SFL Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 17, 2023

There are 8 speakers on the call.

Operator

Welcome to SFL's Second Quarter 2023 Conference Call. My name is Marius Furuly, and I'm Vice President for Investor Relations in SFL. We have a new format for the conference call this time using Zoom, and I hope this will be both as informative as usual and easier to navigate afterwards for you. Our CEO, Uli Hakir, will start the call by briefly going through the highlights of the quarter. Following that, our Chief Operating Officer, Trim Shirley, will comment on vessel performance matters before our CFO, Aksel Olesen, will take us through the financials.

Operator

The call will be concluded by opening up for questions, and I will explain the procedure to do this before the Q and A session. Before we begin our presentation, I would like to note that this conference call will contain forward looking statements within the meaning of the U. S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates or similar expressions are intended to identify these forward looking statements.

Operator

Forward looking statements are not guarantees of Future Performance. These statements are based on our current plans and expectations and are inherently subject to risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward looking statements. Important factors that could cause actual results to differ include, but are not limited to, Conditions in the Shipping, Offshore and Credit Markets. You should therefore not place undue reliance on these forward looking statements. Please refer to our filings within the Securities and Exchange Commission for a more detailed discussion of our risks and uncertainties, which may have a direct bearing on our operating results and our financial condition.

Operator

Then I will leave the word over to our CEO, Ulya Flakir with highlights for the Q2. Thank you, Marius.

Speaker 1

The total charter revenues were $4,000,000 in the quarter, which were down from the previous quarter primarily due to the sale of 4 spot threaded tankers earlier this year. Over the last 10 years, we have changed the business model from a maritime leasing company to maritime infrastructure with long term time charters to end users. Only around 9% of our charter revenues were from 7 bulkers and the container vessels employed on short term charters and in the spot market. The EBITDA equivalent cash flow in the quarter was approximately $109,000,000 in line with the previous quarter. And over the last 12 months, the EBITDA equivalent has been $480,000,000 The net income came in at around $17,000,000 in the quarter or $0.13 per share.

Speaker 1

The net income continues to be impacted by the drilling rig Hercules, which had no revenues in the 2nd quarter, but with full operating expenses while finalizing its comprehensive special survey or SPS and upgrades. The SPS was finalized in mid June and we then started the mobilization to Canada. We have been paid the mobilization fee from Exxon for the transit, But due to U. S. GAAP accounting rules, all of this will be recognized in the Q3 together with the mobilization costs.

Speaker 1

There was also a $6,000,000 gain in the quarter relating to sale of the last spot traded Suezmax tanker. This is our 78th quarterly dividend and over the years we have paid more than $2,600,000,000 in total and closing in on $30 per share.

Speaker 2

And we

Speaker 1

have a robust charter backlog supporting continued dividend capacity going forward. The announced dividend of $0.24 per share is in line with the previous quarter We represent a very strong dividend yield at current share price levels. Our fixed rate backlog continued to increase and stands at approximately $3,600,000,000 from owned and managed vessels after recent charters. This provides continued cash flow visibility going forward with significant additional cash flow from the drilling rig Hercules and the new build car carriers from the Q3 onwards. And importantly, the back book 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.

Speaker 1

The SPS and upgrade work on a harsh environment, heavy submersible Hercules, was completed in mid June and the rig then moved under its own power to Canada to commence a contract with ExxonMobil Canada to drill one well which started mid July. The duration is estimated to approximately 135 days, including mobilization to and from Canada, and the contract has an estimated value of $50,000,000 implying a day rate of approximately $375,000 per day for the period. Thereafter, the rig moved to Namibia and commenced a contract with a subsidiary of Galp and Agia for 2 wells plus an optional well testing. Excluding optional days, the duration will be approximately 115 days, including mobilization, with an estimated contract Value of another $50,000,000 implying a day rate of approximately $435,000 per day for that period. After Namibia, the rig will move back to Canada to commence their recently announced contract with a subsidiary of Equinor.

Speaker 1

The contract is from one well plus one optional well. The duration for the firm contract period is approximately 200 days, including transit to and from Canada, implying a day rate of approximately $520,000 per day for the period. The rig will then be opened for new contracts from the Q4 2024 onwards. The secured backlog on the Hercules is now in excess of $200,000,000 and we estimate approximately $100,000,000 EBITDA from the rig over the next 12 months. This rig is only one of only a handful harsh environment ultra deepwater semisubmersible rigs available.

Speaker 1

And market analysts are positive to market prospects based on recent tender activity and the tight supply demand balance. The harsh market prospects into 2025 is particularly promising, And we now see day rates in excess of $500,000 per day as evidenced by our recently announced contract with Equinor for next year. This is up 50% from last year and most of that goes straight to the bottom line. And we continue to renew our fleet and divest the world of tankers. We sold 4 tankers traded in the spot market earlier this year, and we have now sold the Landbridge Wisdom, which is the only remaining bareboat charter tanker in our fleet.

Speaker 1

This is a VLCC on a relatively low bareboat charter rate and the charterer exercised a fixed price purchase option a short while ago, where we will sell the vessel back to them later in August. The net cash proceeds is estimated to approximately $10,000,000 and book gain in the Q3 is estimated to around $2,000,000 In May, the Board of Directors has authorized the repurchase of up to an aggregate of $100,000,000 of SFL shares. So far, around 1 point 1,000,000 shares have been repurchased at an average cost of $9.27 per share or just over 10% of the authorized amount and there is $90,000,000 remaining. Further purchases may be made at your discretion in the form of open market repurchase programs, privately negotiated transactions, accelerated share repurchase programs 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 our shareholders and other factors.

Speaker 1

We 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 our common shares. This fiber program is valid until June 30, 2024. And with that, I will give the word over to our Chief Operating Officer, Trim Schirle.

Speaker 3

Thank you, Ole. Over the years, we have changed both fleet composition and structure, and we now have 73 maritime assets in our portfolio, and our backlog from owned and managed shipping assets stands at $3,600,000,000 The current fleet is made up of 15 dry bulk vessels, 36 container ships, 30 tankers, 2 drilling rigs and 7 car carriers where 3 are on the water and 4 are under construction in China. The new buildings are scheduled for delivery over the next 10 months starting in September. We have evolved from having a single Asset class chartered to 1 single customer to a diversified fleet and multiple counterparties. And the fleet composition has varied from originally 100 and tankers via majority offshore assets 10 years ago to container vessels now being the largest segment with just under 50% of the backlog.

Speaker 3

We are now a maritime infrastructure company. Most of our vessels are on long term charters that we have over the last 8 to 10 years completely transformed the company's operating model and I've moved away from finance type bareboat chargers and instead assumed full operating exposure, which makes us relevant for large industrial end users like, for example, Volkswagen, Maersk, Exxon and others. In the Q2, 92% of charter revenues from all assets came from time charter contracts and only 8% from bareboats or dry leases. In addition to fixed rate charter revenues, We have 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 $25,000,000 Out of the current 73 vessels, we have 13 non variable type contracts and 60 on time charter and spot trading.

Speaker 3

Our operation is quite complex with vessels across multiple sectors. We have our own commercial operation out of Oslo and Operational Management out of Singapore and Stavanger. Our OpEx philosophy is to continuously invest in our fleet to optimize the vessel's performance and maintain a high level of service for our customers. This includes investing to minimize oil fire as well as investments to increase cargo carrying capacity and reducing energy consumption. This has become increasingly important with the implementation of IMO carbon intensity indicators, which will impact vessels' operational profile, including routing and speed.

Speaker 3

In Q2, we had a total of over 6,000 operating days, defined as calendar daytechnical off hire or off hire for dry docking. Our overall utilization across the fleet It's 99.4% in Q2, a number we are continuously striving to maintain as high as possible. The charter revenue from our fleet was $174,000,000 in Q2 and our OpEx in the quarter was $38,000,000 One of the key metrics for SFL is the reduction of carbon emissions by improving our fleet weighted average AER or annual efficiency ratio. AER as a carbon intensity indicator is a measure of how carbon intensive our fleet is by The emissions per actual capacity and distance sales. By the Marpol convention, IMO have implemented requirements for reducing carbon intensity of all ships larger than 5,000 gross tons from 2023 onwards.

Speaker 3

The requirement to obtain an acceptable CII rating will be gradually structure each year towards 2,030. Such requirements can either be met by fleet renewal, increased efficiency of existing fleet or a combination of both. Although CAI compliance is certainly challenging, SFL is well positioned to manage IMO's trajectory towards 2030. As part of our fleet renewal program, we have 4 LNG dual fuel Car carriers under construction in China that when entering into service will be among the most modern and efficient ships in the car carrier market. On the energy efficiency front, we have carried out an investment program for all vessels in our fleet, including energy saving devices and Technology to capture and analyze data from onboard sensors for real time performance management and voyage optimization.

Speaker 3

Furthermore, we are cooperating closely with several of our key charterers on further vessel upgrades. The scope includes exhaust gas scrubbers, Cargo Intake Boost, hull modifications, new propellers and propeller fixtures as well as enhanced antifouling systems. We also collaborate with Key Chartres on data integration for more optimal weather routing and performance management. In addition to reducing carbon emissions, we believe these investments will make our vessels more attractive in the market when the vessels are either up for redelivery of our potential charter extensions. And with that, I will give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.

Speaker 3

Thank you, Tim.

Speaker 2

On this slide, we show a pro form a illustration of cash flows for the 2nd quarter. Please note that this is only a guideline to assess the company's performance, and it's not in accordance with U. S. GAAP and also net of extraordinary and noncash items. The company generated cash flow gross charter hire of approximately SEK 174,000,000 in the 2nd quarter, including approximately SEK 2,200,000 of profit share, We're approximately 92% of the revenue coming from our fixed chart rate backlog, which currently stands at SEK 3,600,000,000 providing us a strong visibility in the cash flow going forward.

Speaker 2

In the Q2, the container fleet generated gross charter hire of approximately SEK 90,000,000, including approximately SEK 2,000,000 in profit share related to fuel savings on 7 of the large container vessels. Our Tanki fleet generated DKK35 1,000,000 in gross charter hire during the Q2 compared to approximately DKK47 1,000,000 in the previous quarter. Part of the high from our vessels during the spot market in the Q2 was 2,200,000 compared to 10,000,000 in the Q1 following the sale and delivery of the 3 remaining for vessels during the Q2. Consequently, we do not expect any contribution from tankers trading in the spot market from Q3 onwards as all our remaining 13 tankers are employed on long term contracts with high quality charters. The company has 15 dry bulk carriers of which 8 were employed on long term charters during the quarter.

Speaker 2

The vessels generated approximately SEK 24,000,000 in gross charter hire in the 2nd quarter. 7 of these vessels were employed in the spot and short term market and contributed approximately $7,200,000 in charter hire during the quarter compared at $4,600,000 in the previous quarter. SFL owns 2 harsh environment drilling rigs, the Checkup rig Liones and the semasubmersible rig, Hercules. The lines is currently on a long term contract with ConocoPhillips Scandinavia until the end of 2028. During the Q2, the rig generated approximately $19,000,000 in contract revenues, in line with the Q1.

Speaker 2

As in the Q1, we recorded operating expenses on Hercules, which were approximately 7,000,000 Furthermore, there has been no revenue from the Hercules during the quarter due to special periodic survey and upgrades, which were completed in mid June before the rig mobilized to Canada to commence the drilling contract with ExOne Canada. Although the Hercules commenced mobilization towards Canada in mid June, we recorded no revenue in the Q2 due to U. S. GAAP accounting standards for drilling service contracts, which recognize revenue only from the drilling commencement date. Accordingly, mobilization and demobilization revenue and cost reduction contracts will therefore be amortized over drilling days in the Q3 and recorded in the Q3 P and L.

Speaker 2

And finally, our 3 car carriers generated a gross charter hire of approximately $6,000,000 during the Q2, including approximately $200,000 in profit share related to fuel savings on one of the vessels. Our operating and G and A expenses for the quarter for SEK 68,000,000 compared to SEK 75,000,000 in the previous quarter. This summarizes to an adjusted EBITDA of approximately SEK 109,000,000 in the 2nd quarter compared to SEK 110,000,000 in the previous quarter. We then move on to the profit and loss statement as reported under U. S.

Speaker 2

GAAP. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. And as our business strategy focuses on long term charter contracts, A large part of our activities are classified as capital leasing. Therefore, a significant portion of our charter revenues are excluded from used 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 accounting purposes.

Speaker 2

So the 2nd quarter report total operating revenues according to U. S. GAAP of approximately €165,000,000 which is less than approximately $174,000,000 of charter hire actually received for the reasons just mentioned. During the quarter, the company recorded profit share income of approximately $2,200,000

Speaker 1

from fuel savings from some of

Speaker 2

our large container vessels and a car carrier. And while we recorded nearly a full quarter of operating expense on Hercules, we did not record any revenue on the Rig Duties temporary yard sale. And as just mentioned, revenue from the Hercules reduced U. S. GAAP accounting standards we recognized only from the drilling commencement date and has been reflected in our P and L in the Q3.

Speaker 2

Furthermore, the net was also impacted by nonrecurring noncash items, including a gain from the sale of the Suezmax tanker Eurbite of approximately SEK 6,400,000. A net positive mark to market effect of SEK 1,900,000 an active mark to market effect from ex investments of SEK 1,000,000 and a decrease of SEK 200,000 on credit loss provisions. So overall and according to U. S. GAAP, the company reported a net profit of approximately SEK 17,000,000 or SEK0.13 per share.

Speaker 2

While reporting on the transitional quarter, it's worthwhile to mention that we expect revenue to increase from Q3 onwards as we will record First quarter of revenue from the Hercules rig following the commencement of the Exxon contract in July. Also, We expect revenue effect from our 4 car carriers new railings to be delivered during the next three quarters. In addition, the new 3 year Starter for our 2 car carriers, Compulsor and Conductor, will commence in Q4 and Q1. We estimate EBITDA from these vessels to be approximately SEK 47,000,000 per year, Significant increase in existing contracts, which was approximately SEK 9,000,000 per year. Moving on to the balance sheet.

Speaker 2

At quarter end, SFL had approximately SEK 201,000,000 of cash and cash equivalents. Furthermore, the company on multiple securities approximately SEK5,900,000 based on market prices at the end of the quarter. In June, Svelte was notified about the purchase of Nona Vilsi's Johan Berber Charter with redelivery that took place at the end of 'forty six. A SEK 10,000,000 positive cash effect is expected after repayment of The debt relating to the vessel with a corresponding book gain of approximately NOK 2,000,000 to be recorded in the Q3. In May, the company announced a SEK 100,000,000 share buyback program.

Speaker 2

So far, the company has acquired approximately 1,100,000 shares at an average price of approximately $9.27 per share. During the quarter, SFL refinanced the drilling rigs at Hercules and Leinz in 2 separate loan facilities with SEK 150,000,000 per range. The refinanced Hercules and Leinz loans have matured in the Q4 of 25

Speaker 3

and in

Speaker 2

the Q2 of 20 26 respectively. Furthermore, the company arranged 2 oil costs for 2 existing vessels, the Car Carrier Agency and the container missile Maersk Pallefas. Financiences were secured at very attractive rates with matching maturities that match the long term chartering contracts and had a net positive cash flow effect of more than SEK 80,000,000 in the second quarter as the vessels were debt free. The outstanding capital expenditure of NOK 194,000,000 on our 4 car carriers under construction, of which the first vessel This is expected to be delivered during the Q3 as we secured to YOLCO arrangements. And during the Q2, We drew down SEK 33,000,000 on a pre delivery facility with respect to the 2 lost car carriers under construction.

Speaker 2

The remaining CapEx will be paid for special periodic Furuly and our press on the Hercules, which now is completed, will be funded with cash on hand. And the same goes for the outstanding amount of approximately SEK 48,000,000 of the NOK bond maturing in September. So based on the Q2 numbers, the company's book to equity ratio for approximately 27.6%. Then to conclude, The Board has declared a cash dividend of $0.24 per share for the quarter. This represents a dividend yield of approximately 9% based on the closing share price yesterday.

Speaker 2

In May, the company announced $100,000,000 share buyback. And so far, the company has acquired approximately 1,400,000 shares for a price of approximately $9.27 per share. Our fixed hardwood backlog currently stands at SEK 3,600,000,000 which provides us with strong stability on the cash flow going forward. The latest financing facility is concluded. The company's new building and capital expenditure program is now fully financed.

Speaker 2

Materially all of the short term debt is refinanced New Long Term Loans. In summary, SFL has secured new financing arrangements so far in 2023 in excess of 1 $1,000,000,000 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, the recent contract awards for 2 car carriers on contracts with Volkswagen with commencement in Q4 and Q1, The estimated EBITDA from these vessels is approximately SEK 47,000,000 per year, a significant increase from existing contracts, which is approximately SEK 9,000,000 per year. Finally, we announced a new contract award for harsh and wind semisubmersible drilling in Hercules confirming a tightening supplydemand balance and a strong market outlook, which is now materializing in attractive day rates and a strong cash flow generation. And with that, we conclude the presentation and move on to the Q and A session.

Operator

Thank you, Axel. We will now open up for a question and answer session. For those of you who are Following this presentation through Zoom, please use the raise hand function to ask a question. When your name is called out, Please unmute your speaker to ask your question. Thank you.

Operator

And we will have our first Question from Richard Diamond. Please unmute your speaker to ask your question.

Speaker 4

Yes. Good Afternoon, everyone. Given the lack of shipyard capacity and rising ship values, Is it fair to assume that purchase options in general will represent in the future Significant value to SFL shareholders?

Speaker 1

Well, yes, because with the newbuilding prices coming up, they're very substantial, both on the back of the full order book at the shipyards, where they now also start to actually make a little bit of profit instead of losing a lot of money as they used to do. You also have inflation in both raw material costs that goes into building the ship and, of course, labor building it, which means that when the ownership typically secondhand values over time will have a it will be linked to newbuilding prices. So if we had sort of the old model where we were just sort of a financial leasing provider in the shipping space, We would typically have to give away purchase options in order to do deals. That's what most people do when they are in that game. And then, of course, there is a higher probability of those purchase options being exercised and therefore called away from us.

Speaker 1

So the good example here we think is to assist in car carriers we have. If they have been on 1 or more financial lease, The charter would have exercised those purchase options because but instead now we can recharter them at a much higher rate than we had in the first charters. And that is of course goes straight to the shareholders. So I think rising newbuilding prices is definitely benefiting existing shareholders.

Speaker 3

Thank you.

Operator

Thank you, Richard. We will take our next question from Clement Molins. Please unmute your speaker to ask your question.

Speaker 5

Hi, Oliver and team. Thank you for taking my questions. I wanted to start by asking about the West Linus, which is employed on our contract earning at market adjusted rate, which if I remember correctly is adjusted semiannually. How should we think about the vessels contribution going forward given the strengthening market environment?

Speaker 2

Thank you. So that is correct. So the line is on our contract with Konakofillets until the end of 2028 on the equities field on the northern side in the North Sea. As you correctly point out, The contract is adjusted semiannually, basically end of April and end of October. Day rate is around just shy of 200,000 barrels per day.

Speaker 2

For the time being that market is still It's somewhat kind of neutral. So also going forward at least we expect the day to stay in that region for the time being. But we also expect over time activity on Norwegian content of sales to increase and that could potentially then reflect in the high contribution from the region.

Speaker 5

Thanks for the color. I also wanted to ask About the carrier carriers to be delivered over the next year, could you provide some commentary on the cash flows those vessels are expected to generate? And secondly, is the incremental debt to be drawn down to finance the vessels hedged?

Speaker 3

So the cash contribution from New Berlin is It's considered substantial, I would say, that especially for the first two vessels coming, where we will have Initial voyage there, but I think

Speaker 1

Well, yes, I mean, we do not disclose sort of the contribution per vessel on an individual basis. So as Trond was pointing out, first, as that you deliver, first, we will have a voyage from Asia to Europe, where the vessels will then be delivered to Volkswagen. The spot market for car carriers right now is super hot. So we will have a very hopefully very significant contribution on the voyage from Asia to Europe. The market It is currently quoted well in excess of $100,000 per day.

Speaker 1

So with an OpEx of around $6,000 per day for similar foot buses like this, Needless to say, there's a lot of cash flow coming there. And then they will commence the 10 year charters at the pre agreed charter rates. And that's also when the new charter rate will kick in on the existing vessels. So we have several sort of elements coming in, but we haven't provided full breakdown of that. But what we do have and have and give everyone access to who wants it is our full charter backlog where you can back out effectively the charter rates that are being generated by the vessels also including the new builds.

Operator

Thanks,

Speaker 2

Sperte. So basically, if you look at our strategies then to fix out these vessels on long term charters with Conoco, Call it a lot in returns on deck. This also the contribution will be accordingly. And for the financing, of course, that is fully financed. I will be drawn down on the 2 first ones in connection with pre delivery.

Speaker 2

It's in and the financing is form of Japanese operating leases at very attractive terms. I do not go into exact details on that. But of course, the margin provided is extremely attractive. The blended financing is going then to be fixed upon delivery. And all in, considering kind of the long dated financing, Yes, it's far more competitive than we find in a traditional banking market.

Speaker 5

Makes sense. Final question from me. Looking at the second half of the year and into 2024, it's clear that your cash flow will improve markedly. How should we think about potential dividend raises going forward? And secondly, how do you plan to balance that saw potential dividend raises with share repurchases.

Speaker 1

Yes. I mean we see of course both as shareholder returning capital effectively to shareholders direct and indirect. Our aim is of course And what everything we do is focused around building this distribution capacity to shareholders. But we never communicate or I mean never give sort of guidance on what the dividend will be next quarter or quarters after that. But typically When we've seen in the past, usually, when we increase dividends, we manage to stay there.

Speaker 1

And also the Board, an important piece of, I'll call it the Board deliberations around the dividend every quarter is the long term sustainability of the dividend level sort of being discussed. You're correct. 3rd quarter onwards will have significantly more cash flow hopefully than 1st and second quarter. That's primarily due to one rig being out of service with costs being incurred and paid And that rig is now back working and then we get the new bills. But we cannot guide you specifically on What the dividend might be next quarter and after nor will we communicate specifically how much How many shares we will buy back?

Speaker 1

We have bought back just over 1,000,000 shares, so around 1% of the shareholding. And we have an authorization to buy more than that from the Board. And that will be communicated every quarter as we report or quarterly numbers going forward.

Speaker 5

Makes sense. That's all for me. Thank you for taking my questions. Thank you.

Operator

Thank you, Clement. Our next question comes from Arif Hamid. Please unmute.

Speaker 6

Yes. Hello. First, I'd like to compliment the management team on continuing to do a good job. I have two questions and requests. Okay.

Speaker 6

The first question is, you've reduced some inventory and certainly have cash to reinvest. What areas appear Attractive now both for new builds and for used assets.

Speaker 1

Yes. We are looking I mean we are You guys have called it segment agnostics. So we focus across the board in the maritime space and which is also reflected in our So you don't mix. We look at transaction opportunities in all these segments in parallel. And just as an example, last year we screened and properly modeled out transactions with an aggregate value of around $23,000,000,000 And we ended up doing only a small fraction of that.

Speaker 1

That's a coincidence. So there are many reasons for why we you don't do a deal. It's got to be the right counterparty with the right asset. We are very mindful of sort of the of new fuel and what we say where that is Driving and what kind of assets we want to own long term. The financing we think is available for the specific asset a specific charter, etcetera.

Speaker 1

So that and of course, we are greedy and we want proper returns as we do deals. If we hadn't been if we hadn't if we were if we would accept really low returns, we could have done, of course, a lot, lot more. So all this comes together and it's all about trying to deliver long term value for shareholders. And We don't guide on specific allocation of capital between segments. So over time, you've seen that And sometimes we were investing more in the energy space and other times over the history of the company we have invested more on the liner side Specifically containerships and also car carriers.

Speaker 1

So we hope to build the business and but Exactly which segment, we will we cannot say. I would say maybe to round out that is that Some of the segments, there are relatively fewer long term chartering opportunities. For instance, on the tanker side, on the dry bulk side, they are not that Frequent to see long term orders, which we prefer because that gives us the cash flow visibility. But we find deals there as well As you can see from our portfolio. So we look across the board.

Speaker 6

Okay. So there's no specific area that looks like a good trend right now? No, I think when you talk

Speaker 1

to shipping analysts, they typically focus on just the near term, call it market cycle. And there of course you have Like the tanker market right now near term, which has sort of a record low order book, which is in many people's sort of intention right now. But of course, when we do a deal and say we look for 10 year charters, you have to look through the near term cycles.

Speaker 3

So it goes to 10 years,

Speaker 1

you can, in theory, build as Many shifts as you want in any specific segment. So that is more important to look for the right technology, the right counterparty and the right structure where we And up with a, call it, a residual, call it, asset exposure or value that we think makes sense at the end of the charter in addition to taking in the counterparty risk etcetera in the charter. And I would say the way we have, call it, Read on our business model going from a more financial oriented company where we did a lot of beer boat and beer boat like structures. That is typically done with intermediaries who then provide who then give service to the end users. So Changing that to a more integrated maritime logistics setup Means that we deal more directly with end users and we think that also gives us better risk reward operationally and over time.

Speaker 6

Okay. Well, that's selectivity in your acquisitions. That's part of the reason for my compliment at the beginning. Okay. My next question is, you talk about income cash flow increasing substantially in the next couple of quarters.

Speaker 6

Can you make an estimate of how big a jump you see the in the operating income?

Speaker 2

I'm not I think we tried to guide some I don't really like to be really too specific on quarter by quarter in advance. I think what you'll see in Q3 That will see contribution from the Hercules in particular as regard the accounting for that rig will be according to Service Contracts. We basically take that over the actually kind of start the commencement of the drilling, just the drilling period, including mobilization, demobilization also the costs. That's also a bit bumpy quarter to quarter going forward. Then in Q4, you'll see basically the 1st car carriers contribution coming in, same in Q1.

Speaker 2

So it It's going to be kind of building up I think into Q1 and then Q2 you'll see the full contribution from the rig and the car carriers. So it looks promising basically. I mean everything is locked in. There's no more spot contribution on the tankers, somewhat on the drybulk. But that's kind of marginal, but I think it looks solid.

Speaker 1

And if you know the Based on the drilling rig, I mean, the first charter is around $375,000 or so per day. And then the recently announced charter is in TESO 500. And most of that goes straight to the bottom line. So that will be a good effect. But that, of course, is over time, I mean, well into next year.

Speaker 6

Okay. That all sounds great. So what it sounds like is, in the next quarter, there might be a modest jump, but this will steadily increase. And by the middle of We might be looking a lot better. Is that right?

Speaker 2

I think it's said we'll be building up step by step. But I

Speaker 1

think it's fair to say that I think Q3 will be Significantly off from the Q2, because in the Q2, we had that drilling rig out of service, so SCIMA revenues, but then with costs.

Speaker 6

So, you have some costs you're sitting on for the next quarter, right?

Speaker 1

Oh, yes. So, we still have some costs Into next quarter, but then we also have the revenues from the rate.

Speaker 6

Yes, I know, but that's what I'm saying is you have costs that you couldn't book in this quarter, so you're going to book them next So the revenues won't be as good.

Speaker 2

Yes. It's only 14 approximately 14, 15 days from the 2nd quarter that were being transferred into the 3rd quarter, so not too much.

Speaker 6

Okay. That all sounds great. Okay. I have one request, and that is, I know when you do a deal, you don't usually disclose the details, but what would be very helpful Would be to know what the change in the cash position of the company is once the deal has closed or what the new cash position of the company is. So if you could consider giving that information out when you announce a deal, that would be helpful.

Speaker 2

Absolutely. I think what we do today is we do it on a quarterly basis. And I think one of our strengths as a company is to turn around quickly and close transactions. And sometimes We use cash from balance sheet just to close out the transaction. And then in order to find optimal and the best possibly price financing.

Speaker 2

We do the financing later. So that will be quite accurate actually to report at that close thing. So I think We try to be very kind of open on the quarterly basis, and I think that's I think what's feasible for a company like ESFL.

Speaker 6

Okay. Sounds very good. And what I just wanted to say is last time at last quarterly announcement or The sound was terrible and here on Zoom it's fine. So thank you very much for that. And thank you for taking my questions.

Speaker 3

Thank you, Yves. Thank you.

Operator

Thank you, Aris. Our next question comes from the line of Christian Wetherbee. Please unmute to ask your question.

Speaker 7

Yes. Hey, thanks guys. Thanks for taking the question. So I actually had a question on the container side. So curious To get a sense of what you're hearing from your customers just as it pertains to overall demand in the market, I know obviously charters are going Give you some insulation from fluctuations in the spot market, but just general thoughts on peak in terms of utilization of the vessels.

Speaker 7

And then anything that you can kind of think about in terms of that market, we've seen spot rates on some of the Transpac business begin to inflect a bit higher. I'm curious if there's any discussion of potential stabilization in that business over a longer term perspective or if you think this is a bit of a blip before we were to see More capacity come online out of the new building programs across the industry over the course of the next several quarters?

Speaker 3

It's difficult to be very precise on what chart we'll see Because but in our discussions and from the utilization of our fleet, we see that the utilization is high. There is no waiting on any of our ships. On the container side, all our charters are looking to invest in our ships together with us. And that has to do with the type of ships that we have as well. Of Of course, not all sizes are the same.

Speaker 3

But of course, in the sort of big feeders to large, such as sort of 10000 to 15000 TEU ships seems to be really the bread and butter for the lines. And So from our discussions, there is definitely no panic going sort of big worry that we hereabouts. Things seem to be they all seem to be looking forward, not And even if the rates the box rates have fallen, that is an issue. The volumes, at least from what we see here, are very healthy. And so I think what the container lines are looking at, I mean, they are not really so focused on ships.

Speaker 3

What they are focused on is logistics. And they are really they are not really Shipping companies anymore. So they are looking at lowest cost for container carriers and to get the carbon emissions and the costs down. And we believe that owners that can help them do that are in a good position. And that is becoming We think more and more important and especially from the likes of Marius and Hapag Lloyd that are big with us, we see that that's their focus really.

Speaker 7

Okay. That's very helpful. I appreciate the color and time. Thank you very much.

Operator

Thank you, Christian.

Speaker 6

I have one more question if I could briefly ask.

Operator

Jump in, Art.

Speaker 6

It has to do with a change in law in In Bermuda corporate law, I'm just wondering if that's going to affect the company at all.

Speaker 2

I assume you're referring to the OECD kind of global taxation or is it

Speaker 6

I read just recently that they're proposing a change. It could be what you just said, but I'm not sure. It's definitely about corporate taxation.

Speaker 2

Yes. No, sure. I think that's a global initiative and certain, call it, kind of thresholds To meet that, I don't think we are kind of at that threshold yet. I think many Shipping companies are also under different tonnage tax structures, so that's, of course, a possibility. And some of our fleet It's already under that in Cyprus.

Speaker 2

So management and the Board is evaluating and following that closely.

Speaker 6

Okay. Thank you.

Operator

Thank you again, Arif. As there are no further questions from the audience, I would like to thank everyone for participating in this conference call. If you have any follow-up questions to management, there are contact details in the press release or you can get in touch with us through the contact pages on our web page www.sodelcorp.com. Thank you very much.

Speaker 3

Thank you.

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Earnings Conference Call
SFL Q2 2023
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