Good day and thank you for standing by and welcome to the Q2 2021 SFL Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. For your information, this conference is being recorded. Now I would like to hand the conference over to your speaker today, Ole Hirsacker.
Please go ahead.
Thank you, and welcome all to SFL's 2nd quarter conference call. I will start the call by briefly going through the highlights of the quarter. And following that, our CFO, Aksel Olsen, will take us through the financials, and then 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 Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates and 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 discussion of our risks and uncertainties, which may have a direct bearing on our operational results and our financial condition. The announced dividend of SEK0.15 per share, it represents a dividend yield of around 8.5% based on closing price yesterday, And this is our 70th quarter with dividends, so it's a bit of a celebration from that perspective. Over the years, we have paid nearly $28 per share in dividends or around $2,400,000,000 in total, and we have had an increasing fixed rate charter recently, supporting continued dividend capacity going forward. The total charter revenues And in the spot market, the EBITDA equivalent cash flow in the quarter was approximately $103,000,000 The last 12 months, the EBITDA equivalent has been approximately $424,000,000 The net income came in at around $20,000,000 in the quarter or $0.16 per share.
There were some one offs in the quarter, including a smaller impairment on a rig Recycling and negative mark to market on interest hedging instruments. There was also a higher interest element in the quarter as we have already raised the capital to refinance the remaining $147,000,000 convertible note in October and have, therefore, around $2,000,000 extra interest charge in the Q2 and Q3 until it's paid down. There were also around $900,000 higher upgrading costs in the quarter due to additional crew rotation costs linked to COVID restrictions. Our fixed rate backlog has increased and stands at approximately $2,700,000,000 from owned and managed vessels after recent acquisitions and adjusted for the recent disposals. This has provided continued cash flow visibility going forward.
The backlog excludes revenues from 16 vessels traded in the short term market and also excludes future profit share optionality. In addition, we have excluded charter hire relating to the drilling rigs to be conservative in light of the ongoing financial restructuring in Zebra. We are very pleased to continue to execute on our commitment to invest in assets and markets with a lower carbon footprint. We have spent a lot of time on evaluating various new technology initiatives that can improve performance of vessels, including our existing vessels on the water. In April, we agreed with the Volkswagen Group to build and charter out 2 new build dual fuel car carriers designed to use liquefied natural gas or LNG for propulsion.
And today, we announced an agreement to build 2 more vessels in the same series. The charter period for all these four vessels is 10 years from delivery in 20232024 and the transactions So I've added more than $400,000,000 to the fixed rate charter backlog and importantly also added 2 very solid counterparties to our customer portfolio. We are not yet at liberty to disclose the name of the counterparty for the last two vessels, but actually we can say so much that it's a large Investment grade Asian based shipping company, and we really look forward to working with them more closely and hopefully over time also develop more business opportunities with that. In addition to the car carriers, We have recently added 2 additional 14,000 TEU container vessels with charters to Evergreen. These are sister vessels to 4 vessels we already own and deliveries scheduled in just 2 to 3 weeks.
In addition to the solid cash flow during the remaining two and a half years or so with Evergreen, A key attraction here is the re chartering position in 2023 2024 for fuel efficient vessels we know are very attractive assets in the market. The purchase price is confidential, but I can confirm that it's significantly below current chart of the values reported by brokers. We have also agreed to acquire 2 modern 6,800 TEU vessels with long term charters to Maersk Line. 1 of the vessels have been delivered to us already and the second vessel is expected in a week's time, so we'll have good cash flow effect already this quarter. Total acquisition cost for these vessels is around $150,000,000 And with the rally in second end market, The charter revalues are in fact already up 40% to 50% from the levels we have acquired them at, creating a nice offer for us.
With these vessels, we will have 15 vessels on charter to Maersk. All these vessels and also the Evergreen vessels and the car carriers are in time charter terms where we are responsible for tactical management and vessels operation and therefore also have the direct interaction with Coincidentally, our customer MSC has exercised purchase options for 18 vintage feeder vessels. Due to the age of these vessels, the deal structure was bareboat charters with no technical risk and MSC had purchase obligations at the end of the charter period. The vessels are now 25 years old on average and MSC has exercised repurchase options with some vessels delivering at the end of this month and the remaining in September. Net cash proceeds after repayment of associated debt is estimated to approximately $40,000,000 And we expect a neutral to marginally positive book effect from this transaction in the 3rd quarter.
Excluding the drilling rigs, the backlog from owned and managed shipping assets were SEK2.7 billion at the end of the quarter. Over the years, we have changed both fleet composition and structure And we now have more than 70 shipping assets in our portfolio and no vessels remaining from the initial fleet in 2,004. In addition to the long term chartered vessels, we have 16 vessels trading in the short term market. We also had a significant contribution from profit share over time, both relating to charter rates and fuel savings. We do not have a set mix in this portfolio.
Focus is on evaluating deal opportunities across segments and try to do the right transactions from a risk reward perspective. Over time, we believe this will balance itself out, but we try to be careful and conservative in our investments And not just in Maastricht because money is burning in our pockets. The 2 drilling rigs are not included in the reported charter backlog figures. And with respect to Seadrill and the ongoing financial restructuring, we cannot give more details than what we have disclosed in our press releases or is otherwise publicly available. We received approximately 75% of the lease hire under the existing charter arrangement for West Leaders and West Turkless Chapter 11 proceedings.
Both rigs are active and working for all companies and the charter rate is sufficient to cover our debt service relating to the rigs. And we have, of course, we are, of course, pleased to see a strengthening harsh environment market in the North Sea on the back of a firm oil price. A few weeks ago, we entered into an amendment to the charter agreement relating to the semi submersible drilling rig West Hercules. Under the amendment agreement with Seadrill, Seve Circle is contracted to be employed with all major Equinor in Norway and Canada until the second half of twenty twenty two and thereafter redelivered to SFL in Norway. This agreement remains to be reconfirmed by the court in September And if so, SFL will continue to receive a bareboat hire of around $65,000 per day until Seadrill emerges from Chapter 11 And thereafter, approximately $60,000 per day while the rig is employed under a contract and generating revenues for Seadrill Approximately $40,000 per day in all other modes, including where the rig is idle and mobilized to and from Canada for the Equinor board.
We continue to have a constructive dialogue with Seadrill regarding the rig West Linus, which is on a sub charter to ConocoPhillips in the North Sea until the end of 2020 Seadrill has filed a planned support agreement, which is also supported by a majority of its secured creditors. Based on these filings, a potential emerging from Chapter 11 could be in early 2022, and we expect to have more clarity on West Linus Over the years, we have gone from a single asset class chartered to 1 single customer to a diversified fleet and multiple counterparties. And over time, the mix of the assets in charter backlog has varied from 100% tankers to nearly 60% offshore 10 years ago to container and car carriers now being the largest segment with 80% of the backlog. If we look at the counterparties, it is known mainly to end users and market leaders in their respective segments and relative few are intermediaries where we have less visibility on the use of the assets and quality of operations. Strategically, this also gives us access to more deal flow opportunities such as to repeat business with Maersk, MSC and Evergreen, for example.
Our strategy has therefore been to maintain a strong tactical and commercial operating platform in cooperation with our sister companies and the Sea Tankers Group. This gives us the ability to offer a wider range of services to From structured financing to full time time charters. And with full control of the vessel maintenance and performance, Including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels through the life of the assets And not only be passively owning vessels employed on bareboat charters where the customer may not always have an incentive to make such improvements. In addition, we can retain more of the residual value in the assets when we charter out on time charter basis and in the current environment with rising raw material costs Driving replacement cost for vessels, this value is for the benefit of SFL and our stakeholders, while for bareboat charter deals, CFO, Absal Olesen, who will take us through the financial highlights of the quarter.
Thank you, Mr. Hetake. On this slide, we are showing a pro form a illustration of cash flows for the Q2. Please note that this is only guidelines to assess 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 Approximately $142,000,000 in the 2nd quarter, with more than 80% of the revenue coming from our fixed charter backlog, which currently stands at SEK2.7 billion, providing us a strong visibility on our cash flow going forward. In the Q2, the liner fleet generated gross charter hires of approximately NOK75 1,000,000, including approximately NOK2.4 million in profit split Contribution related to fuel savings on some of our large container vessels. Of this amount, approximately 95% at approximately $2,200,000,000 is an average remaining charter term for approximately 4.7 years or approximately 7.5 years Our tanker fleet generated approximately $15,000,000 in gross charter hire. Of this amount, more than 80% was derived from our vessels for long term charters to among others, FIDD 66 and Frontline.
The net charter hire from the company's 2 Suezmax tankers employed in the short term market was approximately 1,800,000 compared to 2,500,000 in the previous quarter. Our drybulk fleet of 22 vessels generated approximately €39,000,000 in gross charter hire, including approximately €1,200,000 in profit share Contribution from our Capesize vessels on charter to Gold Motion. Of this amount, approximately half was derived from our Well, that's also long term charters to Golden Ocean, FinalTrans and Hidden Lake Lobbies, while the other half was derived from our 10 Supramax and handsets vessels employed in the short term markets. These vessels generated approximately NOK 14,900,000 in net charter hire compared to SEK9.8 million in the previous quarter. Svela owns 2 drilling rigs, which have been chartered out to subsidiaries of Siedel on bareboat terms.
In the 2nd charter, we received charter hire of approximately $12,200,000 from the rigs. This summarizes to an adjusted EBITDA of approximately NOK103 1,000,000 for the 2nd quarter compared to NOK98 1,000,000 in the first quarter. We then move on to the profit and loss statement as reported on the U. S. Cash.
As we have described in previous earnings calls, Our accounting statements are different from those of a traditional shipping company. And that's our business strategy focuses on long term charter contracts. A large part of our activities are classified as capital leasing. As a result, a significant portion of The total revenues are excluded from U. S.
GAAP operating revenues and instead booked as revenues classified as repayment of investment in finance leases and vessel loans, For the Q2, we report total operating revenues according to U. S. GAAP of approximately EUR 117,000,000, which is less than During the quarter, the company recorded profit net income of $3,600,000 mainly related to fuel savings on some of our large container vessels And the drybulk vessels are long term charters to go in motion. Furthermore, the net result was impacted by a non cash impairment of NOK1,900,000, reflecting the net proceeds from the recycling of S. Torus during the Q3, In addition to approximately $1,000,000 in additional OpEx related to challenging crude change logistics and approximately $2,000,000 in additional interest costs Due to issuance of Sustainability Linked Bond in April, ahead of maturity of the convertible bond in October.
So overall and according to US GAAP, the company reported a net profit of NOK19.5 million or $0.16 per share. Moving on to the balance sheet. At quarter end, SFL had approximately SEK372,000,000 of cash and cash equivalents, excluding approximately $8,000,000 of cash held in a wholly owned non consolidated rig owning subsidiary. Furthermore, the company marketable securities of approximately $23,000,000 based on market prices at the end of the quarter. In April, the company successfully placed a SEK150 1,000,000 senior secured sustainable fee linked fund due in 2026.
The bond will have a Q4 of 7.25 per annum and the net proceeds will be used to refinance existing debt, including our convertible bonds and maturity in October, which is included in the short term debt with approximately 147,000,000 outstanding at quarterend. The company has remaining CapEx of approximately NOK670,000,000 relating to recent acquisitions. During the Q2, the company issued approximately 10,000,000 new shares with ATM and DRIP programs, Net proceeds of approximately $87,000,000 to part finance these acquisitions and to have additional investment capacity going forward. The remaining investments announced are expected to be funded with senior debt, and there are no immediate plans to raise more new equity. As of today, we have obtained approximately €300,000,000 of senior debt from international banks at attractive terms, addressing the funding of the vessels to be delivered during the Q3.
Based on the Q2 numbers, we count on the book equity ratio of approximately 28%. And to summarize, the Board has declared a cash dividend
of $0.15 per share for the quarter.
This represents a dividend yield of approximately 8.5% based on the closing share price yesterday. This is the 70th consecutive quarter dividend and since inception of the company in 2004, approximately $28 per share or approximately $2,400,000,000 in aggregate has been returned to shareholders to dividends. SFL has successfully committed close to SEK700 1,000,000 towards accretive investments so far this year. And in the process, We have expanded our relationship with some of our key clients by investing in modern, eco designed containerships, At the same time disposed of older, less efficient vessels, demonstrating our commitment to further improve our carbon footprint pursuant to our ESG strategy. Following the recent investments, our backlog from our shipping assets now stands at SEK 2,700,000,000 providing strong visibility on future cash flow, debt service and continued distribution capacity.
With SEK372,000,000 of cash at quarter end, SFL is well positioned to execute on new accretive investments in the time to come. And with that, I give the word back to the operator who will open the line for questions.
We're now taking the first question from the line of Randy Giveans at Jefferies. Please go ahead.
So I guess the first Couple of questions are around the new container ship acquisition, 14,000 TEU vessels. Can you give the age of the ships? Are they scrubber equipped? Some more details. I know you're not going to give the purchase price, Just trying to get some other details around that.
And then looking at kind of residual upside after the current charters end in 'twenty three and 'twenty four?
Yes, absolutely. The vessels are sister vessels to 414,000 TEU vessels that we have today On charter to Evergreen, these are very fuel efficient vessels. These are in fact, one of our vessels was the first Vessel with 51 meter beam, I. E, the very biggest you can take through the Panama Canal. So our vessel was the first of that size to go through the Panal and actually use that corridor to serve the U.
S. East Coast market. So we know these are very versatile vessels with very good deadweight capacity and fuel efficient built And in 2014. They don't have scrubbers. This is something we discussed With the current charter, Evergreen, in the end, when you charter out a vessel, it's your customer who pays for the fuel.
So if we were to make such investment, it would, of course, be if we got either a compensation for that investment through linked to their Fuel savings or profit share like we've done with Maersk on several vessels where we have a base increase for the investment and then we get the cuts of the profits that comes out of that. We have not made such agreements with Evergreen. And of course, therefore, we cannot justify making that investment now. Of course, when we look at the new charter position, this is something we would obviously discuss With, call it, a new potential charter for these vessels if it makes commercial sense for us. Right now, we know that the shipyards are all sold out for vessels of this size and category from PolyJet Shipyards.
Well, 'twenty four is basically is well sold out and we hear that even 'twenty five may be challenging certainly for series of vessels. So and we've also seen other operators out there forward fixing already vessels with chartering positions similar to ours. So we see that there is also good demand on the potential on the customer side. But Exact timing of this is something we would have to look at. And again, it's all about trying to Create the best, call it, economic outcome for us from a risk reward perspective, obviously.
Got it. Okay. And then looking at your drybulk assets, clearly those are outperforming, most of your others now profit The convertible maturity is handled Seadrill mostly in the past now. So all of those things together, how do you view the dividend current at $0.15 Chances you re up that back to the $0.25 it was before the recent cut?
And
then how do you view your dry bulk fleet from here as well?
Yes. Thanks. Very valid questions, of course. On the dry bulk side, we are, of course, very excited to see the dry bulk market being Very robust and has been increasing over the last few months. Of course, if you look at the economic side of that and certainly from a reporting side because of the new, call it, accounting principles For shipping assets with low to discharge principle, you have effectively a delay in the revenue recognitions when the market is Strengthening and then the corresponding, call it, the tail if the market is softening.
So the $1,250,000 we got in Share from Gold Notion on top of the base rate. So this is just icing on the cake as we like to say We would, of course, like to see more icing on the cake. And based on the forward market, it could be significantly more than what's reported this quarter, But it has a delay effect, as I mentioned. And of course, the profit share is in the end actual performance for the vessels. Also, if you look at our acquisitions recently, we've done several deals that are delivering in the 3rd quarter.
Some vessels are already delivered, several are to be delivered over the next very few weeks. So we will see more we will see Cash flow production from these assets already in the quarter. So I think As we come to the finalization of the 3rd quarter and we look at the numbers at that time, That would be a more, call it, prudent time to look at also the distribution at the time. And needless to say, we were focused as always on distribution per share, long term distributable capacity per share. So of course, it's an objective to build dividend going forward, but exact timing and amounts, etcetera, It's something the Board has always reserved the right.
We never we have never in the history of SFL given specific forward guidance on dividends. But typically, we've been Correcting dividends down very, very seldom, and usually it's been stable and increasing. So Let's hope we can get back to our good old pattern also on that side.
Yes. Sounds good. Well, that's it for me. I'll turn it over.
Thank you.
We are now taking our next question from the line of Greg Lewis at BTIG. Please go ahead.
Hey, thank you and good afternoon all I guess, I would like to ask, Randy It's right. Big question around the dividend. I guess I'll ask it a different way. If we were to kind of rewind the clock a little bit, The first dividend move down was from the looked like it was driven by The ongoing issues around Seadrill and then the 2nd knockdown of the dividend was really around COVID. And so realizing that there's a lot more than just Seadrill and COVID that drive the decision around dividend, Are those two things kind of like hurdles or events we should be thinking about as we try to Think about when we could see a return in growth to the dividend?
Or is it more, Hey, those two things happened. We've moved on and it's more just about doing some more of these transactions, which we announced
Yes. Good. Difficult to be very specific on that. I mean, of course, when we made the adjustments, one was due to General, huge market uncertainty surrounding the whole COVID, which had much wider sort of impact Then just on the drilling side, and then you had the meltdown on the rig side where Seadrill was in the process of filing for Chapter 11 when we felt that it would be, It was very prudent to take down the dividend given the heightened uncertainty around that. We have some more visibility now with Seadrill with given what we noted in the report with one rig where we have an agreement that will run through next year.
But it's not entirely out of the woods. Hopefully, over the next couple of months now, we will have more clarity there as well. But at the same time, we also See very good performance in some of the other asset classes like the drybulk vessels that was mentioned. And we've been doing more business with these new transactions and, of course, hope to execute on additional deal opportunities going forward. So I think the best way to phrase it is probably that the Board will is assessing, call it, The dividend with a perspective of what they believe is long term sustainable in a more normalized world.
And this quarter, the dividend was kept stable. Next quarter, Management can hope that there is good performance, continued good performance and also better visibility and also Cash flow coming in from these new assets that will build that long term distribution capacity. But again, we cannot make A few comments on what the dividend could be because, again, this is a right to board reserves To have the appropriate flexibility.
100%. I also realizing that you are limited And what how you can talk about the relationship with Seadrill and the rigs. But I guess, I'll ask it this way. It's been reported in the news that a couple of other drilling Is it right to think that if Company A acquires Seadrill, they by default, even though Ship Finance is the owner of those rigs? Or is it is that something where then Ship Finance, I'm really just looking for color around the relationship contract or agreement.
Like how would something like that work if
Just Just to clarify your question, I think your question is, is there some kind of that our rigs automatically are a part of the sale that is required? Yes, that's exactly right. Exactly, yes. So it is really up to the Board We cannot be acquired to make a separate proposal to SFL in that respect and up to the Board to evaluate That proposal in if there should be a potential bid on the table. So there's no kind of Automatic consequence that an offer and seizure also relates to those assets because those are assets of SFL And operated separately.
But we also note that that said is that we have to attractive harsh environment assets, which also seem to be the most desired asset class if you look at these assets. So We will just have to see how things develop.
Okay. And then as I think about that, and I'm really interested in the Conoco Contract with the jack up. I mean, is there any change of control where does you know what I mean? Like, is that something where Conoco As the, I guess, customer of that rig, is there any approval process through them? Or is that something where, Yes.
I'm just kind of curious, do they have any input into the potential whatever And potentially where that rig goes in the event that Seadrill decides to have its company be sold?
I cannot talk for the Westellara, which is a history of Linus, where we're that is also working for Comoco. But The concept on ARIG and our relation with Seadrill and Oconoco is that Under the contract agreement, SFL has a basic and fast track in rights into that contract not to be unreasonably withheld And I think if you look at the operations of the rig, It's more of part of the infrastructure of the Eco Physic field, which has still a long lifetime. So We believe there is interest from Commerzbank to keep that rigam, but that will have to be addressed if and when such situation occurs.
Okay. Thank you very much for that. Have a great day.
Thank
you. And we
are taking our next question from the line of Liam Burke at Bradley.
Yes. Thank you. You on the press release, you have a capital requirement of $670,000,000 on the acquired vessels plus new builds. Understanding you're taking delivery on the Q3 on the existing vessels and then the new builds Delivery is 2024. Could you give us a sense of timing of how that outlay of $670,000,000 would go?
Yes, absolutely. I mean, we have I mean, the newbuildings are the newbuildings, we have that CapEx. I mean, there's some, called pre delivery funding and then the bulk majority on delivery. On kind of the 5 vessels that some have been delivered and some are in the process of being delivered. I mean, financing has been secured Basically with a combination of cash at hand and also senior bank financing at very attractive terms.
So that's all secured. We experienced a tremendous interest from financing institution based on, I would say, on the high quality of assets, but also I call the counterparties on the other side. So that's, of course, very encouraging to see and basically addressed in full.
Okay. And you mentioned you've got additional deals that you're looking at. Would that be primarily in the container space or are you looking across the board to your entire fleet?
Now we are segment agnostic. So we look at opportunities across the board in several shipping, call it sectors. We think this is a really important distinction from many other Maritime companies who are focused on one single segment and therefore is looking to investing there. What we have seen over time is that Typically, it's at the peak of the markets that the equity market is open and when banks will lend you the most money. And therefore, If you are in one single segment, you're almost programmed to invest the bulk of your capital maybe at the suboptimal time.
So what we try to look at, we look at multiple segments at a time and we evaluate risk rewards And market dynamics within the segments and we compare them to each other. So you can say it's a coincidence. We've done mainly over the last couple of months, we've done mainly container ships and car carriers, which both liner type assets, but still Very different sort of market dynamics, where one segment has boomed a lot and the other has strengthened, but Not but differently than the container side. At the same time, we also see many opportunities in other sectors where There has been less activity. So we'll what we say, we are optimistic and our mindset is that We look at diversifying both asset types and counterparties.
And therefore, we are not therefore, we're not only focused on
There are no further questions from the line. Please continue.
Thank you. Then I would like to thank everyone for participating Our Q2 conference call and also thank the SFL team on board of vessels and onshore for their continued efforts In a time with continued operational disruption caused by the COVID-nineteen situation. If you have any 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.