SFL Corporation Ltd.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Thank you for standing by and welcome to the Q3 2020 SFL Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. I must advise you that the conference is being recorded today, Thursday, November 12, 2020. I would now like to hand back to first speaker today to Ole Hjertaker, CEO. Please go ahead sir.

[Ole Hjertaker:]

Thank you and welcome all to SFL’s third quarter conference call. I will start the call by briefly going through the highlights of the quarter. And following that our CFO, Aksel Olesen will take us through the financials and the call will be concluded by opening up for questions. 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. 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 with the Securities and Exchange Commission for more detailed discussions of our risks and uncertainties which may have a direct bearing on our operating results and our financial condition.

[Aksel Olesen:]

Thank you, Mr. Hjertaker. On this slide, we are showing pro forma illustration of cash flows for the third quarter. Please note that it is only guideline to set the company’s performance and it’s not in accordance with U.S. GAAP and also net of extraordinary and non-cash items. The company generated gross charter hire of approximately $157 million in the third quarter, with more than 90% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.2 billion. And while the current charter backlog relating to our offshore assets maybe impacted by the pending TU restructuring, the backlog from a shipping portfolio stands at a solid $2.4 billion providing us the strong visibility on our cash flow going forward. At quarter end, SFL has a liner fleet of 48 container vessels and 2 car carriers. The liner fleet generated gross charter hire of approximately $80 million. Of this amount, approximately 98% was derived from our vessels on long-term charters. At quarter end, SFL’s liner fleet backlog was approximately $1.8 billion, with an average remaining charter term of approximately 4.5 years or approximately 7 years if weighted by charter revenue. Approximately, 84% of the liner backlog is the world’s largest liner operators, Maersk Line and MSC with the balance of approximately 16% to Evergreen. Our tanker fleet generated approximately $24 million in gross charter hire during the quarter, including $4.8 million in profit-split contribution from our 2 VLCCs on charters to Frontline. The vessels are 6 unprofitable sub-charters until the end of the quarter, ensuring the stability on the quarterly profit-split also for the fourth quarter. The net contribution from the company’s 2 Suezmax tankers was approximately $3.3 million in the third quarter and the vessels are traded in the short-term market. On November 11, the company redelivered the last VLCCs to the Hunter Group of declaration of a purchase option. Whilst the repayment of the associated financing, the transaction increased SFL’s cash balance by approximately $10.7 million. In the third quarter, our dry bulk fleet generated approximately $28.4 million in gross charter hire. Of this amount, approximately 70% was derived from our vessels on long-term charters. During the quarter, the company had 10 Handysize vessels employed in spot and short-term markets. The vessels generated approximately $7 million in net charter hire compared to $2.4 million in the previous quarter. At the end of the third quarter, SFL owned 3 drilling rigs. All of our drilling rigs are long-term bareboat charters to fully guaranteed affiliates of Seadrill Limited and generated approximately $24.4 million in charter hire during the quarter. This summarizes to an adjusted EBITDA of approximately $170 million for third quarter or $1.08 per share.

[Operator:]

You have the first question coming from the line of Chris Wetherbee. Please go ahead announcing your company name.

[Chris Wetherbee:]

Yes. Hi, thanks. It’s Chris Wetherbee from Citi. Appreciate you taking the question. I guess I wanted to start on the offshore side, and could you give us a sense of from a cash perspective, how far in arrears we are with the payment here in 4Q? And sort of what are the quarterly cash, maybe give us a little bit more clarity on sort of the quarterly cash impacts of not paying charters?

[Ole Hjertaker:]

Yes, thanks for calling in. We were paid in full in the third quarter, around $24 million. The charter rate is in the region of around $90,000 per day on average for these vessels. And of course, that hire has not been paid in October and has so far not been paid in November. While, but importantly here, two other rigs are employed on profitable sub-charters, as I mentioned and as part of the call it chartering structure, we agreed from the outset that all the charter hire is being paid into pledged accounts, that is pledged in favor of us. So, all the revenues they get in from their respective sub-charters, be it ConocoPhillips from one of the rigs and Equinor on the other, everything goes into an account where Seadrill cannot use that money unless we give our prior consent, so…

[Chris Wetherbee:]

Okay.

[Ole Hjertaker:]

So, there is an amount much bigger than the charter hire due to us that is accumulating on those bank accounts right now that cannot – that is really sort of -- that’s what we say sitting there. Right now, we can say status quo, there is more money accumulating, but of course, over time, I mean some of this money should be used for operating expenses. So, Seadrill needs to fund that from other sources right now. But I guess again, this is what we say, we continue our discussions and negotiations and Seadrill of course, has similar discussions and negotiations with other stakeholders. So, we cannot give any comments on the details of that exactly how that this could play out over time.

[Chris Wetherbee:]

Okay. Okay, understood. That’s very helpful information. So, I appreciate that. And then when you think about what that could – what that -- assuming that non-payment continues through the quarter, how that impacts your thought process around dividends and distributions as you go forward?

[Ole Hjertaker:]

Yes. So, that is – in order to well, I would say, eliminate sort of questions around that, the Board took the step to reduce the dividend to $0.15, which is a very – what we say from which is more than covered from the shipping side alone. So – and by that, we hope that at least given the uncertainty right now, relating to those rigs and the charters to Seadrill and how that restructuring is playing out, we have some significant contribution from those other assets. And while there are financing right now, 2 of the 3 vessels have financing agreements attached, one with a more flexible bullet structure and the other with more regular payments, of course, the one rig with the financing with a limited guarantee, we are limited or what we say, our liability is limited to that guarantee unless we agree to do something else. So, I think we have 81 vessels and rigs and all outside of the drilling rig here, and we have significant cash flow from all of them. And importantly, even if there could be issues in one, you can say box here like the – on the offshore side on each of those rigs, that has no impact on contribution and cash flow from the other assets.

[Chris Wetherbee:]

Okay, that’s helpful. And one final, if you allow me would just be on the West Linus, can you talk a little bit any of the specific terms that you were able to get in terms of the amended financing there that terms around that?

[Ole Hjertaker:]

Unfortunately, I cannot give any specific comments on that right now. We will get back to that in due course, but we have agreed more flexible terms in exchange for increasing the guarantee. This is also the rig that has a sub-charter that runs through 2028. So, what we say, it’s a – there is a lot of visibility on the underlying cash flow coming from that asset and that’s also why we -- for now has increased the guarantee on that one.

[Chris Wetherbee:]

Okay, alright. Well, thanks very much for the time. I appreciate it.

[Ole Hjertaker:]

Thank you.

[Operator:]

The next question comes from the line of Randy Giveans from Jefferies. Please ask your question.

[Randy Giveans:]

Gentlemen, how is it going?

[Ole Hjertaker:]

Good. Thank you. How are you?

[Randy Giveans:]

Great, great. So, in the past, you have touted your strategy, your balance sheet as having the ability to buy when other shipowners in other sectors cannot, right? So, with that, how do you view kind of your fleet today? What asset classes are most attractive? Clearly, dry bulk and tanker asset values remain depressed. So, has there been any interest from dry bulk owners for sale and leasebacks to SFL? And then last time we talked, you wanted to expand your tanker exposure, but asset values were too high. Clearly, those have come in as well. So, how do you view both dry bulk and tankers in terms of acquisitions at these levels?

[Ole Hjertaker:]

Yes, thanks. We, of course, continuously evaluate opportunities in multiple sectors. And we are looking at -- literally at opportunities in all the sectors right now. It’s what we say, but we typically never comment on transactions that we don’t do. So, we will notify when we do it. And in the meantime, we are screening a lot. We are going further than that on other deals. And hopefully, we have with the last 12 months concluded, we have added $250 million to the backlog, and of course we have additions to grow the business also of note going forward, certainly outside the offshore side for now, while until the whole Seadrill situation is sorted. And you are correct, I mean we try to– we try to time transactions and we try to be mindful of cycles and we typically try to be careful if segments are peaking. I would say generally this year, there was good activity, good volume at the beginning of the year. And then for a period I think most operators out there were more or less paralyzed I think by COVID-19 and uncertainty surrounding that, I sense that the market is picking up more now. What we have seen on the financing side is that we are now concluding financing better I would say all-in cost if you add margin and underlying interest, we are financing ourselves cheaper than we have seen earlier. So, it was about at least this positive, there is good access to capital, but we have to be mindful of, of course of the asset risk we take on. But we can do many things. I mean, we can do straight operating type charters where we run the vessels time charter, but we also do deals like we did with the Hunter vessels. We structured that with what was more – it was more like a structured financing you can say. It was really a cost of capital arbitrage, where we had, where we could utilize our access to very attractive funding and they were willing to pay up for that, because they needed the flexibility in the deal. So, we got like a risk adjusted return, of more than 20% on effectively sort of around 60% leverage on the assets. So, we are looking at the both those sort of types of deals across the sectors, but we typically will not tell you how much we will do in any single one. It’s really all about trying to do the right deals and be open for opportunities across the board.

[Randy Giveans:]

Okay. And then I guess following up on the dividend, you cut it from $0.35 to $0.25 just two quarters ago. And I think the reasoning behind that was twofold. One, it brought the yield closer in line to maybe 10%, when your shares were trading at $10 a share. But also it was kind of a getting in front of any possible risks with the drilling rigs, right, and kind of getting in front of that to reduce it to 25. Now, again, you reduced it to 15. Is that solely due to the drilling rigs or were there other reasons around that? So just trying to figure out why a secondary cut? And what the risks are from here?

[Ole Hjertaker:]

Yes, thanks. I think when we reduced it from $0.35, it was, I would say, more relating to general risks, call it caused by the whole COVID-19 situation, where we saw, some assets, when we saw charter rates come down sharply, and in some segments. And we also had the car like, asset like the car carriers that came off charter, and where we put them in layoff. So instead of generating revenues, you could say, you have a negative call it cash flow, because you are paying for layoff costs, while they don’t do any money so that was really a factor more relating to that. And as we have seen, I would say, the offshore and the rig side, and this is, of course, linked also to the old price, but it’s been deteriorating, I would say over the last few months, we believe, and this is the Board’s decision, of course, but we believe that it would be appropriate to effectively eliminate all call it the cash flows, that has previously been in there from those from the drilling rigs from the distribution capacity and show that it’s with a good margin, to cash flow generating from the other assets and of course, depending on the outcome of the Seadrill, quality restructuring, when we when we are on the other side of that, of course, it’s easier for the board and to look at the distribution capacity and possibly reinstate, some of that reduction that has been taken up. So also, as we as we used some cash to buy back, the loan on the drilling rig, of course, you can argue that, if that hadn’t been bought back, you could have reinvested that in other assets, which could have generated some contribution. So, that is really, call it, the reasoning around this latest adjustment.

[Randy Giveans:]

Alright. Well, I will leave it at that. Thanks so much.

[Ole Hjertaker:]

Thank you. Bye-bye.

[Operator:]

Our next question comes from the Liam Burke. Please ask your question announcing your company name. Liam Burke, your line is open.

[Liam Burke:]

Yes, thank you. On the container side of the business, you mentioned potentially acquiring assets not specifically in the container space, but the rates are pretty strong and you are benefiting there. What does it look like in terms of adding assets and containers with rates so strong?

[Ole Hjertaker:]

We also look at the container market obviously. When we look at opportunities, we look at it on a from a long-term perspective, of course, right now and certainly in the short-term, we see very booming container rates and we see the liner operators generating a lot of cash flow now from the market. It’s – I would say, it’s very reassuring to see and of course, given that we have a lot of container ships on a portfolio to the larger container operators, we are very happy to see that there has been a very good discipline in the market and where they have been building buffers in amidst uncertainty and the disruption caused by COVID-19. So, yes, we are also looking at containership assets and we would be happy to add more also in that sector. If we find the right asset at the right price and where we can get, structure the road to financing around it, so it gives us a good risk adjusted return. So, yes, absolutely.

[Liam Burke:]

And looking at your fleet, some of the smaller bulkers and tanker vessels that are not on longer term charters is that consistent or will let’s say consistency in your overall strategy where it matched the financing to the contract or how does that workout in the long-term?

[Ole Hjertaker:]

Our reasoning for having vessels that are not deployed on long-term charters, it’s not because we have sort of acquired them to keep them in the spot market. Typically, vessels, that we trade in the short-term market has been assets that has been on longer term charters and that have come off those charters. And because we have an operating platform, where we can manage those vessels, if we had been a pure call it financial profile, we would have to either re-charter at what we think as at the bottom of the market or sell those assets. Instead, we can trade them in the market. And of course, our ambition is to find longer term charters as the market improves. So, that is really the reasoning behind it. We also have call it variable, call it cash flow from profit share arrangements, which you can say to a certain degree is similar, you agreed to maybe a little lower base rates in exchange for getting optionality linked to profit share, which is a way for us to also capitalize on our strengthening market. But over time, I think generally if you look at it over the years, it’s been roughly 10% of the cash flow on average from I would say short-term charters or the spot market and the predominant volume of cash flows in SFL has been driven by the longer term.

[Liam Burke:]

Great. Thank you very much.

[Ole Hjertaker:]

Thank you.

[Operator:]

Our next question comes from the line of Greg Lewis. Please ask your question announcing your company name.

[Greg Lewis:]

Yes, thank you and good afternoon everybody. Ole, in realizing you can’t talk much about the Seadrill restructuring. Just curious you mentioned the cash account that’s building, when post the – the last if we were to look back, the last time Seadrill came out of restructuring, how long after that there of reemergence from restructuring? What was Ship Finance unable to access that capital or did you still receive that payment?

[Ole Hjertaker:]

Yes, I am not sure if I got it right, there was some noise on the line here, but if I read you correct, are you asking me how long a time it took to proceed to emerge from bankruptcy or did you..

[Greg Lewis:]

No, I guess – yes correct, not how long because we won’t know that. But as I think about the process and maybe it’s deferring or being very similar to what it was last time post the reemergence, how long was it before you, before Ship Finance received that cash in that account?

[Ole Hjertaker:]

Okay, yes. So, sorry I understand, well at that time this is back in 2017, the charter rates at that time was higher. We also had a lot more financing at the time back then. And we did receive full charter hire all the way through the Chapter 11 process and that was part of our – what we say the pre-agreement between the stakeholders at the time that we would be paid full charter hire. So, the adjustment in the charter hire took effect when Seadrill emerged out of Chapter 11.

[Greg Lewis:]

Okay, okay. And then just one other one for me around this realizing that it’s a much smaller piece of the portfolio this time around, but really as we think about this, the last time this happened, despite maybe there being opportunities in the market, Ship Finance, my recollection was really stayed out of the market in terms of acquiring assets, is there any reason to think that this time that could potentially be different?

[Ole Hjertaker:]

No, I would say that was more coincidental. We have no intentions of staying away from the market. We know we took out the financing on one rig. And we have – we still have good capacity to do new deals. So, it’s not – that is certainly not our intention. But of course, it all boils down to finding the right deals and doing them. And of course we want them to be truly accretive to distribution capacity.

[Greg Lewis:]

Perfect. Okay, thank you.

[Ole Hjertaker:]

Thank you.

[Operator:]

There are no further questions at this time sir. Please continue.

[Ole Hjertaker:]

Then I would like to thank everyone for participating in our third quarter conference call and also thank the SFL team for their tremendous efforts in a challenging time with disruption caused by COVID-19 situation both onboard the vessels and onshore. Situation around the drilling rigs does remain unresolved as we have discussed today, but at least two of the harsh environment rigs are producing significant cash flows for Seadrill, which is very positive in the circumstances and we will remain very focused on the situation in order to create the best possible outcome for SFL and our stakeholders. But our rigs are only part of the puzzle there. So we cannot control the timing for resolution, but will of course notify you all when there are developments. If you do have follow-up questions, there are contact details in the press release or you can get in touch with us through the contact pages on our webpage www.sflcorp.com. Thank you.

[Operator:]

That does conclude teleconference today. Thank you for participating. You may now disconnect your lines. Thank you.