösmag tank at glory crown of 10.2 million and recorded an impairment of 7.4 million relating to the sale of the chemical tankers Elbe and Lesse.
Also, the company recorded a 7.4 million non-cash loss due to negative mark-to-market on derivatives linked to SFL bonds acquired during the quarter.
Overall, and according to US GAAP, the company reported a net profit of approximately 6.3 billion or 5 cents per share.
Moving on to the balance sheet.
At Courtroom, SFL had approximately $185 million of cash and cash equivalents.
Furthermore, the company has multiple securities of approximately 7 million US market prices at the end of the quarter.
In January , the SFL issued a new 160 million sustainability link bond that matures in 2027.
Part of the proceeds were applied against the convertible note, which was repaid in cash at its maturity in May, as well as against repurchase of the NOC23 bonds maturing in September .
During the first quarter, SFL closed four Yolko financing arrangements, one for each of our four car carriers currently under construction for delivery in 2023 and 2024.
The combined financing amount is approximately 300 million corresponding to the yard contract by Stcoins Annualole.
Consequently, the arrangements will have a positive cash flow effect at the delivery of the vessels, equivalent to your installment's pay to date, for approximately 100 million. Additionally, the company entered into a pre-delivery 47 million bank loan facility for two vessels plus eight million.
to be delivered in 24, further enhancing the complex liquidity position during the period up to the delivery of the results.
We also signed and drew down a $145 million financing facility on force-use maxes during the quarter.
Subsequently, quarter-end SFL closed the refinancing of the semi-submersible drilling rig Hercules and the jacket drilling rig Linus. The financing amount was 150 million per rig, with maturity in the fourth quarter of 2025 and the second quarter of 2016 respectively.
Additionally, SSL also closed two JOLCO financing arrangements, one for 45 million for the car carrier Arabian Sea with a term of approximately 6 years and one for 38 million for the container vessel Mars Pelopas for approximately 7 years. As the vessels were dead free, the transactions developed.
positive cash flow effects in excess of 80 million combined in the second quarter.
Based on the Q1 numbers, the component booked XB ratio of approximately 28.3% The board has declared a cash dividend of 24 cents for the quarter.
This represents a dividend yield of approximately 11% based on the closing share price last Friday. The Board has also authorized a new share buyback program with validity until the end of Q2 2024.
Our fixed rate charter backlog currently stands at 3.7 billion which provides us with strong stability on the cash flow going forward. The latest financing facility is concluded, the company's new bill and capital expenditure program is now fully financed and all materially.
and material all of the short-term debt is refinance with long-term loans. In summary, SFL has secured new financing arrangements so far in 2023, totaling approximately 1 billion dollars.
The amount is split across 12 different facilities and a wide array of products securing a continued well-diversified funding platform for the company going forward. Furthermore, with a recent contract award for a two-car carrier on contract with Volkswagen the commencement in Q3 and Q4 is here.
We estimate the EBITDA from these S.O.s to approximately 47 million per year, a significant increase from existing contracts, this was approximately 9 million per year.
Finally, we announce a new contract award for a harsh environment semi-submersible drilling rig Hercules.
confirming a tightening supply demand balance and a strong market outlook, which is now materializing into attractive day rates.
And with that I give the world back to the operator who will open the line for questions.
Ladies and gentlemen, we now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 1 on your telephone.
We are now taking the first question.
Please stand by.
The first question from Sherif M. from BTIG. Please go ahead. Your line is open.
Hi, good morning, good afternoon. Thanks for taking my question. So first, looking past the most recent contract for the Hercules, what are the long term employment prospects for that rig? Is the plan to have it stay in Namibia? Yeah.
Yeah, thanks. This one contract after Exxon in Canada is in Namibia and as you can imagine it's a fairly long transit but the oil companies are more than happy to compensate for that. But this rig can work in multiple places. So we are of course...
it on relatively shorter contracts as we see the charter rates coming up fairly sharply as you may also have seen on the graph we included in the presentation where we've seen the daily rates coming up very fundamentally over the last year or so
Yeah, and that said, in terms of location, there are tenders out in several geographic locations in North America. You have several in the North Sea, and Namibia has become a hotspot as well, and you see Petrobras also requiring more rigs. You have recently seen two North Sea rigs going down to Australia.
conversations about work for those vessels and really how a charter is looking at crude and product tankers right now? Yeah I think you know looking at the two prototype you are mentioning there they are the two charter to P66
I think they are very happy with the vessels, they fit very well in their program as we understand. And also, you know, the charter, optional charter rates and the charter rate they're on today is way under the spot market today. So if you ask anyone circling now, you know, you wouldn't hesitate to...
Thank you.
Thank you for your question. We are now taking the next question.
Please stand by.
And the next question from Richard for Castellal Capital, please go ahead. Your line is open.
Richard Damon, your line is open.
Richard Damon, your line is open. Um th-
Good morning, good afternoon. I want to commend you on the buyback. Given that there's significant cognitive dissonance regarding..
the stock price and the outlook for the company. It's really, SFL is in the best shape it's been both in chartering operations and financing since I started following SFL and SFL.
the company in 2014. And I wondered if you could provide some color on how you visualize deploying the buyback now that it's been approved. And I have one more question.
Thank you Richard and thanks for your speaking to the choir here obviously. Now we think that having multiple tools and the investor call it or value enhancement the toolbox is good for the company. As you know we've had sort of dividend reinvestment plans and ATM.
call it optionality, sort of in that toolbox that we have used, you know, rarely sparingly, but we have used it in the past. We just renewed that now. And we believe that also having share repurchase optionality as part of our, I would say capital allocation strategy.
you know, is wise. We cannot give you sort of specific numbers for how much of that we will utilize, if any, I mean that we cannot disclose, but clearly, you know, we have seen the share price coming down in a market where we think the underlying, you know, for, you know, call it value.
more like a normal sort of one of those bare-bought charters that you know maybe we could have done some years ago you know the charterer would have kept that all that value. Instead we own the we own these vessels and we keep that residual value which we think is much better for our stakeholders.
The same thing with the drilling rig Hercules that we spent some time on here on the call. We think that the market dynamics there is very interesting. Of course it's all about timing. It's a very expensive asset. The SPS process that we are going through now is of course very expensive for us.
We still believe that this will be a very, you know, this could really contribute to you know, earnings per share, you know, from later in the year and onwards.
So we see there is softness in the share price, having opportunity to buy back from time to time could enhance value, long-term value for our stakeholders.
So I hope that was vague enough but precise enough for you, Richard. Absolutely. And the second question is, you know, as you look over shipping markets and you know, you're
you decide where you want to allocate capital, what do you think are the most interesting areas today?
Yeah, it's a tricky question. I mean, we look at market opportunities across the board, you know, across all these segments.
And we see opportunities everywhere but given where the segments are in their cycle you would structure the deals differently. So tanker market for instance had come up quite rapidly with values which means that you know the deal we would do a year, year and a half ago.
where we would accept effectively a lower rate than a deal, but with more optionality on the upside, now we would probably look more for fixed rate and to ensure that we take it down to a more mid-level, depreciated market value at the end of the charter period.
At the same time, we see an underlying...
value, I would say the underlying, you know, the floor air is coming up because you know there is a reduced the shipbuilding capacity out there and the values measured in dollars are coming up both new building prices and also second-hand prices now over time. So that means that
what you pay now maybe may have a, you know, you could say call it an inflation hedge in itself, owning a maritime asset out there. So that is mitigating some of that risk that you would take on if you invest a little higher in the cycle than our preference.
So I would say it's more down to structuring. We look at deals now on the tanker side. We look at deals You know on the rival side we look also in the container segment. Although of course there we are quite careful And you know the car carrier market has been quite interesting
over the last two years. So, across the board, but we're also patient, so we don't feel that we need to invest a certain amount every single quarter. It's all about finding the right deals and deploying the capital when we think that the Dombics are right for us and our stakeholders.
which means that maybe a quarter or two we won't invest but then when we see the right deal we can invest a lot more. So that is the balance. And then also back to the share repurchase program, having that also then as a tool for capital allocation.
hopefully will benefit shareholders long term.
hopefully will benefit the benefit shareholders long term. Thank you for your question.
We are now taking the next question. Please stand by.
And the next question from Clement Mullins from Value Investor H. Please go ahead. Hi, thank you for taking my questions. I want to start with a modeling question about the Hercules.
You've lined up two strong short-term contracts and I was wondering, do mobilization costs come on top of the contracted revenues you mentioned on the press releases? The mobilization contract is a part of the contract amount mentioned correctly.
Yeah, depends on the day to equate. But yeah, it becomes basically have a certain days that we calculate based on certain mobilization and demob
Alright, that's helpful. After recent disposals on the tankers page, you've greatly reduced your overall spot exposure but you still own some bulkers threatening on spot. How should we think about those going forward? Are they non-core or are they still an important part of your fleet?
That's a good question. I would say any asset, I would say, you know, in our shop, anything is for sale at the right price if we think that it's beneficial for shareholders. But generally, I would say that those vessels are trading in the market.
them and you know and they generate good cash flow and certainly good return on invested capital but whether or not we may sell them at some point you know that that we cannot say there's no they're definitely not identified and defined as a sales candidate
or being marketed as such in the market.
But if you have a lot of cash and want to invest, I mean, we would be happy to entertain an offer by you. All right, that makes sense. Thank you for taking my questions. Thank you. You're welcome.
But if you have a lot of cash and want to invest, we would be happy to entertain an offer by you. All right, that makes sense. Thank you for taking my questions. Thank you. You're welcome. Thank you for your question.
There are no further questions at the moment. I will hand back the conference for closing remarks.
Thank you. Then I would like to thank everyone for participating in the conference call. And if you have any follow-up questions, 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.
Welcome to the conference for today. Thank you for participating. You may hold this connect.
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