SFL Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2024

There are 6 speakers on the call.

Operator

Hello, everyone, and welcome to SFL's Third Quarter 2024 Conference Call. My name is Espin Joassun. I'm Vice President of Investor Relations in SFL. Our CEO, Olej Achdakko, will start the call with an overview of the 3rd quarter highlights. Then our Chief Operating Officer, Trim Schoehler will comment on vessel performance matters followed by our CFO, Aksel Olesen, who will take us through the financials.

Operator

The conference call will be concluded by opening up for questions, and I will explain the procedure to do so prior to 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 risks and uncertainties, which may have a direct bearing on operating results and our financial condition.

Operator

Then I will leave the word over to our CEO, Uli Harka, with highlights for the Q3.

Speaker 1

Thank you, Aspen. We are now announcing our 83rd dividend and continue building our unique profile as a maritime infrastructure company with a diversified fleet. We reported revenues of more than $260,000,000 this quarter and the EBITDA equivalent cash flow in the quarter was approximately $167,000,000 which is significantly up from the 2nd quarter. Over the last 12 months, the EBITDA equivalent has been $580,000,000 The net income came in at around $45,000,000 in the quarter or $0.34 per share. And we had positive contributions relating to profit share on Capesize Bulkers and fuel cost savings were $4,200,000 in the quarter, offset by approximately $5,600,000 in negative non cash mark to market and one off items.

Speaker 1

Due to U. S. GAAP accounting rules, the revenue and expense in the quarter for the drilling rig Hercules also includes the mobilization period that started in the Q2. Our CFO, Axel Olesen will give more details on this when he goes through the numbers for the quarter. Our fixed rate backlog stands at approximately $4,700,000,000 and importantly 2 thirds of this is to customers with investment grade rating giving us a unique cash flow visibility.

Speaker 1

This backlog figure excludes revenues from the vessels trading in the short term market and also excludes revenues on the new dual fuel chemical carrier that will operate in the pool with stalled tankers. It also excludes future profit share optionality, which we have seen can contribute significantly to our net income. And in line with our commitment to return value to shareholders, we are paying a quarterly dividend of $0.27 per share or around 10% dividend yield. Most of our vessels are on long term charters and we have over the last 10 years completely transformed the company's operating model making us relevant for large end users like Maersk, Volkswagen Group and Vitol. We have been busy renewing and extended multiple existing charters and have also recently ordered 5 large container vessels in combination with 10 year time charters adding $1,200,000,000 in that transaction alone.

Speaker 1

In addition, we have taken delivery of 7 new vessels so far this year including 4 vessels during the Q3. We are also in the process of upgrading several other vessels and our Chief Operating Officer, Trim Schirley will talk more about this later. During the quarter, we raised another unsecured bond loan the 16th in a row. This was issued as a floating rate note in Norwegian kroner and we have swapped it to U. S.

Speaker 1

Dollars at approximately 6.45 percent fixed interest. This was primarily used to refinance a bond loan that was due to expire in early 2025. It has also been a busy quarter from a financing perspective where we have effectively addressed virtually all short term asset debt maturities matching funding with charter tenors. And with that, I will give the word over to our COO, Trim Shirley.

Speaker 2

Thank you, Ole. When including our newbuilding program as well as the 6 vessels delivered this year, we have 81 maritime assets in our portfolio and our backlog from owned and managed shipping assets stands at $4,700,000,000 The current fleet is made up of 15 dry bulk vessels, 39 container ships, 18 tankers, 7 car carriers and 2 drilling rigs. We have a diversified fleet of assets chartered out to 1st class charters and mostly long term charters. Container vessels is a larger segment with almost 65% of the backlog. In the Q3, 96% of charter revenues from all assets came from time charter contracts and only 4% from bareboats or dry leases.

Speaker 2

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. In Q3, profit split arrangements have contributed about $4,300,000 Out of the 81 vessels and rigs, we have 11 container ships on bareboat type contracts and the rest of the fleet on time charter or spot trading. Our operation is quite complex with vessels across multiple sectors and we have our own commercial operation out of Oslo and operational and technical management out of Singapore and Stavanger. In Q3, we had about 6 1,700 operating days defined as calendar day less technical off hire and drydockings. 3 vessels have been in drydock in the quarter and our overall utilization across the fleet in Q3 was about 99%.

Speaker 2

The charter revenue from our fleet was $263,000,000 in Q3, which is up from Q2, mainly due to the drilling rig Linus being back in operation end of July after a special periodic survey. The drilling rig Hercules entered our contract in Canada end of October and is currently on our way across the Atlantic to the West Coast of Norway. As part of our decarbonization and commercial strategy, we continue to invest in new vessels as well as upgrades to our existing fleet. Our fleet has lately been enhanced by 11 LNG dual fuel vessels and 3 LR2 tankers. Its 4 newbuilding 7,000 CEU car carriers have already been delivered to charterers Volkswagen and K Line and 233,000 denweight ton LNG dual fuel stainless steel chemical tankers have been delivered and are on service to stalled tankers.

Speaker 2

516,800 TEU container vessel newbuilds are to be delivered in 2028. And by October, all 3 of our newbuilding LR2s have been delivered to Vitol. Our investment in fleet upgrades continues. And in Q3, we had 3 vessels in drydock where energy saving devices and upgrade works were also carried out. Such investments and cooperation with our charters is important as a way to grow our relationship and increase backlog from existing vessels.

Speaker 2

Early this year, we increased the backlog to Maersk with new 5 year charters for 7 of our large container vessels, which is a result of our close relationship and cooperation on vessel upgrades performance enhancements. The first 48700 TEU vessels will dock from December onwards and the upgrades include energy saving devices and increased cargo intake, boosting cargo capacity to about 9,500 TEU, while also reducing fuel consumption. Another 311,000 TEU vessels will dock from Q2 next year also with energy and cargo system upgrades to be carried out. On the Hapag Lloyd charters, the remaining 3 vessels out of 6 will be completed in Q4 before delivery to Hapag Lloyd on the new 5 year time charters. A key tool in delivering on the various projects is a strong operations, technical and newbuilding team who can work in close contact by charterers.

Speaker 2

Fleet renewal and upgrades improves energy and operational efficiency of our vessels. This is increasingly important in the new world of ever tightening environmental regulations, both regionally and globally. I will now give the word over to our CFO, Aksel Oresund, who will take us through the financial highlights of the quarter.

Speaker 3

Thank you, Trim. On this slide, we are showing a pro form a illustration of cash flows for the Q3. Please note that this is only a guideline to assess the company's performance and is not in accordance with U. S. GAAP and also net of extraordinary and non cash items.

Speaker 3

The company generated gross charter hire of approximately SEK 263,000,000 during the Q3, with approximately SEK 89,000,000 coming from our container fleet. This includes approximately SEK2,400,000 in profit share related to fuel savings on 7 of our large container vessels. The Car Care fleet generated approximately SEK26 1,000,000 of gross charter hire in the quarter, including profit share from fuel savings. And our tanker fleet generated approximately $37,000,000 in gross charter hire, up from approximately $30,000,000 in the previous quarter following the delivery of 3 tanker vessels during the quarter. SFL has 15 dry bulk vessels, of which 8 are employed on long term charters.

Speaker 3

The vessels generated approximately $25,000,000 in gross charter hire, including approximately $1,700,000 profit share generated from our 8 Capesize vessels on long term charters to Golden Ocean. The 7 vessels employed in the spot and short term market contributed with approximately $8,400,000 in net charter hire compared to approximately $8,200,000

Operator

in the

Speaker 3

Q2. In the Q3, our energy assets generated approximately SEK 86,000,000 in contract revenues compared to approximately SEK 29,000,000 in the 2nd quarter. Leiners is under a long term contract with Konica Philips in Norway until May 2029. During the quarter, revenues from the rig was approximately SEK 16,000,000 compared to approximately SEK 10,000,000 in the second quarter as the rig resumed operations in late July after financing its 10 year special survey. As of November 1, the rig's contract rate has been adjusted upwards to approximately $224,000 per day under the market adjustment rate mechanism.

Speaker 3

During the Q3, the Hercules commenced its drilling contract with Equinor in Canada. Revenue and costs associated with drilling contracts are recorded in accordance with U. S. GAAP, which specifies that mobilization and demobilization fees and associated mobilization costs are to be recorded over days spent drilling during a contract. So for the Q3, we recorded approximately SEK 70,000,000 in contract revenue compared to approximately SEK 90,000,000 in the second quarter.

Speaker 3

Operating costs increased approximately SEK 32,000,000 from approximately SEK 11,000,000 in the second quarter as the rig recorded full operating costs from early July, plus amortized mobilization costs deferred from the 2nd quarter as per the accounting standards just mentioned. Our operating and G and A expenses for the quarter was approximately SEK99 million compared to approximately SEK70 million in the second quarter, mainly due to the Hercules being back on the contract for most of the quarter. This summarizes to an adjusted EBITDA of approximately SEK 167,000,000 compared to SEK 131,000,000 in the previous quarter. Then move on to the profit and loss statement as reported on the U. S.

Speaker 3

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, some parts of our activities are classified as capital leasing. Therefore, a portion of our charter revenues are excluded from U. S.

Speaker 3

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. So for the Q3, we report total operating revenues according to U. S. GAAP of approximately SEK 255,000,000, which is less than approximately SEK 263,000,000 of charter hire actually received for reasons just mentioned.

Speaker 3

This includes profit share income of approximately SEK4,200,000 from fuel savings from some of our large container vessels, our car carrier and our 8 Capesize dry bulk vessels on charter to Golden Ocean. During the quarter, we had an increase in vessel operating expenses, mainly due to new vessel deliveries, scheduled drydockings and the Hercules being back on contract for most of the quarter. We also had an increase in depreciation and tax, driven by new vessel deliveries and Hercules operations in Canada, respectively. So overall and according to US GAAP, the company reported a net profit of approximately SEK 44,500,000 or NOK0.34 per share compared to approximately NOK 20.6 million or NOK0.16 per share in the previous quarter. Moving on to the balance sheet.

Speaker 3

At quarter end, SFL had approximately SEK 164,000,000 of cash and cash equivalents. The company also had multiple securities of approximately SEK 4,600,000 in addition to debt free vessels with an estimated market value of approximately SEK 90,000,000. In September, the company issued a new NOK bond of SEK 750,000,000 in the Nordic credit market. The loan bears a coupon of 3.25 percent above the 3 month NIBOR reference rate and the term is 5 years. The cash flows are swapped approximately $71,000,000 and the interest rate is fixed at approximately 6.45 percent.

Speaker 3

In connection with the new offering, SFL exercised its option to redeem the NOK 600,000,000 bond, which was due in January 2025. The company has recently concluded financing arrangements of approximately $1,000,000,000 with approximately $700,000,000 being drawdown during the quarter and the balance subsequent to quarter end. During the Q3, the company paid the 1st jar installment of 10% relating to newbuilding order of 5 16,800 TEU container vessels with delivery in 2028. Now the 5% is estimated due at the end of the Q4 and the balance is due closer to delivery. We expect this to be financed by pre delivery and post delivery loan facilities.

Speaker 3

And finally, in July, the company raised SEK 100,000,000 in gross proceeds from U. S. Public offering by issuing 8,000,000 common shares. So based on the Q3 numbers, the company had a book equity ratio of approximately 28%. Then to conclude, the Board has declared the 83rd consecutive cash dividend of $0.27 per share, which represents a dividend yield of approximately 10%.

Speaker 3

Following recent investment and charter renewals, our fixed charter rate backlog currently stands at SEK4.7 billion, providing us with strong visibility on our cash flows going forward. The company has a strong balance sheet and liquidity position, and we recently raised SEK 100,000,000 of gross profits in a public equity offering, in addition to more than SEK 1,000,000,000 of financing so far this year to address both refinancing of existing vessels and new acquisitions. And with that, we conclude the presentation and move on to the Q and A session.

Operator

Thank you, Aksel. We will now open for a question and answer session. For those of you who are following this presentation through Zoom, please use the raise hand function under reactions in the toolbar to ask a question. Thank you. And we have our first question from Sheriff Almagarabi.

Operator

Please unmute your speaker and ask your question.

Speaker 4

Hi, thanks for taking my questions. Ola, historically, some container ships have done some sale and leasebacks to help with fleet management. Do you expect that to happen this year? And is that something that could be an opportunity for SFL?

Speaker 1

Well, we have a significant number of containership in our fleet. So and from time to time, we have also acquired containerships directly from liner companies. We have gone more away from doing more financial, call it, sale leasebacks, which is really a high levered financing in reality. So we have some legacy assets there. But I would say all the investments we have done over the last 5, 6 years have been long term time charters.

Speaker 1

And we think those deals have worked out pretty well. And I think also having an operational platform like we have built up now makes us relevant for the likes of Maersk's and Hapag Lloyd and Volkswagen and others. So we, of course, wouldn't mind do more business in that segment as we also look for opportunities in all the And

Speaker 4

just any color you can provide on how conversations are going with And just any color you can provide on how conversations are going with potential charterers?

Speaker 1

Oh, yes. The rig recently finalized drilling for Equinor in Canada has been working there since July. And it's now being moved to Norway. It's a pretty efficient location given the distance and you call it maritime traveling distance. That's why we take it to the North Sea.

Speaker 1

There are opportunities in the North Sea. And remember, this rig has previously worked during the wintertime up in the Barents Sea and the ultra harsh environment. So it's a very capable rig. And it's managed by Odfjell, who is, I would say, deemed to be among the top 2 or 3 operators of the most sophisticated drilling rigs out there. So, we are looking for opportunities both in the North Sea and in West Africa primarily.

Speaker 1

Near term, we don't see so many opportunities in Canada, but we expect that to come back later next year or into 2026. So near term, we focus more on North Sea and West Africa. We cannot be specific on discussions and the opportunities we see, but we believe Odfjell, who also announced their earnings today, they at least signal a positive outlook on the market segment.

Speaker 4

Okay. Thanks very much for taking my questions.

Speaker 1

Thank you.

Operator

All right. We will take our next question from Clement Mullens. Clement, go ahead.

Speaker 5

Good afternoon. Thank you for taking my questions. I wanted to follow-up on Shrief's question on the Hercules. And first of all, I was wondering, do you expect to recognize any revenue on Q4 from the contract with Equinor in Canada?

Speaker 1

Yes. Thank you. Yes, we have I mean, the rig has been working now virtually to the end of October. So there's been a full month on hire, plus we are also compensated for moving the rig afterwards. So we are effectively covered for say 2 out of 3 months in the Q4.

Speaker 1

And of course, while we wait for the next contract, we will of course adjust and trim expenses along with that. So there will be a decent contribution from the rig also this quarter.

Speaker 5

Makes sense. Thanks for the color. And this one is more from a modeling perspective, but should the asset remain open throughout part of 2025, could you provide some commentary on the expenses you would expect maybe on a daily basis?

Speaker 1

Yes. You have when the rig is working, as it has been both in Namibia and Canada, now in 2 rounds, we have seen operating expenses in the region around 200 $1,000 per day. That is, of course, with full marine crew, full operational crew, full drilling activities ongoing day and night with that rotation pattern. So when we in between contracts, we can reduce operating expenses a lot. And then it's really more down to how do we how much of the equipment do we want and do we need to run all the time to make sure that it's ready to go, that it's hot and can go straight out and drill on a new contract.

Speaker 1

So from a modeling perspective, I think if you put in $75,000 to $100,000 per day, you should be pretty safe on the cost side. We will, of course, manage cost and limit that as much as we can. But our primary objective here is to get the rig out working again, so we generate positive cash flows from the rig in operations.

Speaker 5

Makes sense. This was kind of like the worst case scenario. That's all for me. Thank you for taking my questions.

Speaker 1

Thank you.

Operator

Thanks. We've received a question on the side here. You've sold a 2,005 built container vessel. What are your plans for the other older container vessels in the fleet?

Speaker 1

Yes. Thank you. It's correct. We recently sold a 2,005 built feeder vessel, 1700 TEU. That container ship has been on a contract with Maersk now for a period.

Speaker 1

And as we have seen over time now, we typically own vessels until we see that we cannot really charter these vessels longer term. And typically, we sell them own vessels that are older than 20 years. So as this now is approaching the 20 year anniversary next year, we feel that this is an opportune time to dispose of the vessel at with a nice profit from that sale. We also have some other legacy older containerships in the fleet. We have 74,100 TEU containerships with MSC.

Speaker 1

That's really on a bareboat financing structure. Those vessels will there are purchase obligations on those vessels basically early Q2 next year. So those vessels would also then effectively be phased out. And then we have a sister vessel of the vessel we recently announced we now are now sold. That's also coming off charter again with Maersk during the Q2.

Speaker 1

And we have to assess what we do with that vessel over time. We may recharter it or we may sell it similar as we did with the one we just announced now. So we are monitoring that market, of course, very closely. A positive side effect of doing this with these solar vessels is that these are also, from a fuel efficiency perspective the least efficient vessels in the portfolio. And if you look away from the 74,100s and then 17 old 1700 that's remaining, All the other vessels are modern eco design vessels built from 2013 onwards with eco engines, etcetera.

Speaker 1

So the effect of that is that we will actually have improvement in our fuel efficiency ratio. Thank you, Alain.

Operator

Okay. As there are no further

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