SFL Corporation Ltd

Thank you and welcome all to SFL's fourth 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 then be concluded by opening up for questions where our Chief Operating Officer Trym Sjølie will also participate. Before we begin our presentation I would like to note that this conference call will contain forward-looking statements within the meaning of the US 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 uncertainty that will 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 market. 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 over risks and uncertainties, which may have a direct bearing on our operating results and our financial conditions. The announced dividend of 15 cents per share represents a dividend yield of more than 7% based on closing price yesterday, and this is our 68th quarterly dividend payment. In light of the continued uncertainty surrounding Cedril and outcome of their Chapter 11 restructuring, the Board adjusted the dividend to 15 cents last quarter and effectively then excluded all contribution from offshore assets for the time being. Over the years, we have paid more than $27 per share in dividends, or $2.3 billion in total, and we have a significant fixed rate charter backlog supporting continued dividend capacity going forward. The total charter revenues was $144 million in the quarter, with more than 90% of this from vessels on long-term charters, and less than 10% from vessels employed on short-term charters and in the spot market. The EBITDA equivalent cash flow in the quarter was approximately $106 million and last 12 months the EBITDA equivalent has been approximately $464 million. We recorded a significant impairment in the quarter relating to an idle drilling rig, which was taken down to scrap value in order to be conservative. But cash flow from our other assets were not impacted by the offshore market situation and the free cash flow from other assets were well above the distribution capacity with a good margin in the quarter. Despite prepaying more than $100 million on an offshore related financing in the quarter, the consolidated cash position at quarter end was more than $200 million and in addition we had nearly $30 million in marketable securities. Our fixed rate backlog, excluding anything from the drilling rigs, stands at approximately $2.3 billion from owned and managed vessels after recent charter extensions and vessel transactions, providing significant cash flow visibility going forward. And the backlog excludes revenues from 16 vessels traded in the short-term market and also excludes any future profit share optionality. The profit share does contribute optionality value for us, and in the fourth quarter, it accumulated to more than $5 million. The last quarter, it was primarily relating to the two VLCCs on Charter to Frontline, but going forward, we expect a relatively higher contribution from fuel savings of container vessels with scrubbers in light of increasing fuel price and fuel spreads. With a strengthening dry bulk market, we can also hope for some positive contribution from profit share on Cape-sized bulkers as well. During the last few months, we strengthened our balance sheet and investment capacity by raising nearly $50 million through share issuance. This, combined with other initiatives, has in reality fully restored our investment capacity despite the prepayment of more than $100 million on an offshore drilling rig, as mentioned earlier. and there are no immediate plans to raise more equity. At the end of the fourth quarter, we also sold a 50.1% stake in a subsidiary which leases out four large 19,000 TU container vessels to MSC. The purchaser was an entity affiliated with Hammond Holdings, our largest shareholder. The purchase price was approximately $17.5 million, and in effect the transaction, an effect of the transaction was that the assets and associated debt were reclassified as equity account debt and therefore slimmed the gross balance sheet. Our equity ratio increased while the estimated net reduction in SFL's distributable cash flow from these assets is limited to only approximately $700,000 per quarter as a large portion of our invested capital is an interest-bearing intra-company loan which remains unchanged. As previously announced, Seedrill and most of its subsidiaries filed Chapter 11 cases in Texas last week. We have entered into agreements relating to two of our drilling rigs where we will receive approximately 75% of the lease hire under the existing charter agreements for Westlinus and West Hercules for the time being. The agreed amounts are sufficient to cover SFL's debt service relating to the rigs. These agreements will ensure uninterrupted performance on the subcharters to the oil major, where CEDRIL will be allowed to use funds received from the respective subcharter to pay a fixed level of operating and maintenance expenses. With regard to the rig Vestaurus, the lease is expected to be rejected and the rig re-delivered to SFL. This rig is now debt-free and has been held in layup by Seadrill for more than five years. And SFL is currently evaluating strategic alternatives for the rig, including potential recycling at the European Union-approved green recycling facility. The harsh environment Jacob Rig West Linus is subchartered to an oil major until the end of 2028, while the harsh environment semi-submersible rig West Hercules is employed on consecutive subcharters to an oil major in the North Sea. While no insurances can be provided with regards to the outcome of the CEDRIL's Chapter 11 proceedings, SFL continues to have constructive dialogue with CEDRIL and the relative financing banks to find a long-term solution for the West Linus and West Hercules. We can unfortunately not make any further comments right now relating to the rigs and the pending restructuring, but our objective is, as always, to maximize long-term value for our stakeholders. Excluding the drilling rigs, the backlog from owned and managed shipping assets was $2.3 billion at the end of the fourth quarter. Over the years, we have changed both fleet composition and structure, and we now have 81 shipping assets in our portfolio and no vessels remaining from the initial fleet back from 2004. We have gone from a single asset class chartered to one single customer to a diversified fleet and multiple counterparties. and over time the mix of the charter backlog has varied from 100% tankers to nearly 60% offshore at one stage to container being the far largest segment right now. In addition, we have 16 vessels traded in the short-term market which we define as up to 12-month charters and also from time to time significant contribution from profit share as discussed earlier. We do not have a set mix in the portfolio, focuses on evaluating deal opportunities across the 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 invest just because money is burning in our pockets. Our strategy has been to maintain a strong technical and commercial operating platform in cooperation with our sister companies in the Sea Tankers Group. This gives us the ability to offer a wider range of services to our customer, from effectively structured financing to full service time charters. But more importantly, we also believe it gives us unique access to deal flow in our core segments. And with full control over 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 We do, of course, closely follow the various developments in new propulsion technology and other initiatives to reduce or eliminate carbon footprint by commercial vessels and to ensure that our asset portfolio remain competitive in the long run. And with that, I will give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights for the quarter.

Thank you, Ms. Hjertaker. On this slide, we have shown our performance illustration of cash flows for the fourth quarter. Please note that this is only a guideline to assess the company's performance, and is not in accordance with US GAAP, and also not of extraordinary and non-cash items. The company generated gross charter hire of approximately 144 million in the fourth quarter, with more than 90% of the revenue coming from our fixed charter rate backlog which currently stands at 2.3 billion, providing us with strong visibility on our cash flow going forward. During the quarter, the line of fleet generated gross charter hire of approximately 82 million, including 1.9 million in profit split contribution related to fuel savings on some of our large container vessels. Of this amount, approximately 95% was derived from our vessels on long-term charters. At the end of the quarter, SFL's liner fleet backlog was approximately 1.7 billion, with an average remaining charter term of approximately 4 years, or approximately 7 years if weighted by charter revenue. Approximately 85% of the liner backlog is the world's largest liner operators, Maersk Line and MSE, with a balance of approximately 15% to Evergreen. Our tanker fleet generated approximately 19 million in gross charter hire, and the VCC's charter to frontline shipping generated 7.1 million, including 3.5 million in profit-based contributions. And during 2020, the total profit share contribution from these assets was 18.6 million. Furthermore, the net charter hire from the company's two Zeus Max tankers employed in the short-term market was approximately 1.6 million in the quarter. And in November, the company re-delivered the last VLCC to Hunter Group. And after repayment of the associated financing, the transaction increased as a close cash balance by approximately 10.7 million. During the quarter, our dry bulk fleet generated approximately 27 million in gross charter hire, and of this amount, approximately 70% was derived from our vessels on long-term charters. During the quarter, the company had 10 handy-sized vessels employed in the spot and short-term market, and the vessels generated approximately 6.4 million in net charter hire, compared to 7 million in the previous quarter. SFL owns three drilling rigs, which have been charged out to subsidiaries of Seadrill. In the fourth quarter, we received charter hire of approximately 16.3 million. Subsequent to quarter end, SFL entered into certain agreements relating to drilling rigs, subject to final quarter approval. While the West Taurus will be re-delivered to SFL, the West Hercules and West Linus will continue their employment with CEDRIL, in order to ensure uninterrupted performance on the subcharters to oil majors. This summarizes the adjusted EBITDA of approximately 106 million for the fourth quarter, or 91 cents per share. We then move on to the profit and loss statement, as reported on the US GAAP. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company, as 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 our charter revenues are excluded from US GAAP operating revenues, and instead booked as revenues classified as repayment of investment in finance leases and vested loans, resulting in associates and long-term investments, and interest income from associates. So for the fourth quarter, we report total operating revenues according to US GAAP of approximately $150 million, which is less than approximately $144 million of charter hire actually received for reasons just mentioned. During the quarter, the company recorded profit split income of $3.5 million from our tank vessels on charter to frontline. and 1.9 million from profit split arrangements related to fuel savings on some of our large container vessels. The company also recorded non-recurring and non-cash items during the quarter, including a positive mark-to-market effect relating to hedging derivatives of 3.4 million, a negative mark-to-market effect relating to equity and debt investments of 4.2 million, a gain of 5.6 million from charter termination and sale of subsidiaries, in addition to increasing the credit loss provisions with 2.8 million. Furthermore, the company recorded a gross impairment of 252.6 million on the drilling rig with Taurus, partly offset by a debt extinguishment effect of 66.1 million, After associated debt was repurchased at a discount, implying a net impairment of approximately 187 million. So overall and according to US GAAP, the company reported a net loss of 165 million, or $1.49 per share. Moving on to the balance sheet. At quarter end, SFL had approximately 215 million of cash and cash equivalents, excluding approximately 3.4 million of cash held in wholly owned, non-consolidated subsidiaries. Furthermore, the Compden marked all securities of approximately 29 million, based on market prices at the end of the quarter. Also, as well as five debt-free vessels and a rig with a combined charter-free market value of approximately 46 million, based on broker appraisals. In our last quarterly call, we mentioned that ADS crew carriers, where SFL owns approximately 17%, had sold all their vessels at attractive prices, and that the net proceeds from the sale would be distributed to the shareholders. The distribution has now been approved, and as a result, SFL expects to receive a dividend of approximately 9 million during the first quarter. The subsidiaries owning the drilling rigs West Hercules, West Linus and West Taurus have previously been accounted for as investments in associates, applying the equity method in accordance with US GAAP. These equity accounted subsidiaries are wholly owned by SFL, but as a result of the accounting treatment, operating revenues, operating expenses and net interest expenses in these subsidiaries were not included in SFL's consolidated income statement. The net contribution from these subsidiaries was recognized as a combination of interest income from associates and results in associates. During the fourth quarter, the subsidiaries owning the rigs West Taurus and West Linus were reassessed and fully consolidated after, among other things, changes to certain financing terms relating to the assets. From the time of consolidation at the end of October 2020, all revenues earned and costs incurred was accounted for as operating items in the consolidated income statements of SFL, and concurrently the balance sheets of SFL Deepwater and SFL Linus were fully consolidated into the consolidated balance sheets of SFL. And based on the fourth quarter figures, The company had a book equity ratio of approximately 26%. Then to summarize. The Board has declared a cash dividend of 15 cents per share for the quarter, which represents a dividend yield of approximately 7.4%, based on the closing share price yesterday. This is the 68th consecutive quarterly dividend, and since inception of the company, In 2004, more than $27 per share, or $2.3 billion in aggregate, has been returned to shareholders through dividends. And while we continue to collect revenue from our fixed chart rate backlog, we also have upside-down profit split arrangements from our VCCs and cave-sized vessels, in addition to profit split arrangements related to fuel savings of some of our large container vessels. We have added more than 230 million to our fixed chart rate backlog the last 12 months, and we actively continue to explore new business opportunities, with particular focus on investments in assets with a lower carbon footprint in order to position our portfolio for the future. And with that, I give the word back to the operator, who will open the line for questions.

Thank you. Ladies and gentlemen, as we now are beginning the question and answer session, just a reminder, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. And if you wish to cancel your request, please press the hash key. Our first question today comes from the line of Randy Givian from Jefferies. Please go ahead, your line is open.