SFL Corporation Ltd

The total charter revenues were up 17% compared to the third quarter. The majority of the revenues were from vessels on long-term charters and around 16% from vessels employed on short-term charters and in the spot market. The EBITDA equivalent cash flow in the quarter was approximately $135 million, which is up 7% from last quarter. and over the last 12 months the EBITDA equivalent has been 504 million dollars. The net income came in at around 48 million in the quarter or 38 cents per share which was in line with the previous quarter. This included contributions from profit share arrangements and also positive mark-to-market on interest rate swaps and equity and bond investments. We also received a delayed charter hire payment in excess of 10 million dollars from CEDRIL in the quarter. The announced dividend of 24 cents per share is one cent up from the third quarter, where it represents a dividend yield of around 9.3% based on closing price yesterday. This is our 76th quarterly dividend, and over the years we have paid more than $2.5 billion in total, or more than $29 per share. And we have a robust charter backlog supporting continued dividend capacity going forward. Our fixed rate backlog has increased significantly over the last year and stands at approximately $3.6 billion from owned and managed vessels after recent acquisitions and charters, providing continued cash flow visibility. And importantly, the backlog figure excludes revenues from vessels traded in the short-term market and also excludes future profit share optionality, which we have seen can contribute quite significantly to our net income from quarter to quarter. The harsh environment semi-submersible rig Hercules was original on a long-term beer boat chartered to seed drill. It was re-delivered to SFL in December and is now managed technically and operationally by Oddfjell Drilling. Before mobilizing the rig for the drilling contract with Exxon in May, the rig will have to complete a scheduled special periodic survey or SPS. We are also preparing for some upgrades to the rig to make it more attractive for long-term contracts. Currently, we estimate costs to approximately $80 million, including SPS costs and upgrades. There will not be any revenues on the rig in the first quarter while this is undergoing, while operating costs will accrue. The gross contract value of the Exxon Charter in Canada is estimated to around $50 million, with a duration of approximately 135 days, including mobilization. The rig will then be available for new contracts from mid third quarter and there is good progress on new charter opportunities which will be announced in due course. The rig is one of only a handful rigs fully equipped to drill in the harshest Arctic environment and market analysts are positive to market prospects based on recent tender activity and a tight supply-demand balance. We have seen that the international market for deepwater drilling rigs without these harsh environment features has risen quickly. The harsh market has been lagging recently, but we believe prospects for 2024 and 2025 is particularly promising. This is confirmed by recent fixtures in the North Sea, where, as an example, Transocean announced a three-year contract in Norway last autumn at a charter rate which implies an annual EBITDA in excess of $80 million. During the fourth quarter, we took delivery of four vessels with long-term charters. This includes the last two out of four Suez Maxx tankers chartered to Koch Industries, a new-built container vessel chartered to Maersk Line, and a car carrier chartered to UCOR. These four vessels added $260 million to our fixed backlog, in addition to profit share optionality on fuel saving. In January, we raised a new $150 million sustainability-linked unsecured bond loan. The proceeds will be used to refinance bond loans maturing in 2023 and for working capital purposes. After quarter-end, we have bought back notes with nominal amounts of approximately $70 million, and currently there is approximately $105 million remaining on a convertible note due in May, and approximately $40 million in a Norwegian kronor denominated bond due in September. We have also today announced the sale of a 2009 built Suezmax tanker. This vessel has been trading in the sport market for a number of years now and we are taking advantage of a strong tanker market which is also reflected in the value. This is in line with our strategy of selling older vessels and reinvesting in newer and more fuel efficient vessels. Net cash proceeds is then estimated to approximately $23 million after repayment of associated debt and we expect a book gain of approximately $5 million this quarter. Over the years we have changed both fleet composition and structure and we now have 77 maritime assets in our portfolio and our backlog from owned and managed ships stands at $3.6 billion. Over the years we have gone from a single asset class charter to one single customer to a diversified fleet and multiple counterparties and the fleet composition has varied from 100% tankers to nearly 60% offshore 10 years ago to container vessels now being the larger segment with around 50% of the backlog. Most of the vessels are in long-term charters and in the fourth quarter 93% of charter revenues from our shipping assets came from time charter contracts and only 7% from bare bottom or dry lease. In addition to fixed rate charter revenues, we have had significant contributions to cash flow from profit share over time, both relating to charter rates and fuel savings. Last 12 months, the aggregate profit share has been around $28 million with around $7 million in the fourth quarter. 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 with a focus on technology and transition over time to more fuel-efficient vessels. The strength of our counterparties and diversification is key when we assess a portfolio and quantify our contracted backlog. And the list speaks for itself with market-leading operators like Maersk, Hapaglod, ConocoPhillips, P66, Volkswagen, and now lately Exxon, to name a few. Relatively few of our customers 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 the repeat business we've had with Maersk, MSC, Evergreen and Trafigura, for example. Our strategy has therefore 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 customers, from structured finance on one end to full service time charter, which we're doing more of. 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 passive the owning vessels employed on bare boat where the customers 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 and inflation, driving replacement costs for vessels, this value is for the benefit of SFL and our stakeholders. For bare boat deals, this value is usually retained by the charterer through fixed price purchase options. 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, Mr. Hjertaker. On this slide, you'll see a performer 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 a net of extraordinary and non-cash items. The company generated gross charter hire of approximately 208 million in the fourth quarter, including approximately 7 million of profit share, with approximately 84% of the revenue coming from a fixed charter rate backlog, which currently stands at 3.6 billion, providing us with strong visibility on our cash flow going forward. In the fourth quarter, the liner fleet generated gross charter hire of approximately 99 million, including approximately 6.5 million in profit share related to fuel savings on seven of our large container vessels and one car carrier. At the end of the fourth quarter, SFL's liner fleet backlog was approximately 2.4 billion with an average remaining charter term of approximately 4.5 years or 7.3 years if weighted by charter hire. Our charter backlog includes approximately half a billion of backlog from our seven car carriers. In the fourth quarter, SFL had a fleet of 18 crude oil, product and chemical tankers, with the majority employed on long-term charters. A tanker fleet generated approximately 49 million in gross charter hire during the quarter, compared to approximately 42.4 million in the previous quarter. SFL had two SUSEMEX tankers and two smaller chemical tankers trading in the spot and shorter market. The net charter hire from these vessels was approximately 12.1 million in the fourth quarter compared to approximately 11.5 in the third quarter. Subsequent to quarter end, SFL sold a 2009-built Thusmax tanker for a total consideration of approximately 39 million. Net cash proceeds to SFL after repayment of a sold-dated debt is estimated to be approximately 23 million, and they expect to record an accounting gain of approximately 5 million in the first quarter. The company has 15 dry bulk carriers, of which 8 were employed on long-term charters during the quarter. SFL generated approximately 23.7 million in gross charter hire from the dry bulk fleet, including approximately 400,000 of profit share. 7 vessels were employed in the spot and short-term market, and contributed approximately 9 million in net charter hire during the quarter. compared to approximately 10 million from six vessels in the previous quarter. SFL owns two harsh environment drilling rigs, the 2014 built track-up rig Linus and the 2008 harsh environment semi-submersible rig Hercules. The Linus is currently under long-term contract with ConocoPhillips Scandinavia until the end of year 2028, and the rig is employed on the greater ecofisk field in the North Sea. During the fourth quarter, the RIG generated approximately 18.6 million in contract revenues. In addition, SFL received 10.5 million relating to catch-up payments for previously reduced charter hire from CEDRIL during Chapter 11. The Harsh Environment Semi-Submersible RIG, Hurtless, was an available charter to CEDRIL until the end of December 2022, where the BOM RIG was re-delivered to SFL. During the quarter, we received approximately 7 million in charter revenues. Our operating and G&A expenses was higher in the fourth quarter as we recorded the first full quarter of operations for the liners. In addition, we had higher than normal operating expenses for shipping feet due to vessel deliveries during the quarter. Older income of approximately 2 million is primarily derived from interest income from financial investments. This summarizes to an adjusted EBITDA of approximately 135 million in the fourth quarter, 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. Therefore, a significant portion of our charter revenues are excluded from US GAAP operating revenues. This includes repayment of investment in sales direct financing leases and leaseback assets, and revenues from entities classified as investment in associates for accounting purposes. So for the fourth quarter, report total operating revenue according to US GAAP for approximately 198 million, which is less than approximately 208 million of charter hire actually received for the reasons just mentioned. During the quarter, SFL received 10.5 million relating to capital payments for previously reduced charter hire procedure during Chapter 11. Furthermore, the company recorded profit share income of approximately 6.5 million from huge savings from seven of our large container vessels and one car carrier, in addition to approximately 400,000 from our eight cave-sized driveable vessels. Also, the company recorded a 2.9 million gain related to positive market-to-market effects related to equity and debt investments, and a decrease of 400,000 in credit loss provisions. And finally, The company recorded a 1.4 million gain related to positive mark-to-mark effects related to interest rate swaps. And at quarter end, approximately 70% of our financing was fixed rate or swaps to fixed by financial hedging instruments. And with the recent raise in interest rates, we now see the benefits of a conservative financing strategy. Similar to our charting strategy, we have aimed at significant diversification in our funding base. Both in terms of structure and geography, as this has proven to give us more flexibility over time. Based on our assumptions, we estimate that one percentage increase in interest rates from current levels equals approximately 2 cents per share in lower distributable cash flow per quarter, and vice versa. And when evaluating new investment opportunities with a conservative approach when assuming the interest rate cost during the life of the project, and we generally seek to fix the interest rates back-to-back with a fixed charter duration or include an interest rate adjustment in the charter rate. As previously mentioned, our operating and G&A expenses was higher in the fourth quarter as we recorded the first full quarter of operations for Aligners. We had higher than normal operating expenses for the shipping fleet due to many vessels' deliveries during the quarter. So overall, and according to US GAAP, the company reported a net profit of approximately 48.5 million, or 38 cents per share. Moving on to the balance sheet. At quarter end, SFL had approximately 188 million of cash and cash equivalents. Furthermore, the company had multiple securities of approximately 7 million best-in-market prices at the end of the quarter. In addition, the company had seven debt-free vessels at quarter end, with a combined charter-free value of approximately 180 million, based on average broker appraisals. During the fourth quarter, the company entered into long-term financing arrangements for two 14,000 TU container vessels in the Japanese leasing market. The combined amount was 240 million, and the term is seven years. SFL also secured long-term financing facilities for four newly acquired Susmax vessels of 145 million. In January, SFL issued a new 150 million sustainability-linked unsecured bond with maturity in 2027. The proceeds will be used for refinancing of existing debt facilities and working capital purposes. As of today, Approximately 105 million is currently outstanding under convertible notes due in May 2023, and approximately 40 million, equivalent in Norwegian kroner, is currently outstanding under bond due in September 2023. At the end of the quarter, Esvel has four LNG dual fuel car carriers under construction for delivery in 2023 and 2024. The remaining capital expenditures related to yard installments was approximately 210 million at quarter end. The majority of this is expected to be financed by debt facilities in due course. Based on the Q4 numbers, the company had a book equity ratio of approximately 28.3%. Then to conclude. The company has delivered another strong quarter with growth in both revenues and EBITDA. The board has declared a 76 consecutive cash dividend to increase the dividend to 24 cents per share. This represents a dividend yield of approximately 9.3% based on the closing share price yesterday. The company has a strong balance sheet and liquidity position, and we recently raised a 150 million senior unsecured sustainability linked bond which together with cash and balance sheets addresses the upcoming maturities in the convertible note in May and the NOF bond due in September. Our fixed chart rate backlog currently stands at 3.6 billion, after adding 1.4 billion in 2022, which provides us with strong visibility on our cash flow going forward. We have seen a strong recovery in the offshore drilling market since the beginning of the year and our two harsh environment drilling rigs are well positioned to benefit from an increased activity level in the sector. And with that, I give the word back to the operator who will open the line for questions.

Thank you. As a reminder, to ask a question, you need to slowly press star 11 on your telephone keypad and wait for a name to be announced. To withdraw your question, please press star 11 again. This will take a few moments. Now we're going to take our first question. And the first question comes from the line of Chris Weatherby from City. Your line is open. Please ask your question. Excuse me Chris, your line is open. We're going to take the next question. And the question comes from the line of Greg Lewis from BTIG. Your line is open, please ask your question.

Yes, thank you, and good afternoon, everybody, and thanks for taking my questions. Ole, I did have a couple questions around, you know, the rigs you mentioned. You know, you mentioned the $80 million of rig capex ahead of the contract with Exxon Canada. You mentioned upgrades about potentially long-term work. As we think about the Hercules, it's a high-quality rig. When we think about these capital upgrades, is this like MPD? Is this BOP? Any kind of color you could give us around the upgrades related to that rig and the costs associated with those upgrades as you bid that rig for, I guess, longer-term employment?

Yeah, absolutely, and thanks for calling in. Drilling rigs are quite expensive to run, and that goes for any drilling rig, whether it's harsh environment or not. It consists of two main parts. It's the top side where the under drilling functionality and then you have the platformer itself or you can say the marine piece which is really sort of stable in the water while under drilling operations. And then you have Relatively few drilling rigs with a steel quality, and that needs to be built from the yard side. It's got to have a steel quality that can withstand, I would say, extreme cold and also ultra harsh weather, and this rig is one of them. and it has been drilling up in the Barents Sea during winter under pretty extreme conditions. Over time, of course, both drilling equipment and the marine part, just like any ship, you can say, will have to be renewed, painted, parts changed, generators need to be overhauled. I mean, this is sort of a normal procedure. The difference with a drilling rig and a normal ship is that a ship is basically like a big bathtub with a small engine in the end that you push through water, and the drilling rig has a lot more equipment and a lot more high-value equipment on board. And as a consequence, as you go through your scheduled maintenance, there is more work to be done. So while we kind of give you a full breakdown on element by element, I would say that you have one piece which is just regular, you know, standard maintenance. And then you have, you know, some upgrades that are relating to, you know, as we've mentioned that this rig will be able to do more than it is doing today. It's been working more as an exploration rig over the last, I would say really since it was new. While we are doing some upgrades where it would also qualify for more Development Drillings, where we can see more So if you look at the sort of the, and then you also have some upgrades relating to specific contracts, for instance, you know, for this, you know, contract in Canada, there is around $6 million of upgrades that needs to be done, and really to qualify for quality requirements in Canadian waters for this specific drilling rig as an example. So it's a mix of elements. The good thing we hear, we are working with Oddfjell Drilling. They have several, I would say, sister rigs, very similar spec rigs, so they have a lot of experience in this. Also in terms of procuring the equipment and the spears and equipment, because that is now, we've been through a period where This whole segment has been under the weather, I would say since 2014, 2015, when the market came down. And that also, you know, that's not only for the drillers themselves, but also for anyone involved in that value chain, be it, you know, you know, parts suppliers and equipment manufacturer and everyone. So now when things are really revving back up, you know, you not only have a sort of a, you know, of course, cost to make sure you can manage, but also facilitating all the parts in time for, you know, the drilling, you know, activities that you're going to do. So that is also, you know, important piece here to actually get everything you need in time. Also what we are looking for looking at and this is so this is with with any drilling rig or any equipment over time you know as as things you know with time you know you have to replace equipment you know sometimes you have equipment where the manufacturer cannot longer service it because because of from a timing perspective so so that is also something that is it's going into the overall cocktail yeah But the other side of this is cash flow potential on these drilling rigs. Because, you know, we have an example, there was a drilling rig, TransOcean, that was announced last fall on the Norwegian continental shelf, three years, generating sort of more than 80 million dollars in cash flow. You know, EBTA cash flow per year, you know, relating to that contract. So, yes, they are expensive to upgrade and maintain and take through special surveys, but there's also very significant cash flow potential when these rigs work in a reasonably hot market.

Yeah, no doubt about it, especially where rates are, you know, not that I want to spend all the time talking about the offshore rigs, but I think it is somewhat As people think about SFL and as we try to think about the dividend, that's obviously important to us and investors and obviously SFL as well. I guess in previous years when the rig market, like you mentioned, was in a six to seven year downturn, the assets maybe weren't as viewed as core to the portfolio. And really, I guess what I'm trying to understand is As we think about potential for the offshore rigs to be additive to the dividend, maybe a six or 12-month contract on the Hercules doesn't make it additive to the dividend, but is that a fair way to think about it where maybe if the rig is on a multi-year contract, generating cash flows, obviously paying back the You know, the initial investment, probably in under a year. Is there any way to think about how those, how the two rigs can impact the dividend? Or should we be thinking about cash flow from those rigs really being deployed elsewhere on maybe longer term business to then drive the dividend higher? Any kind of color you can give around that? I realize that was a long question.

Thank you for making an attempt to answer that. I think as you see on both rigs, you start with the line, it has a long-term contract, which is market-linked. I think as you know, Worker Sales True 23, and we see the market expectations for 24 and 25. I think that's when I should expect to come in to call it the distributable cash flow from the rigs in terms of kind of contributing to the dividends. I think that's kind of the timeframe we're looking at. I think if the line is covered, it's reset every six months. That's positive, and then you basically have are interesting supply demand for that type of rigs in the North Sea with many rigs leaving as well. And also same with the semis, we've seen many semis migrating out on the international market where you actually see now higher day rates than in the North Sea. You see, you have a lower OPEX and you have more term business. And that's really when you can see, get visibility on that, that we can guide on more precise André Reppen, Aksel Olesen, Thecla Panagides

We have quite significant cash flow or cash position at the end of 2022. We recently raised that new bond loan that is effectively taking out the bond maturities we have this year. And on the asset side, we are effectively fully invested as the remaining installments on the car carriers that we have under construction will most likely be covered by debt facilities. There may actually be cash, you know, So from that perspective, this is something that we have been prepared for for quite a while and we put down the money now and of course we wouldn't do that if we don't think that this is accretive to SFL and the distribution capacity long term.

Yeah, now 100%. And then just kind of pivoting more to a bigger picture, how we should think about lease yields and really your returns. I mean, clearly interest rates have gone higher. I don't know if the era of free money is over or not, but it looks like at least in the medium term there is. It looks like we've seen some crackdowns, we'll just say it in Asia around some leasing companies. Deploying capital across the maritime space. Has there been any, is there any shakeout where we could see returns for SFL in a higher interest market? Could that actually be a positive for SFL, just given the diversity and kind of your different pockets of money? Or should we be thinking about that as neutral at best?

You have two sides. I mean, if you look at a more financial, call it the structured finance, we have some assets that are effectively structured finance type deals, bearable type deals. You could say that those are becoming more competitive in a way, because as we have seen it over time, You know, investors, not in SFL, but in other, call it, vehicles or companies who have that strategy, it looks like investors have more of an absolute return requirement, whereas the companies who might, you know, call it, use those, call it, financing services, you know, they could otherwise go to the bank and borrow at a floating rate, which was lower. That has not come up. From our perspective, I mean, we focus more on time charter contracts, because then we have more direct interaction with the end users. But also, if you look at the way we have sort of managed interest rate risks over time, we have tried to hedge that out. So when we do a deal, we structure the financing, and then we hedge the interest rate generally. So, which means that, you know, when they come up for rechartering, yes, then we have, you could call it, then we have an interest rate exposure, but charter rates are also have an element of interest embedded in themselves, because for anyone who wants to charter up a vessel, you know, they will have to take into account their financing costs at that time. So I would say on the longer perspective, we are more neutral on the interest rate side. We do think there will be more, call it, bare-board type deals perhaps coming down the line. But we're looking at a lot of deal opportunities. As an example, last year, we did a tally after end of 22. I think we did proper work on deals worth around $23 billion in total. Of that we ended up doing, you know, less than a billion, you know, for various reasons, it could be that we didn't like the return profile risk reward, maybe the counterpart didn't work for us, etc. So, so we're screening a lot of deal opportunities and try to be disciplined. and selective when we do deals.

And I think a general note on our access to financing in terms of banks and Japanese leases, I think that has improved over the last year. I think with our name track record, I think we're able to achieve extremely competitive financing. And as Ole alluded to, the limitations you see in the Chinese market, you could argue it's kind of a More bearable type financial providers, which we could just have been competitors to ours, although we haven't done bearable. So I think kind of the financing market there is now smaller and that potentially gives us more opportunities.

Super helpful. Thanks for the caller.

Thank you.

Thank you. There are no further questions. I would like to hand the conference over to our speaker, Ole Hjertaker for closing remarks.

Thanks. Then I would like to thank everyone for participating in this conference call. And if you do 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 website. Thank you.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.