SFL Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2024

There are 6 speakers on the call.

Operator

Welcome to SFL's Q1 2024 Conference Call. My name is Sande Bolbjergren. I'm Vice President for Investor Relations in SFL. Our CEO, Uli Akpakir, will start the call with an overview of the Q1 highlights. Then our Chief Operating Officer, Toom Scholli 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, intents, 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 operation to be materially different from these 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

Speaker 1

looking statements.

Operator

These filings is an extremely deep bearing on our operating results and our financial condition. Then I will leave the word over to our CEO, Olej Arthakte with highlights for the 3rd quarter.

Speaker 2

Thank you, Sanddarth. We are now announcing our 81st dividend and have built a unique profile as a maritime infrastructure company with a diversified fleet. The total charter revenues were $236,000,000 in the quarter, which is up 13% from the previous quarter, primarily due to the delivery of our new car carriers and also increased revenues on the drilling rig Hercules. The EBITDA equivalent cash flow in the quarter was approximately $152,000,000 which was also significantly higher than the previous quarter. And over the last 12 months, the EBITDA equivalent has been $523,000,000 The net income came in at around $45,000,000 in the quarter or $0.36 per share.

Speaker 2

We had a positive contribution of $2,200,000 relating to profit share on Capesize Bulkers and €3,300,000 relating to fuel cost savings and also some minor one off items including $1,800,000 mark to market gain on interest rate swaps. In line with the improved results and commitment to return value to our shareholders, we are again increasing our quarterly dividend and this time to $0.27 per share. We have paid dividends every quarter since our inception in 2,004 and this has accumulated to more than $30 per share or more than $2,700,000,000 in total. And we have a robust and increasing charter backlog supporting continued dividend capacity going forward, which stands at $6,000,000,000 and importantly, the backlog is concentrated around long term charters to very strong end users. And I would note that the backlog figure excludes revenues from the vessels trading in the short term market and also excludes revenues on the new dual fuel chemical carriers that will operate in a pool with Stolt Nielsen.

Speaker 2

And it also excludes future profit share optionality which we have seen can contribute significantly to our net income. We have recently announced several new acquisitions and charters. In March, we announced the acquisition of 3 new 110,000 deadweight ton LR2 product tankers for an aggregate purchase price of approximately $230,000,000 in combination with long term time charters to a world leading energy and commodities company. The vessels are currently under construction in China and have conventional propulsion system with the latest eco design features. We expect to take delivery of the vessels between June October this year and the charter period will be minimum 5 years plus up to 3 years of extension options.

Speaker 2

This adds around $200,000,000 to a fixed rate backlog excluding the optional years. The charterer will have options to purchase the vessels after year 5 and 8, subject to a profit share mechanism with SFL. In April, we announced an agreement to acquire 233,000 deadweight ton chemical carriers with LNG dual fuel propulsion system. The vessels are built in 20222023 and fitted with stainless steel cargo tanks and the aggregate purchase price is approximately $114,000,000 We expect to take deliver of the vessels in July and have arranged long term employment for the vessels with affiliates of Stolt Tankers, a subsidiary of the World in Chemical Logistics Stolt Tankers vessels will be employed for a minimum of 8 years when 1 vessel will be on a fixed rate time charter and 1 vessel will be employed in a pool with similar sized vessels. The fixed rate vessel has option to a profit share mechanism with SFL.

Speaker 2

We have a very close business relationship with Maersk Line and have 17 vessels on long term charters to them now. We recently agreed to extend charters for 310,600 TEU vessels until 2,030. And Maersk also exercised the 1 year pre agreed extension options on 3 other vessels ranging from 8,700 to 9,500 TEU. In addition to this, we have also fixed our 1700 feeder GreenACE on a short term charter to Maersk until late 2024. In aggregate, this adds approximately $250,000,000 to our charter backlog and in addition, we have a profit share relating to scrubber benefits on some of the vessels that is expected to add additional revenues for us over time.

Speaker 2

In April, we raised a new $150,000,000 senior unsecured sustainability link bond loan in the Nordic market. Maturity will be in the Q2 of 2028 and the coupon is 8.25%. Proceeds are for refinancing existing debt and for general corporate purposes. As part of the use of this facility, we have repaid a Norwegian kroner denominated bond loan due in June 2024 with the equivalent of $81,000,000 outstanding at the end of the Q1. And with that, I will give the word over to our Chief Operating Officer, Wim Schirley.

Speaker 3

Thank you, Ulla. Including vessels to be delivered this year, we have 76 maritime assets in our portfolio and our backlog from owned and managed shipping assets stands at $3,600,000,000 15 partnerships that's chartered out to 1st class charters and mostly long term charters. And assumed full operating this meant for large engines like dry and wet segments. The 2 new dual fuel chemical tankers on time charter to Stolt and Pool with Stolt Tankers is a recent example of this. In the Q3, 95% of charter revenues from all assets came from time charter contracts and only 5% from bareboats or dry leases.

Speaker 3

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. And in Q1, profit split arrangements have contributed about $5,500,000 Out of the 76 vessels, we have 11 on bareboat contracts and 65 on time charter and spots. Our operation is quite complex with vessels across multiple sectors, and we have our own commercial operation out of Oslo and operational management out of Singapore and Stavanger. In Q1, we had a total of almost 6,500 operating days, defined as calendar day less technical off hire and drydockings. One vessel has been in drydock in the quarter.

Speaker 3

Our overall utilization across the fleet in Q1 was 99.5%. The charter revenue from our fleet was $236,000,000 in Q1 and OpEx for the fleet was $81,000,000 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 off hire as well as investments to increase cargo carrying capacity and reducing energy consumption. Such investments and cooperation with our charters is important as a way to grow our relationship and increase backlog from existing vessels. As part of our fleet upgrade program, we are working with our main chart contained charterers, Maersk and Hapag Lloyd, to increase energy efficiency of our container fleet.

Speaker 3

With Maersk, we are making investments across the long term chartered fleet for various energy efficiency measures, including hull and propeller modifications when the vessels are in drydock. These modifications ensure the vessels remain attractive to charters over time. And as Ole mentioned, we just entered into new 5 year time charters of 310,600 TEU container ships with Maersk in which energy efficiency was an important consideration. For the 6 SOPAG Lloyd vessels, we are investing in energy saving devices, improved hot form with new bulbous bow, new propellers and fittings, antifouling paint and exhaust gas scrubbers. Furthermore, we are boosting the cargo intake up to nominally 15,400 TEU by increased deadweight delivered to Hapag Lloyd and we estimate that fuel consumption and emissions per TEU carried is down by approximately 20%.

Speaker 3

And with that, I will give the word over to our CFO, Akzo Rudsson, who will take us through the financial highlights of the quarter.

Speaker 1

Thank you, Trim. On this slide, we are showing our performance of cash flow. The quarter note that this is a guideline to assist the company's performance and is not in accordance with U. S. GAAP and also net of extraordinary and noncash items.

Speaker 1

The company generated gross charter hire of approximately 2 $36,000,000 in the Q1. It's approximately 93% of revenue coming from our fixed chart rate backlog, which currently stands at 3,600,000,000 providing us with strong visibility on the cash flow going forward. In the Q1, the container fleet generated gross charter hire of approximately SEK 90,000,000, including approximately SEK 3,000,000 in profit share related to fuel savings on some of our large container vessels. With 7 car carriers on charter following the delivery of our 2 remaining dual fuel LNG car carriers during the quarter, gross charter hire increased approximately €25,000,000 in the Q1 compared to approximately €22,000,000 in the 4th quarter. Our tankers on long term charters generated approximately CHF 30,000,000 in gross charter during the Q1, in line with the previous quarter.

Speaker 1

The company has 15 drybulk car carriers drybulk carriers, of which 8 were employed on long term charters. The vessels generated approximately CHF 24,000,000 in gross charter hire in the Q1, including approximately CHF 2,000,000 profit share generated from our 8 Capesize vessels on charter to Golden Ocean. 7 of these vessels were employed in the spot and short term market and contributed approximately SEK 6,500,000 in net charter hire compared to approximately SEK 7,300,000 in the previous quarter. SFL owns 2 modern harsh environment driven rigs, the large stack of liners and the semasubmersible ultra deepwater rig hurdles. During the Q1, the rigs and final contract in the quarter.

Speaker 1

During the quarter, liner's revenue was approximately SEK 19,600,000 compared to approximately $19,000,000 in the previous quarter. The rig is currently at the yard in Norway 10 year special expect the rig to be off fire for approximately 5 weeks. In the first quarter, of the quarter was spent in mobilization mode. The rig is currently mobilizing to Canada for a contract with Equinor. And on the U.

Speaker 1

S. GAAP, organization fees are just telecom and cost on Hercules in the Q2. Our operating and G and A expenses for the quarter was SEK 85,000,000 compared to SEK 80,000,000 in the 4th quarter as the Hercules won contract for the full quarter. This summarizes to an adjusted EBITDA of approximately $152,000,000 compared to €132,000,000 in the previous quarter. We then move on to the profit and loss statement as reported under U.

Speaker 1

S. 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 portion of our charter revenues are excluded from U.

Speaker 1

S. GAAP operating revenues. This includes repayment of investment in sales type, direct financing leases and leaseback assets and revenue from entities classified as investment in associates for accounting purposes. So the Q1 report total operating revenues according to U. S.

Speaker 1

GAAP of approximately SEK 229,000,000, which is less than approximately SEK 236,000,000 of charter hire actually received for reasons just mentioned. During the quarter, the company recorded profit share income of approximately SEK 5,500,000 from fuel savings from some of our large Montana vessels, our car carrier and our 8 Capesize drybulk vessels on charter to Golden Ocean. On the financial items, we had positive noncash mark to market effects from swaps of approximately 1,800,000, negative mark to market effects from equity investments of approximately SEK 400,000 and an increase of approximately SEK 100,000 on credit loss provisions. Furthermore, we had an increase in tax linked operations of the Hercules in Namibia. So overall and according to US GAAP, the company reported a net profit of approximately $45,300,000 or $0.36 per share compared to approximately $31,400,000 or 0.25 dollars per share in the quarter.

Speaker 1

At quarter end, SFL had approximately SEK168,000,000 of cash and cash equivalents. Furthermore, the company marketable securities of approximately $5,100,000 in addition to debt free vessels with an estimated market value of more than $100,000,000 In terms of CapEx commitments, a recently acquired 5 tankers with total CapEx of approximately $340,000,000 of which we expect approximately DKK240,000,000 to be financed with senior bank financing. In addition, our harsh environment, Tacker Brickliners, is scheduled to undergo its senior SPS with an estimated net capital expenditure of approximately SEK 30,000,000 Subsequent to quarterend, the company successfully placed a new sustainability linked bond of $150,000,000 addressing the 2024 NOC bond maturity in addition to proceeds for general corporate purposes. Furthermore, the company has a range of $37,000,000 Nioco financing where previously debt free container vessel Maersk Birkett at very attractive terms and maturity matching the long term charter. So based on Q1 numbers, the company had a book equity ratio of approximately 28%.

Speaker 1

Then to conclude. The company has delivered another strong quarter with growth in both revenues and EBITDA. The Board has declared the 81st consecutive cash dividend as increased the dividend to 0 point 2 $7 per share, which represents a dividend yield of approximately 8%. Our fixed charter backlog currently stands at SEK 3,600,000,000 which provides us with strong visibility on our cash flow going forward. And with that, we conclude the presentation and move on to the Q and A session.

Operator

Thank you, Akzo. We will now open for a question and answer session.

Speaker 1

For those of you who

Operator

are following this presentation for Zoom, please use the raise hand function to ask a question. When your name is called out, And we'll have our first question from Kliment Mullins. Please unmute your speaker to ask a question.

Speaker 4

Good afternoon, Oli and team. Thank you for taking my questions. I wanted to start by asking about the recent chemical tanker acquisitions. Adding a long term contract on one of them is aligned with your usual structure, but could you provide some insight on the reasoning for employing 1 of them installed

Speaker 2

spool? Absolutely. So Nielsen is the leader of chemical logistics. They are operating these vessels in the market, but they have a very high proportion of contract of affreightments, I. E, call it volume contracts with their customers.

Speaker 2

There is therefore visibility on charter revenues relating to those vessels. And the reasoning for doing a combination of the 2 in reality is that we have then the support of, on the one vessel with a fixed rate And then we have the market, call it opportunity and exposure on the other vessel. And right now, the market or the near term market based on the COA coverage is significantly higher than the fixed rate charter on the one vessel. So the balance looks to be very good in the near term. From time to time, we have taken some market exposure, but different also.

Speaker 2

As per that, we also have profit share relating to earnings in for some assets and also on the fuel saving on other assets. So this is from a portfolio perspective as we see it you know a good way to participate in this market. And we believe there are reasons to believe that this market will remain quite firm going forward also based on the very low order book in this specific segment. Also these vessels have dual fuel LNG dual fuel propulsion which we believe will be an increasing also for the large, chemical companies that are the customers of Stolt Nielsen, where these vessels will be employed.

Speaker 4

Makes sense. Thanks for the color. Thank you. I also wanted to ask about the 2 offshore routes. Regarding the Hercules, could you provide some commentary on what's the bid for long term contracts?

Speaker 4

And secondly, on the Linus, revenue increased quarter over quarter. Is that attributable to the index linked component of the contract?

Speaker 2

Yeah, I mean to start with the Hercules. Hercules is now mobilizing from Namibia on its way to Canada to start drilling for Equinor. So we expect that to start in Canada in early July. So it will be in transit and in the meantime it started to transit just a week or so ago. That you know so and that contract on Tier 1st quarter and also the scope of work that is needed and the time to drill the wells.

Speaker 2

But we believe during the Q4 is a realistic time when that rig will be released. From a period charter perspective, we are of course more than monitoring the market, looking at opportunities that are out there. But we cannot be specific on employment for the rig, you know, going forward. But we naturally look at all the opportunities that is makes good sense for a rig of this caliber. There are very few harsh environment deepwater rigs in the market.

Speaker 2

It's a relatively tight market. So we believe having this asset there could prove to be very interesting over time. If you look at the liners, that the charter rate there is now increasing. We it's coming up from just over $200,000 per day and will now go to around $220,000 per day for us from May onwards. The charter is linked to index, market index with an adjustment of 10%.

Speaker 2

And this adjustment is really to balance the fact that this rig does not have any, call it, commercial off hire between contracts that you normally see with rigs that go from contract to contract. In the Q2, this rig is will be in a drydock for 10 year special survey. It just arrived at the shipyard yesterday. We expect the work to take around 5 weeks. So we expect the rig to be back out again at the very end of the month.

Speaker 2

That rig has a long term charter. So it will go then go back to the charter to ConocoPhillips that runs until the end of 2028. We also believe that there could be more work potential at the EcoFisk field. Conoco and their license partner had their license extended from 2028 to 2,048 just over a year ago. And we hope that and we believe Linus will continue to do a good job for Conoco.

Speaker 2

And then that there could be opportunities for extended deployment beyond 2028. But we are still quite some time away from any commercial discussions around future deployment of that rig.

Speaker 4

Thanks for the color. That's all from me. I'll pass it over. Thank you for taking my questions.

Operator

Thank you. Thank you. We will take our next question from Gregory Lewis. Please unmute your speaker to ask your question.

Speaker 5

Hey, good afternoon and thank you for taking my questions. I was hoping you could talk a little to how we should be thinking about the dividend and just returning cash to shareholders. I mean, I guess this is another increase. I think there's been 3 consecutive increases. Clearly, as we look at not even cash flows, but just net income, there's definitely room to increase that, the dividend even more.

Speaker 5

Just kind of curious how the Board maybe is thinking about this, realizing that it was good to see, but just looking at something like backlog, backlog looks like it was up more than roughly 10% sequentially. So just kind of any kind of colors you can give and how you're thinking about the dividend, just realizing that it looks like that there is real depth in the long term charter market for a lot of your assets.

Speaker 1

Thank you, Greg. It's Axel here. Yeah, it's a good observation. It's a very solid quarter, increased net income. And so that's, of course, good.

Speaker 1

We have more contract backlog being added. I think from the board's perspective, taking our view quarter by quarter on something is long term and sustainable over time and been increasing the dividend now, as I say, I think at least 3 consecutive quarters, taking that step by step. So I think kind of that's the approach for now being kind of somewhat conservative, realizing there's a lot of kind of capacity. I would say at the same time, there's also kind of significant investment opportunities in the market to further grow the company and kind of to increase the dividend over time. So you don't have to kind of see the totality of kind of how much you increase the dividend quarter by quarter,

Speaker 5

Yeah. Okay. And then I was hoping for some more color on the Hercules. I mean, that rig is obviously moving to Canada. I believe there's some options on the back of the firm work.

Speaker 5

How do we how when does the customer have to exercise those options? And really what I'm wondering is, I'm kind of curious on the time frame around that simply because there's going to be obviously multiple opportunities to fix that rig for work and realizing customer windows 4 drilling rigs right now is becoming a little more urgent. So, I'm kind of curious around that.

Speaker 2

Yes. So the drilling scope in Canada is 2 wells with some testing opportunity around it. The reason why we cannot be too specific on exact number of days is simply that it all depends on the drilling efficiency, which is a combination of, of course, the way the rig is handling the whole draining operation up on the drilling floor, you could say, but also is linked to the rock down where the rig is actually drilling. So, it's we have to be a little bit vague in terms of the exact scope and time it will take. We expect the rig to be employed for definitely for the Q3 and probably for a good chunk into the Q4, probably most of Q4.

Speaker 2

But still, it's we cannot be 100% specific. That said, as you have pointed out, I mean, yes, there are other drilling opportunities. I mean, the rig has been it was very successful when it was drilling in Canada for Exxon. It went to Namibia, drilled 2 wells for Galp, was a major success for Galp. I think they've found more than they estimated to more than 10,000,000,000 barrels of oil.

Speaker 2

It's massive. So we, of course, are very happy with being with sort of being assisting and having the equipment that help them and do that. And of course, that we think will hopefully trigger more drilling activity also in that area. This rig has the capability to drill also in benign water, but we believe that given that it has the capacity to drill wells in sort of ultra harsh environment, very deep water, it's winterized. So it has a lot of features that we believe very few other rigs have and very few rigs that are available from late 'twenty four and into 2025.

Speaker 2

So we are naturally monitoring this market closely, but can only really comment and be specific when we have secured additional work for the rig.

Speaker 5

Okay, great. And then I did want to squeeze another question in just around the acquisition opportunities that you were able to take advantage of in the tanker market earlier this year. It's interesting, right? Like we've kind of gone through a period where it seems like on the container market, there's always opportunities or maybe not always, but more often than not, there are opportunities for long term contracts. As you guys as the company looks kind of at the landscape in the tanker market, which over the last couple of years has been more short term in nature, We've really seen increasing depth in the term charter market in tankers.

Speaker 5

And really, I think the question that I'm getting from some investors is, could we see is were these kind of one offs or is there going to be a that we continue to see and not necessarily from SFL, but just real like long term charters returning to the tanker market.

Speaker 2

If you look at the call it regular, call it crude oil tanker market and the product tanker market that market is dominated by more spot oriented players, voyage charters. We have players like Frontline on the crude oil side, you have Scorpio Tankers on the product side and other players in the various segments who are more active and who do more sort of day to day movement of oil. We're picking up 1 oil here and all the cargo there typically. So what we have been looking for is opportunities to do more long term employment with very strong counterparties and effectively contribute and be part of a logistics chain more than a tramp owner of an asset. I think the chemical market is also a good example of this has more it has more resemblance really to a liner type moving sometimes very complex mixes of cargoes on board 1 vessel at a time going from various terminals and going more in the system.

Speaker 2

So we're quite excited with that deal with it with Zolt, also because there are market leaders in that segment. And we are in a way participating a bit also in the market there given that we have 1 in a pool and with other similar type vessels. So it's a market we are definitely looking at. We are evaluating opportunities there, but we are segment agnostics. It's all about finding the right type of asset, a strong enough counterparty and the right structure of the deal that makes sense for us and that we think can effectively contribute to boost the dividend capacity.

Speaker 2

Because that's our ultimate objective here is how do we build long term sustainable dividends. And we believe both these deals, those deals that we have announced is doing that. And of course also very happy with the multiple extensions and also the long really new charter with Maersk on vessels that have been on charter to Maersk for several years already at high rates that we believe are reflecting, one, that the market is quite robust. And 2, these vessels are doing a really good service from us. And that is you know we pride ourselves of being someone we believe at premium operations on the vessels.

Speaker 2

We try to focus on optimizing fuel consumption which is helping both us in terms of reducing emissions and also helps the customer, of course, in both reducing emissions and reducing fuel costs in the logistics. So that's also something we where we believe there could be further opportunities going forward.

Speaker 5

Perfect. Super helpful. Thank you very much.

Operator

Thanks. Thank you. For those of you who are following this presentation through Zoom, please use the raise hand function under reactions to ask a question. 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 further 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.sflcorp.com.

Operator

Thank you.

Powered by Quartr
Earnings Conference Call
SFL Q1 2024
00:00 / 00:00