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.

Thank you, Mr. Hjertaker. On this slide, there is a formal illustration of cash flows for the first quarter. Please note that it is only a guideline to assess the company's performance and is not in accordance with US GAAP. and also net of extraordinary and non-cash items. The company report generated gross charter hire of approximately 182 million in the first quarter, including approximately 5 million of profit share, with approximately 86% of the revenue coming from a fixed charter rate backlog, which currently stands at 3.7 billion, providing us with strong visibility on the cash flows going forward. In the first quarter, the liner fleet generated gross charter hire of approximately 97 million, including approximately 5 million in profit share related to fuel savings on seven of our large container vessels and one car carrier. Our tanker fleet generated approximately 47 million in gross charter hire during the first quarter, compared to approximately 49 million in the previous quarter. During the quarter, SFL had two Susmex tankers and two smaller chemical tankers trading in the spot and short-term charter market. The net charter hire from these vessels was approximately 10 million. These four vessels were sold during the quarter, and only one vessel is yet to be delivered to its new owners. The company has 15 drivable carriers, of which eight were employed on long-term charters during the quarter. The vessels generated approximately 20 million in gross charter hire in the first quarter. Seven of the vessels were employed in the spot and short-term market and contributed approximately 4.6 million net charter hire during the quarter. SFL owns two harsh environment drilling rigs, the Jacob Rig Linus and the Semi-Submersible Rig Hercules. The Linus is currently on a long-term contract with ConocoPhillips Scandinavia until the end of 2028. During the first quarter, the rig generated approximately 19 million and Contract Revenues in line with the fourth quarter when adjusted for approximately 10 million cash repayment for previously reduced charter hire from CEDRIL during Chapter 11, which was received in the fourth quarter. The harsh environment semi-subversive model rig Hurtless was previously unbearable charter to CEDRIL. For the first time since re-delivery to SFL in December 2022, we recorded a full quarter of operating expenses on Hurtless, which were approximately 7 million. We also expect to record a similar level of operating expenses for the rig in the second quarter. Furthermore, there has been no revenue from the Hercules during the quarter as the rig is currently undergoing a special periodic survey and upgrades before mobilizing for a drilling contract with Exxon Canada expected to happen at the end of the second quarter. Our operating and G&A expenses for the quarter was 75 million, and that also includes the operating costs of the Hercules. This summarizes the adjusted EBITDA of approximately $110 million in the first quarter compared to $135 million in the previous quarter. This result is down predominantly due to the temporary out-of-state of the Herculean rig and the $10 million lump sum received on liveness in the previous quarter. We then move on to the profit and loss statement as reported on the U.S. As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company. A natural 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 cap operating revenues. This includes repayment of investments in sales type, direct financing leases and lease-like assets, and revenues from entities classified as investments in associates for accounting purposes. Through the first quarter, report total operating revenues according to US GAAP of approximately 173 million, which is less than approximately 182 million of charter hires actually received for reasons just mentioned. During the quarter, the company recorded a profit-sharing income of approximately 5 million from fuel savings on some of the large container vessels and a car carrier. As mentioned, we recorded a full quarter of operating expenses on Hercules, and we did not record any revenue on the rig due to its temporary yard stay. We expect the rig to be recording its full first quarter of revenue in the third quarter. During the quarter, the company recorded a gain from the sale of the Susmax tanker Glorikraun of 10.2 million, and recorded an impairment of 7.4 million relating to the sale of the chemical tankers Elbe and Lesley. Also, the company recorded a 7.4 million non-cash loss due to negative mark-to-market on derivatives linked to CFO bonds acquired during the quarter. So overall, and according to US GAAP, the company reported a net profit of approximately 6.3 million, or 5 cents per share. Moving on to the balance sheet. At quarter end, SFL had approximately 185 million of cash and cash equivalents. Furthermore, the company had multiple securities of approximately 7 million, based on market prices at the end of the quarter. In January, SFL issued a new $150 million sustainability-linked bond with maturity in 2027. Part of the proceeds were applied against the convertible note, which was repaid in cash at its maturity in May, as well as against repurchases of the NOC23 bond maturing in September. During the first quarter, SFL caused four YOLCO financing arrangements, One for each of our four car carriers currently under construction for delivery in 2023 and 2024. The combined financing amount is approximately 300 million, corresponding to the yard contract price. Consequently, the arrangements will have a positive cash flow effect at delivery of the vessels, equivalent to yard installments paid to date for approximately 100 million. Additionally, the company entered into a pre-delivery 47 million bank loan facility for two vessels to be delivered in 2024, further enhancing the company's liquidity position during the period up to the delivery of the vessel. We also signed and drew down a 145 million financing facility on four SUSE MAXs during the quarter. Subsequent to quarter end, SFL closed the refinancing of the semi-submersible drilling rig Hercules and the jackup drilling rig Linus. The financing amount was 150 million per rig, with maturity in the fourth quarter of 2025 and the second quarter of 2026 respectively. SSL also closed two Jolko financing arrangements, one for 45 million for the car carrier Arabian Sea with a term of approximately six years, and one for 38 million for the container vessel Marsk Pelepask for approximately seven years. As the vessels were debt-free, the transactions will have positive cash flow effects in excess of 80 million combined in the second quarter. Based on the Q1 numbers, the company has a book equity ratio of approximately 28.3%. Then to conclude. The Board has declared a cash dividend of 24 cents for the quarter. This represents a dividend yield of approximately 11% based on the closing share price last Friday. The Board has also authorized a new share buyback program with validity until the end of Q2 2024. Our fixed rate charter backlog currently stands at 3.7 billion, which provides us with strong visibility on the cash flow going forward. With the latest financing facilities concluded, the company's new bill and capital expenditure program is now fully financed, and all of the short-term debt is refinanced with long-term loans. In summary, SFL has secured new financing arrangements so far in 2023 totaling approximately $1 billion. The amount is split across 12 different facilities and a wide array of products, securing a continued well-diversified funding platform for the company going forward. With the recent contract award for our two car carriers on contract with Volkswagen, with commencement in Q3 and Q4 this year, we estimate the EBITDA from these vessels to approximately 47 million per year, a significant increase from the existing contracts, which was approximately 9 million per year. Finally, we announced a new contract award for a harsh environment semi-submersible drilling rig Hercules, confirming a tightening supply-demand balance and a strong market outlook which is now materializing into attractive day rates. And with that, I give the role back to the operator who will open the line for questions.

Ladies and gentlemen, we now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one, one on your telephone. We are now taking the first question Will you stand by? The first question from Sharif El Maghribi from BTAG. Please go ahead. Your line is open.

Sharif El Maghribi Hi, good morning, good afternoon. Thanks for taking my question. So first, looking past the most recent contract for the Hercules, what are the long-term employment prospects for that rig? Is the plan to have it stay in Namibia? Yeah.

Thanks. This one contract after Exxon in Canada is in Namibia, and as you can imagine, it's a fairly long transit, but the oil companies are more than happy to compensate for that. But this rig can work in multiple places, so we are, of course, optimistic in terms of where we want to employ the rig in order to maximize long-term cash flow. Of course, our objective is to secure longer-term employment for the rig over time. But for now, we think that the timing is better right now to have it on relatively shorter contracts as we see the charter rates coming up fairly sharply. As you may also have seen on the graph we included in the presentation, we have seen the daily rates coming up very fundamentally over the last year or so.

That said, in terms of location, there are tender salt in several geographic locations. In North America, you have several in the North Sea. Namibia has become a hotspot as well, and you see Petrobras also requiring more rigs. You have recently seen two North Sea rigs going down to Australia, so I would say the opportunities are currently worldwide. That's helpful, thank you.

And then looking at the tanker fleet, I see two product tankers are rolling off next year. And tanker fundamentals are looking pretty constructive, recent weakness notwithstanding. So are you starting to have conversations about work for those vessels? And really, how are charterers looking at crude and product tankers right now?

Yeah, I think, you know, looking at the two produce tankers you're mentioning, they are the two chartered to P-66s. I think they are very happy with the vessels. They fit very well in their program, as we understand. And also, the optional charterette and the charterette they are on today is way under the spot market today. So, if you ask anyone, certainly now, you wouldn't hesitate to extend the charters. But these charters and these extension options are, of course, in the charters option. We have to wait and see if they exercise them. And if not, I would say it would be an upside for us.

That's very helpful. I'll turn it over. Thank you.

Thank you.

Thank you for your question. We are now taking the next question. Please stand by. And the next question from Richard Amon for Castleville Capital. Please go ahead. Richard Damon, your line is open.

Good morning, good afternoon. I want to commend you on the buyback. And given that there's significant cognitive dissonance regarding the stock price and the outlook for the company, it's really SFL is in the best shape it's been both in chartering, operations, and financing since I started following the company in 2014. And I wondered if you could provide some color on how you visualize deploying the buyback now that it's been approved. And I have one more question.

Thank you, Richard, and thank you. You're speaking to the choir here, obviously. No, we think that having multiple, call it tools, and the investor, call it, or value enhancement, the toolbox is good for the company. As you know, we've had sort of dividend reinvestment plans and ATM, call it optionality, sort of in that toolbox. that we have used, you know, rarely sparingly, but we have used it in the past. We just renewed that now, and we believe that also having share repurchase optionality as part of our, I would say, capital allocation, you know, strategy, you know, is wise. We cannot give you sort of specific numbers for how much of that we will utilize. If any, I mean, that we cannot disclose. But clearly, we have seen the share price coming down in a market where we think the underlying value backing for, I would say, most shipping stock with replacement cost of the assets coming up and also that we own most of the residual in these assets is a clear benefit for SFL. Just illustrated by the car, the renewal of the car carriers, where if this had been More like a normal sort of one of those bearable charters that, you know, maybe we could have done some years ago. The Charter Reg would have kept all that value. Instead, we own these vessels and we keep that residual value, which we think is much better for our stakeholders. The same thing with the drilling rig, Hercules, that we spent some time on here on the call. We think that the market dynamics there is very interesting. Of course, it's all about timing. It's a very expensive asset. The SPS process that we are going through now is of course very expensive for us, but we still believe that this could really contribute to earnings per share from later in the year and onwards. So while we see there is softness in the share price, having opportunity to buy back from time to time, So I hope that was vague enough, but precise enough for you, Richard.

Absolutely. And the second question is, as you look over shipping markets and you decide where you want to allocate capital, What do you think are the most interesting areas today?

Yeah, it's a tricky question. I mean, we look at market opportunities across the board, you know, across all these segments. And we see opportunities everywhere, but given where segments are in their cycle, you know, you would structure the deals differently. So tanker market, for instance, had come up quite rapidly with values, which means that the deal we would do a year, year and a half ago, where we would accept effectively, you could say, a lower rate in a deal, but with more optionality on the upside, now we would probably look more for fixed rate, and to ensure that we take it down to a more mid-level depreciated, you know, book or market value at the end of the charter period. At the same time, we see an underlying value, I would say the underlying, you know, the floor here is coming up because, you know, there is a reduced shipbuilding capacity out there and the values measured in dollars are coming up, both new building prices and also secondhand prices now over time. So that means that what you pay now maybe may have a, you can call it an inflation hedge in itself, owning a maritime asset out there. So that is mitigating some of that risk that you would take on if you invest a little higher in the cycle than our preference. So I would say it's more down to structuring. We look at deals now on the tanker side, we look at deals on the driver side, we look also in the container segment, although of course there we are quite careful and the car carrier market has been quite interesting over the last two years. So across the board, but we are also We're also patient, so we don't feel that we need to invest a certain amount every single quarter. It's all about finding the right deals and deploying the capital when we think that the Dambics are right for us and our stakeholders, which means that maybe a quarter or two we won't invest, but then when we see the right deal, we can invest a lot more. So that is the balance. and then also back to the share repurchase program, having that also then as a tool for capital allocation, hopefully will benefit shareholders long term.

Thank you for your question. We are now taking the next question. Please stand by. and the next question from Clement Mullins from Value Investor H. Please go ahead.

Hi, thank you for taking my questions. I wanted to start with a modeling question about the Hercules. You've lined up two strong short-term contracts and I was wondering, do mobilization costs come on top of the contracted revenues you mentioned on the press releases?

The mobilization contract is a part of the contract amount mentioned, correct? Yeah. Depends on the . But yeah, it becomes basically have a certain base that we can get based on a certain mobilization and demobilization.

All right, that's helpful. And after recent disposals on the tanker space, you've greatly reduced your overall spot exposure, but you still own some bulkers trading on spot. How should we think about those going forward? Are they, let's say, non-core, or are they still an important part of your fleet?

That's a good question. I would say any aspect, I would say, You know, in our shop, anything is for sale at the right price, if we think that it's beneficial for shareholders. But generally, I would say that those vessels are trading in the market. And, of course, we did sell, we did own seven handy-sized drybook vessels, you know, in the past, and we sold them at what we believe was, you know, optimistically sort of good timing. So for now, we keep these vessels, we keep training them, and they generate good cash flow and certainly a good return on invested capital. But whether or not we may sell them at some point, that we cannot say. They're definitely not identified and defined as sales candidates or being marketed as such in the market. But if you have a lot of cash and want to invest, we would be happy to entertain an offer by you.

All right, that makes sense. Thank you for taking my questions.

Thank you. You're welcome.

Thank you for your question.

There are no further questions at the moment. I will hand back the conference for closing remarks.

Thank you. Then I would like to thank everyone for participating in the conference call. And 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.

That concludes the conference for today. Thank you for participating. You may hold this connect.