SFL Corporation Ltd

Good day and thank you for standing by and welcome to the Q1 2023 SSL 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. To ask a question you will need to press star 1 1 on your telephone. I would now like to end the conference with Tuhole Bjartka, CEO.

Please go ahead. Thank you and welcome to SFL's first conference call. I'll start by briefly going through the highlights of the quarter. Apologies for that interruption. Welcome to SFL's first quarter conference call. I will start the call by briefly going through the highlights of the quarter. Following that, our CFO, Aksel Olesen, will take us through the financials, and the call will be concluded by opening up for questions. Our Chief Operating Officer, Trym Sjølie, will also be present for the Q&A session. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the 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. Formal looking statements are not guarantees of future performance. These statements are based on our current plans and expectations and are inherent subject to risks and uncertainties that could cause future activities and results of operations to be materially different from those that form the formal looking statements. Important factors that could cause actual results to differ include but are not limited to conditions in the shipping offshore and the credit markets. You should therefore not place undue reliance on these formalities. 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 condition.

The total charter revenues were 182 million in the quarter, which were down from the previous quarter, primarily due to one rig out of service and lower dry bulk rates in the first quarter. The previous quarter also included a 10 million one-off payment relating to the seed reel restructuring. The vast majority of revenues were from vessels on long-term charters and around 14% from vessels employed on short-term charters and in the spot market. After the sale of the spot-traded tankers, the long-term charter ratio will increase further. The EBTA-equivalent cash flow in the quarter was approximately $110 million, and over the last 12 months the EBTA-equivalent has been $495 million in total. The net income came in at around $6 million in the quarter, or $0.05 per share. This was significantly lower than the fourth quarter, and primarily caused by the drilling ring Hercules which had no revenues in the quarter but with full operating expenses while undergoing a scheduled comprehensive special survey and upgrades. There were also some one-off mark-to-market effects relating to interest and currency swaps after refinancing bonds in the quarter. The announced dividend of 24 cents per share is in line with the fourth quarter and represents a dividend yield of around 11% based on closing price on Friday. This is our 77th quarterly dividend and over the years we have paid more than 2.6 billion dollars in total and more than 29 dollars per share. And we have a robust charter backlog supporting continued dividend capacity going forward. Our fixed rate backlog continued to increase and stands at approximately 3.7 billion from owned and managed vessels after recent charters providing continued cash flow visibility going forward. And importantly, The backlog figure excludes revenues from the vessels traded in the short-term market and also excludes future profit share optionality, which we have seen can contribute significantly to our net income. We are very pleased to report extended charges with Volkswagen for our two car carriers, SFL Conductor and SFL Composer, which are currently so-called frontrunners for the dual-fuel new builds to be delivered later this year to Volkswagen. We are very happy with the performance, and we have agreed to extend the charters for a minimum period of three years, adding approximately $155 million to the charter backlog. Operating and financial expenses are not affected, so EBITDA contributions increases fourfold, and net cash flow per share after financing increases from around 6 cents per year to around 36 cents on these vessels alone. The expansion and new charter rate will be effective from the time the two new dual-fuel vessels are delivered on their respective 10-year charters to Volkswagen, currently estimated to the third quarter and the fourth quarter this year. We have also recently announced a new shorter contract for Hercules in Namibia, back-to-back with the contract for Exxon in Canada. The new contract is with a subsidiary of Gulf and Egea for two wells, plus an optional well testing. This contract adds more than 50 million dollars to the backlog and the rig will then be open for new contracts from the second quarter 2024 onwards. The quarter was very busy on the financing side with more than 1 billion dollars in new financings including our new built dual fuel car carrier program, sustainability linked notes and refinancing our drilling rigs. With this funding, virtually all our near-term financing and capital expenditure requirements have been secured at very attractive terms. And we continue to renew our fleet and divest of older tankers trading in the sport market. As second-hand prices have increased recently on these assets, along with limited long-term chartering opportunities for older assets, we have decided to sell the two Suez Max tankers, built 2009 and 2010, and the two chemical carriers built 2008. This is in line with the strategy of selling older vessels and reinvesting in newer and more fuel-efficient vessels. The Suezmax tanker Glorichrome was delivered to new owners in March, and the Everbright was delivered in April, and the chemical tanker SFL Weser was delivered in April, and SFL Elbe is expected to be delivered in June. Following the sale of these four vessels, we will not have any tankers vessels trading in the short-term market. Furthermore, the board of directors of the company has authorized the repurchase of up to an aggregate of $100 million of SFL shares. Purchases may be made at their discretion in the form of open market repurchase programs, privately negotiated transactions, accelerated share repurchase program, or a combination of these methods. The timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, Alternative uses of capital, capital availability and the company's determination that share repurchases are in the best interest of its shareholders and other factors. We see this as a tool in the shareholder value toolbox and would note that the company is not obligated under the terms of the program to repurchase any of its common share. The buyback program is valid until the 30th of June 2024. Over the years we have changed both fleet composition and structure and we now have 74 maritime assets in our portfolio and our backlog from owned and managed shipping assets have increased to 3.7 billion dollars. Over the years we have gone from a single asset class chartered 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 largest segment with just under 50% of the backlog. Most of the vessels are on long-term charters and in the fourth quarter 93% of charter revenues from our shipping assets came from time charter contracts and only 7% on bare boats or dry lease. In addition to fixed rate charter revenues, we have had significant contribution 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 more than $28 million, with around $5 million in the first quarter. The strength of our counterparties and diversification is key when we assess a portfolio on quality of our contracted backlog. And the list speaks for itself with market-leading operators like Volkswagen, Maersk, Hapagloy, ConocoPhillips, P66, and now, lately, Exxon and Golf, 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 to repeat business with several of our blue chip customers like Volkswagen now recently. Our strategy has therefore been to maintain a strong technical and commercial operating platform in cooperation with our system companies and the Sea Truckers Group. This gives us the ability to offer a wider range of services to our customers, from structured financing to full service time charters. And with full control over vessel maintenance and performance, including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels throughout the life of the assets, and not only be passively owning vessels employed on beer boats 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 the 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 their stakeholders. For bare-bott deals or deals where the charterer have purchase option, this value is usually retained by the charterer through fixed price purchase options. And in light of the significant capital expenditure on the drilling rig Hercules, I would like to comment some more on the rig and market opportunities. As you know, SFL owns two harsh environment drilling rigs, the 2014 built Jacob rig Linus and the 2008 built semi-subversible ultra-deepwater rig Hercules, which originally were rechartered to Seadrill on Bebo terms. but we took them back in connection with Sidrun's last Chapter 11 bankruptcy process. The Linus remains on its long-term contract with ConocoPhillips Scandinavia until 2028 and is managed by Oddfeld Technology on our behalf. Hercules was re-delivered to us in December and is currently out of service in connection with a scheduled Special Periodic Survey or SPS and upgrade works in Norway and is managed by Odd Fjell Drilling. There were no revenues on the rig in the first and most of the second quarter, while operating costs accrue. We estimate the total cost of the SPS and upgrades to approximately $100 million, and the SPS is expected to be completed in June. It has taken longer and become more expensive than originally estimated, partly due to the condition of the rig at time of re-delivery. We are reclaiming some of the expenses from seed drill, but this is expected to take time as it involves a court process in Norway. Irrespective of that, when the work is finished on the rig, the rig will move to Canada under its own power and commence a contract with Exxon Mobil Canada to drill one well. The duration is estimated to approximately 135 days, including mobilization, and the contract has an estimated value of around 50 million dollars. Thereafter, the RIG will move to Namibia and commence a contract with a subsidiary of GALP Energia for two wells plus an optional well testing. Excluding optional days, the duration will be approximately 115 days including mobilization with an estimated contract value of another 50 million dollars. The RIG will then be open for new contracts from the second quarter 2024 onwards. This rig is one of the only a handful harsh environment ultra deep water semi-submersible rigs available. And market analysts are positive to market prospects based on recent tender activity and a tight supply demand balance. There is also a realization in the market that there has been a fundamental underinvestment in the segment for a number of years. The harsh market prospects for 2024 and 2025 is particularly promising, where we have seen several contracts in excess of $400,000 per day, plus mobilization fees that may increase net rate further. Depending on geographic location, this may imply annual EBITDA contribution in excess of $80 million when the rigs are working, and further rate increases will go directly to net cash flow. The graph on this slide illustrates the fact of the reduced activity level from 2015 and the impact on day rates. We are now back to the tight supply-demand characteristics we saw from, you know, until 2015, but based on a significantly lower recount than at the last peak. And should market rates come back to the 600,000 per day level that all companies have been used to be paying in the past, As we can see on the right side on the slide, EPTA for the RIG would be closer to $150 million per year instead. 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.