Q3 2023 SFL Corporation Ltd Earnings Call
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 the wrong 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.
This includes switching from primarily a 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 into 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 four dual fuel car carrier new builds the vessel named Evan.
We will go on charter to Volkswagen group for 10 years together with assist the 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 billion and EBITDA per vessel over a period of only two months.
In addition to the new bills. We also have two existing vessels on charter to Volkswagen that have been extended for a corpus of Additionally, three 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 9500 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 <unk> share currently is 70%.
In the third quarter, we also fully repaid our Norwegian kroner denominated bond loan issued in 2018, where there was $48 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 depth 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 a harsh environment semi submersible Hercules and the first half of 'twenty to 'twenty three the rig is being in Canada and drilled a well for exxonmobil.
This was finalized in September and since then the rig is mobilized to Namibia with a stockholder in Las Palmas and is scheduled to start drilling for golf and the Gi in Namibia next week.
This is for two wells plus an optional well testing estimated to take around four months, including mobilization.
When we calculate average day rates. We include mobilization of the rig from less polymer 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.
Implying a day rate of approximately 435000 per day for the period.
After the <unk> of the rig will move back to Canada to commence a contract with <unk>. The contract is for one well plus one optional well.
And the duration for the firm contract period of six to seven months, including transit to and from Canada, implying a day rate of approximately $520000 per day for the period.
The rig will then be opened for new contracts from the fourth 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 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, Tim Shirting.
No.
Over the years, we have changed both fleet composition and structure and we are now in maritime infrastructure company with 73 maritime assets in our portfolio.
Backlog from owned and Mike shipping assets stands at $3 4 billion.
The current fleet is made up of 15 drybulk vessels.
Six container ships 13 tankers, two drilling rigs and seven car carriers.
Sure.
For our on the water and three are under construction in China.
The remaining new buildings are scheduled for delivery over the next seven months starting in November.
We have moved from having a single asset class charter to one single customer to a diversified fleet and multiple counterparties and the fleet composition has varied from originally 100% tankers Lamb majority offshore assets 10 years ago, two container vessels now being the largest segment with just under 50% of the backlog.
Most of our vessels on long term charters, but 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 assumed full operating exposure is makes us relevant for large industrial end users like Volkswagon, Maersk up alloyed and others.
In the third quarter and 94% of charter revenues from all assets came from time charter contracts and only 6% from bareboat or dry leases.
Okay.
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 audible, so as well as operational management out of Singapore and <unk>.
Our opex philosophy is to continuously invest in our fleet to optimize the vessel's performance and maintain a high level of service to our customers. This includes investing to minimize our fire as well as investments to increase cargo carrying capacity and reducing energy consumption.
Has become increasingly important with the implementation of IMO carbon intensity indicator, which will impact vessels operational profile, including routing and speed.
EPS is also another hot.
Issue, becoming a <unk>.
From from next year.
In Q3, we had a total of over 6300 operating days defined as calendar days less tasting goal of five <unk> dot and dry dockings.
Three vessels have been drydock in the quarter and our overall utilization across the shipping fleet was nine 9% in Q3 and 85% for the drilling rigs.
For the race as well explained operating days are days on rate or in transit covered by mobilization fees less days off hire days spent in port not on drilling rates.
One of the key ESG targets for <unk> is the reduction of carbon emissions in our fleet.
Such reduction can either be met by fleet renewal and more efficient ships and the green fuels increased efficiency of existing fleet or a combination of both.
And as part of our fleet renewal program, we have.
For LNG, a dual fuel carriers under construction in China of which one was delivered during the quarter. So three 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 hold firm with an asphalt 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 partnership LNG Bunkering.
In LNG mode, we expect a 25% lower carbon footprint per vehicle carried.
Compared to a standard six to 500 Cu conventional PCC.
Yeah.
The vessels are also fitted with the short connection for several emissions operation in port.
And in addition to being able to carry Evs. They will the ships will also be able to carry hydrogen fuel cell vehicles.
The first ship Amgen is on her first of all it from Asia to Europe under <unk> and she will be delivered to folks logging and about one week's time.
And with that I will give the word over to our CFO <unk> <unk>, who will take us through the financial highlights of the quarter.
Okay.
Thank you Tim.
On this slide showing our pro forma illustration of cash flows for the third quarter.
Please note that this is only a.
<unk> emphasis the Companys 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 and approximately 94% of the revenue coming from.
Our fixed charter rate backlog, which currently stands at $3 4 billion, providing us with strongest stability on our cash flows going forward.
In the third quarter and the container fleet generated gross charter hire of approximately $91 million, including approximately $2 6 million in profit share related to fuel savings on seven of our large container vessels.
During the quarter, we took delivery of the first of our four dual fuel and empty car carriers with four 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 fleet generated approximately $30 million in gross charter hire during the third quarter compared to approximate to certify a million previous quarter.
During the quarter two Suezmax tankers were acquired for a total of four to six days in connection with scheduled periodic dry dockings this cost or expense directly of our shipping fleet and opex for tankers in the quarters with therefore, a higher than normal.
The comp is 15 Drybulk car carriers build carriers, which are employed on long term charters during the quarter.
Our vessels generated approximately $20 million and gross charter hire in the third quarter.
Seven of these vessels were employed in the spot and short term market and contributed approximately $6 2 million and net charter hire during the quarter compared to approximately $7 2 million in the previous quarter.
<unk> loans too harsh environment drilling rigs, the jackup rig lines and a semi submersible rig <unk> during the third quarter of the rigs generated approximately $64 million and contract revenues compared to approximately $90 million in the second quarter.
While this is currently under long term contract to Conocophillips Scandinavia until the end of 10 to 28.
In the third quarter, the REIT generated approximately $16 6 million in contract revenues, which is down from the approximately $19 million in the second quarter <unk> was off hire for approximately 16 days relating to an unscheduled repair of the top drive.
Due to the repair works the Opex per rig was also $2 million higher than budgeted four during the quarter.
<unk> completed the drilling contract for Exxon Mobil in Canada in September and Thats now been mobilized media, which is expected to commence the contract with <unk>.
During the quarter the rig recorded approximately $48 million in contract revenues.
The mobilization fees paid by Exxonmobil and associated costs.
Recognize the actual drilling period pursuant to U S GAAP.
The same principle has been applied for demobilization 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 banking banking operation scheduled dry dockings and downtown and repair on the lines.
Some of our system adjusted EBITA 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 standpoint as reported under U S. GAAP.
As we have described in previous earnings calls our accounting statements are different from those of a traditional shipping company.
Unless our business strategy focuses on long term charter contracts a lot.
Part of our activities are classified as capital leasing.
Therefore, a significant portion of our charter revenues rescues from U S GAAP operating revenues.
This includes repayment of investment in sales type direct financing leases and leaseback assets and revenues from entities classified as investment in associates for accounting purposes.
Third quarter report total operating revenues according to U S. GAAP for proximity to owners Prime million. This is less than approximately $240 million of charter hire actually received for the reasons just mentioned.
During the quarter. The company recorded a profit share income of approximately $2 6 million from fuel savings on some of the large container vessels on the car carrier.
As previously mentioned the Hurricane 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 state of the VLCC down disputes with them for approximately $2 million.
Our net positive mark to market effect from stops approximately $2 3 million of positive mark to market effect from equity investments of 300000, a decrease of 200000 on credit loss provisions.
Due to corporate taxes on the tolling taxes in Canada. The company also recorded approximately $2 3 million of taxes in the third quarter related to the hurricane.
<unk> also expects to pay a similar types of customer, Texas inland media.
So overall and according to U S. GAAP the company reported a net profit of approximately 20 913 million or <unk> 23 per share compared to approximately $17 million for certain <unk> 10 per share in the previous quarter.
In terms of near term outlook, we expect global revenues for Hercules in fourth quarter due to a low mobilization periods from Canada, and let me Bill when a rig is due to commence the contracted golf and <unk>.
As mentioned previously revenue from the hurricane as well due to U S GAAP accounting standards.
<unk> has only from the drilling commencement date and has no recession fees will be allocated throughout in respective quarters of clearing operations.
For our core carriers revenues are set to increase asset <unk> new buildings delivering from Q4 to Q2 with a second vessel being delivered from the auto in China second half of November.
Pulling them following the handover towards fog in the first and second new building during Q4 and Q2, the <unk> contactor and the civil compulsory will continue the charters to Volkswagen for another two years with optional years with an estimated EBITDA contribution of $23 5 million.
The vessel per year.
Moving onto the balance sheet at quarter end, <unk> had approximately $180 million of cash and cash equivalents.
Furthermore, the content multiple securities approximately $6 2 million based on market prices at the end of the quarter.
During the quarter the company fully redeemed unlock bond with $49 million was outstanding with cash on balance sheet.
The outstanding capital expenditure of approximately $136 million from a three car carriers under construction has been fully financed by 194 million of net new Yorker financing yet the bedroom.
During the quarter the company Redelivered <unk> ambitious system pulling a declaration of a purchase option.
The sale of 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.
Based on Q3 numbers to compare the book equity ratio of approximately 28.
4%.
And then to conclude.
The Compton has delivered another strong quarter with growth in both revenues and EBITDA.
<unk> declared a <unk> 79 consecutive cash dividend to increase the dividend to <unk> 35 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.
We recently repaid.
Bonds with cash on balance sheet.
Furthermore, a three new buildings are fully financed with attractive long term financing, which will free up additional liquidity upon delivery.
Our fixed charter rate backlog currently stands at $3 4 billion, which which provides us with strong visibility on our cash flow going forward and finally with the Hercules now back in operation and delivery of new build and car carriers together with new contracts for existing vessels.
This strong revenue generation in the quarters to come assist also delivered a new charters commencing.
With that let me conclude the presentation and move on to the Q&A session.
Thank you I've said, we will now open up for a Q&A session for those of you who are following this presentation through Sue please use the raison function to ask a question.
When your name is called out placed on mute to speakers to ask your question. Thank you.
One.
Hey, guys.
Can you hear me.
Absolutely. Thank you.
Couldn't find the right hand.
Auctions, so I figured I'll just hop and this was correct for our mob Greg Lewis.
Yes, Hi, Greg.
I had a few questions I was hoping we can walk through.
It was good to see the.
The dividend increase.
And I guess two things one is <unk>.
As you think about managing.
Trajectory of the dividend over the next I don't know one to two years.
How should we think about balancing.
Potential dividend Mirage.
And and the drilling rigs just because.
It seems it's clearly a very cyclical industry and we're clearly in a strong part of the cycle and those assets look like they are in a probable of Hercules looks like it's going to be able to generate a lot of cash here over the next two to three years, but maybe not as it is.
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 herculean users as we retired track this over the next couple of years.
Yes, I appreciate that.
Hercules as you mentioned, we just spent quite a bit of money on that rig in the first and second quarter of the year and when it was out of service.
Now, it's it's really really only got started so the charter rates in Canada that was fixed.
More than a year ago.
So it was at a lower rate so that the charter rate there should be mounting now.
The asset is expected to start drilling in Namibia already next week.
The charter rate in Namibia is on.
On based on that if we include both mobilization to run from EMEA beyond the drilling rate should be well above the drilling rate, we had or the rate we had in Panama and Dan is going Baxter Tomo later next year for an even higher rate and in fact, you know that.
The drilling rate, we have on Hercules, it's the highest.
Trailing rate I would say in this HEICO two days. So this rig is a very capable unit and.
And customers are clearly willing to pay for the services.
Of nature that market is a shorter term charter market. So it's not this is not a market where you normally get sort of 10, a 10 15 year charters, it's typically shorter charters and we are deliberately not so keen on fixing it long term because we see this mark.
But 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 do they look for really long term charters on that unit I think if we were to look at long term charters for the unit you will you would have to you would have to.
<unk> at lower rates than what we are fixing it.
The current data so far so that's one asset of course, it's bill.
I will say, it's a big asset.
But also if you look at the history of that that drilling rate. I mean, this is a business of drilling that used to be on chartered procedural schedule ended up into chapter 11.
We were offered in the last round of very.
In our minds, a very or call it treatment and the restructuring we decided to take it back and I think.
I think we can be honest and say it's been a really good decision from from the company side to do that because returns. We've had on this right now with the rates. We see is spectacularly better than the alternative would have been but.
We've done that is that is the history on this happening 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 two vessels in the order of the four vessels and we bought another vessel.
And then we have this quite spectacular both you know the the.
Transportation like if you could call it that on two of the of these vessels.
Yeah, you know more.
More than 10% of construction cost just moving the vessel from Asia to Europe. So so you have a lot of other bits and pieces here Thats also generating a lot of cash flow and then we have the re chartering of the two older vessels to Volkswagen where are we you know high where we increased the dividend by <unk>.
Times, five compared to where it was originally.
Simply because we own those assets and we negotiated it down.
And Volkswagen seem to be quite happy with the service we provide them.
So there.
There is not the rig is one piece, but there are also other elements in our portfolio that is also adding and of course, our mindset is yes. Our principal objective nsfl is to return cash to shareholders. I mean, that's why we're here otherwise say there wouldn't be any pointed and having a company like <unk> if we don't.
If you don't really do that over time and you know it's been 79 quarters now in and we've been always made money operationally every single quarter based on our distribution. So I think yes, yes.
We are I think that we are really just at the starting point in our minds of where we are.
In terms of cash flow from from some of these assets.
So hopefully there is more.
There is more powerful dividend potential and also going forward, yes, Leland Super helpful. Thanks. Thank you for that 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 it in an asset.
As as as software scar sulfur has gone up.
Reds have gone up.
How has that changed the potential opportunities or assets al I E. I'm talking to some ship owners and they are looking at eight 9% or even a higher borrowing costs has that created more opportunities for assets.
He is the transactions team.
Busy year as we sit here in November relative to maybe where they were earlier this year or is that the market has been good for a couple of years and it's kind of it's kind of steady as she goes.
Yes, it's a good question I mean, if you go back to 'twenty, two we screened or didn't really work on more than $20 billion of deal potential deal flow.
And we ended up doing one.
Indiana for various reasons.
I think this year has been the volume has been lower and you know in aggregate.
And.
I think with the rising interest rate market. Its also I would say.
Way, we see it.
It's a time lag.
From where the underlying metrics on interest rates is one asset replacement cost is another.
And maybe to a certain degree operating expenses.
To the extent there has been you know call it a little inflation in those metrics. It takes a little time for that to filter through in and our customers' willingness to pay up for those services. So so so that's why I think you know and.
So in 'twenty three as Ben 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 this is going to pick up again.
But I.
I think you know the ones I mean, if you look at if you look at the ones who offer more our 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.
As there is relatively smaller but we have you know.
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 you know over 20 years now we've seen some cycle over the cycles over the year year or so so our focus is to do.
We do deals with strong counterparties and users.
Focus on getting the right yields dawn 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 logistic 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 that's the short short answer to that we are we are constantly screening deal opportunities. We are looking at opportunities we cannot communicate specifically what we what we look at but there are deals that could potentially be done, but we try.
To be this.
Discipline is going 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 we're willing to take on after a deal once the financing structure and maybe importantly, who is the counterparty is this <unk> is strong enough and and and and and then underlying.
Lying volatile market.
Is this cost of counterparty someone who can honor their obligation also in a down cycle because that's what we've seen over the years since that.
Uh huh.
Anybody can do a deal in an up cycle markdown to just pay a little more than the next guy the.
The problem is how do you manage the down cycles, and that's but that's I think that's something that.
We hope our history brings along is that you know.
Yes markets are volatile, but we managed through some pretty rough cycles and hopefully we're set up.
To do even better with cycles going forward.
Okay, Great and then I did just have one other question on the balance sheet.
I noticed we saw.
Yeah.
Yes.
Sequentially.
Some of the.
The long term lease liability went into.
Short term lease liability is that is that.
Is that just going to unwind or should we think about that being.
Either.
Renewed or extended.
Over the next call, but a lot of load coupled.
Demonstrates axle here. So I think you should look at that as well.
Like like our ordinary.
Additional debt.
On the vessels that there are always opportunities to basically roll this going forward as well we haven't finally concluded if we kind of do in New York or do that bit traditional bank financing, but both options are.
Likely psyche, just assume rolling that on the same level.
Okay perfect. Thank you for that thanks, everybody.
Thank you. Thank you.
What else are you. Following this presentation presume that raised some function and can be found on the reactions in the toolbar.
Who is next.
Next question will come from Richard Diamond with a major speaker.
Yes.
Great quarter, great job belting cash Wow.
<unk>.
You and the team have incredible deal flow at S. F al.
What do you say are the most interesting areas looking out to the fourth quarter and back share.
Yeah. Thanks, Thanks for that Richard.
And thanks for the kind words.
We are focusing our across the board our preference are for deals that.
Our I would say logistics sort of oriented I E, where we go in to a logistics chain with Counterparties.
So so car carriers for instance is a segment that we've been spending quite a bit of time on we've grown grown a lot in that segment.
We still think there could be interesting opportunities on the on the container side.
Yes, the market is volatile and yes.
Because I, it's not the Super cycle, we saw a year or two ago, but there is still underlying demand for transportation capacity and certainly with a modern high end assets. The more fuel efficient that is reducing both you know call. It. The you know the answer.
And you know the energy footprint or or emissions footprint per loaded box, you know where that where that matters and that's also where we.
Kevin concentrated our investments.
We are also seeing some opportunities on the on the tanker side.
So I would say is there are there are opportunities across the board here.
We the only the only segment you could say, we don't have in our portfolio that would be natural would be LNG in particular.
But the our dilemma there has been one it's sort of the.
You know 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, so, but so so but otherwise we are we are active across the board then looking opportunities and I think we have quite good access to deal flow.
Thank you.
Thank you.
Yes.
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 webpage Www Dot FFL Corp. Dot com. Thank you very much.
Okay.
Thanks.
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