SFL Corporation Ltd

everybody in and then we'll start let's say to pass thank you Welcome to SFL's fourth quarter 2025 conference call. My name is Espen Jøsund, and I'm vice president of investor relations in SFL. Our CEO, Ole Erdraker, will start the call with an overview of the fourth quarter highlights. Then our chief operating officers, Trum Sjöli, will comment on performance matters, followed by our CFO, Axel Olsson, who will take us through the financials. The conference call will be concluded by opening up for questions, and I will explain the procedure to do so prior to 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. Please note that 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 resource 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 within the Securities and Exchange Commission for a more detailed discussion of risks and uncertainties, which may have a direct bearing on operating resources and our financial condition. Then I will leave the word over to our CEO, Oli Aftako, with highlights for the fourth quarter.

Thank you, Espen. We are pleased to announce our 88th consecutive dividend as we continue to build SFL as a maritime infrastructure company with a diversified high-quality fleet. For the fourth quarter, we reported revenues of $176 million and an EBITDA-equivalent cash flow of $109 million. Over the past 12 months, EBITDA amounts to $450 million, reflecting the continued strength and stability in our operations. In recent quarters, we have taken decisive steps to strengthen our charter backlog, securing long-term agreements with strong counterparties and deploying high-quality assets. And we have made significant investments in efficiency upgrades across the line of fleet, which has enabled a very strong fleet performance. Our Chief Operating Officer, Tim Shirley, will elaborate on this later. In December, we announced two transactions with a charter of four Suezmax tankers, where we agreed to sell a pair of 2015 built Suezmax tankers in the market at very strong price. The vessels were acquired for $47 million per vessel back in 2022, and we agreed to sell the vessels to a third party for approximately $57 million per vessel with a profit share agreement with the charterer. One vessel was delivered in December and we recorded a book gain of approximately $11.3 million in the fourth quarter. Net cash effect after repayment of debt and profit share to the charterer was approximately $26 million. The second vessel was delivered to the buyer earlier this week, and a similar gain will be reported in the first quarter. This transaction has been very profitable for us, with an annualized return on equity above 25%. In parallel, we also agreed to release the charters on two other 2020-built Suez Max tankers against a compensation of $11.5 million per vessel, instead of selling the vessels in the market to a third party. Similar to the two other vessels, the return on this investment has been very strong, based on prevailing values at the time of the agreement in December. We decided to keep these vessels as they are Korean built and very fuel efficient. They're also newly dry docked and more attractive for new potential long-term charters compared to the two older vessels. Based on US GAAP accounting rules, the full settlement compensation was expensed as a cost in the fourth quarter, which turned a net profit into a net loss for the quarter, despite the very strong return on investment so far. The positive side of this is that we have the vessels on our books at only $55 million, while charter-free values, according to shipbrokers, is currently in excess of $80 million. The vessels are currently traded in the spot market, and the market has strengthened significantly since the deal was agreed with less than two months ago. Net cash flow contribution is currently higher from these two vessels alone than all four vessels in the original charter agreement. I would note that the charter hire for vessels in the spot market is accounted for on a low to discharge basis based on US GAAP. So we can expect some volatility in the profit and loss statement from quarter to quarter due to vessel positioning. We will look for new long-term charter opportunities in due course, and market analysts predict a very strong tanker market next few quarters. We have seen an unprecedented consolidation recently in the supply side for the larger 2 million barrel VLCCs and very high charter rates in that segment, which is expected to also have a positive spillover effect on the 1 million barrel Suezmax market, as these two segments over time has shown a high correlation. Thank you. Turning to our offshore assets, the harsh environment drilling rig Linus performs very well on the long-term contract with Conoco, while the harsh environment drilling rig Hercules remains warm-stacked in Norway, pending new employment. The offshore drilling sector is gaining tangible structural support, driven by recent strategic industry developments that underscores higher day rates, extended contract duration, and rising demand for premium high-specification rigs. First, the announced all-stock merger between Transocean and Valaris, announced earlier this week, marks a pivotal consolidation in the space. And secondly, a recent new three-year contract for the noble Great White drilling rig in Norway, which started up in 2027, illustrates the strengthening contract fundamentals. With this backdrop, we remain optimistic about securing new employment for Hercules in due course. So with the announced 20-cent dividend, SFL has now returned more than $2.9 billion to shareholders over 88 consecutive quarters. This represents a dividend yield of around 9% based on yesterday's share price. And our charter backlog stands at $3.7 billion, with two-thirds contracted to investment-grade counterparties, providing strong cash flow visibility. Over time, we have consistently demonstrated our ability to renew and diversify their asset base, supporting a sustainable long-term capacity for shareholder distributions. Our solid liquidity position, including on-road credit lines and unlevered assets at quarter-end, ensures that we remain well-positioned to continue investing in equative growth opportunities. And with that, I will now hand the call over to our Chief Operating Officer, Trim Sjöling.

Thank you, Ole. We have a diversified fleet of assets charted out to first-class customers on mostly long-term charters, and the majority of our customer base is large industrial end-users. After the sale of two Suez Maxes in Q4, our current fleet is made up of 57 maritime assets, including vessels, rigs, and contracted new buildings. Our backlog from owned and managed shipping assets stands at approximately $3.7 billion, and the fleet following Q4 is made up of two dry bulk vessels, 30 container ships, 14 large tankers, two chemical tankers, seven car carriers, and two drilling rigs. Our charter backlog is mainly derived from time charter contracts, and with the exception of four container ships on bare boat leases, the rest are on time charter or in the short-term or spot market. The charter revenue from our fleet was about $176 million, and we had a total of 4,808 operating days in the quarter. Our overall utilization across the shipping fleet in Q4 was about 98.6%. And adjusted for unscheduled technical or fire only, the utilization of the shipping fleet was about 99.8%. This quarter, we had two vessels in scheduled dry dock at a cost of about 4.2 million US dollars. Furthermore, we had a chemical tanker in shipyard to carry out upgrades to the LNG dual fuel system to better handle gas boil off. A sister vessel will have the same upgrade done in Q1. This is part of our drive to ensure we can fully utilize our dual fuel capabilities. All of our six LNG dual fuel vessels are actually operating on LNG, which aligns with our ambitions to reduce greenhouse gas emissions from our fleet. I will now give the word over to our CFO, Axel Olsson, who will take us through the financial highlights of the quarter.

Thank you, Trim. Turning to this slide, we present a performer illustration of our cash flows for the quarter. Please note that this is only a guideline to assess the company's underlying performance. It is not prepared in accordance with US GAAP and excludes extraordinary and non-cash items. The company generated approximately 176 million of charter hire during the quarter. Of this, around 81 million came from our container fleet, including profit share related to fuel savings on seven of our large container vessels. The car carrier fleet generated approximately 26 million of charter hire, compared to 23 million in the prior quarter, reflecting that all vessels were fully back in service during the period following a scheduled dry docking last quarter. In tankers, the fleet generated approximately 42 million of charter hire, down from around 44 million in the previous quarter due to a scheduled dry docking. In dry bulk, we have divested the majority of the fleet over recent quarters, and now have two Campster Max vessels remaining, both trading in a shorter market. Revenue from these vessels was approximately $2.7 million, or at its equivalent of approximately $15,000 per day per vessel. Revenue from our energy assets was approximately 23 million, mainly generated by the line notes, which is in a long-term contract with ConocoPhillips through May 2029. Net operating and G&A expenses for the quarter were approximately 67 million, broadly in line with the previous quarter. Overall, this resulted in an adjusted EBITDA of approximately 109 million, which is in line with the third quarter. Turning now to the profit and loss statement and the US gap. For the quarter, we report total operating revenues of approximately 176 million compared to 178 million in the previous quarter. The net result for the quarter was impacted by several non-recurring and non-cash items, including a gain of sale of Asus Max tankers of approximately 11.3 million, settlement compensation of 23 million relating to two Susmax tankers, positive mark-to-mark effects from hedging derivatives of 600,000, positive mark-to-mark effects from equity investments of 700,000, and an increase in credit loss provisions of 200,000. As a result, under US GAAP, the company reported a net loss of approximately 4.7 million, or 4 cents per share. Turn to the balance sheets. As of year-end, cash and cash equivalents totaled approximately 151 million, with an additional 46 million available under undrawn credit facilities. The facility related to the Hercules rig, which matured at year-end, was repaid using balance sheet cash, leaving the rig debt-free at quarter-end. We have since negotiated a new financing facility, which we expect to execute during the first quarter, serving the customer closing conditions. The remaining capital expenditures on our five container new buildings of approximately 850 million is expected to be funded through a combination of pre- and post-delivery financing. We're experiencing very strong interest from lenders, reflecting a strong financing market for these assets. Finally, based on quarter-end figures, the companies book equity ratios to approximately 26%. To conclude... The board has declared a 80th consecutive quarterly cash dividend of $0.20 per share, presenting a dividend yield of approximately 9%. Our backlog stands at approximately 3.7 billion, with more than two-thirds linked to customers with investment-grade ratings, providing strong cash flow visibility. With a solid balance sheet and equity position, we remain well positioned to act on accreted investment opportunities. With that, I will hand the call back to Espen, who will open the line for questions.

Thank you, Axel. We will now open up for a Q&A session. For those of you who are following this presentation through Zoom, please use the raise hand function under reactions in the toolbar to ask a question. When your name is called out, please unmute your speaker to ask your question. Thank you. And we will have our first question from Mr. Gregory Lewis. Gregory, please unmute your speaker to ask your question.

Hey, thank you, and good afternoon, everybody, and thanks for taking my questions. Thanks for highlighting the activity in the Suez Max with your Suez Max ships. I guess I'd be curious how you're thinking about those vessels. Clearly, the Crew tanker spot market seems to be surprising to the upside, everybody's expectations. Rates are strong. I know the focus is on putting out long-term charters. We've definitely seen some short, I guess, 12-month charters for some of the larger vessels, some Vs. But I'm just kind of curious, just given the strength in rates and where we are in the first part of 2026, Are we starting to see signs or interest from customers or charters around multi-year contracts? Or is it, you know, as we think about these vessels, should we just be thinking more, hey, the spot market's good, the outlook's good for the next couple of years, and we're just going to use this kind of as a trade option?

Yeah, hi, Greg, and thanks. Yes, you know, we find that market segment quite interesting right now for a couple of reasons. And just to also be clear about that, we, you know, when this transaction, call it opportunity, came about, this was based really backed by the agreement we had there with this customer where we, after a certain period of time, you know, gave them the opportunity to effectively trigger a sale with a profit share as long as we were over, you know, a level that gave us a very good return in the first place. And then the market had been moving up and they were interested in doing that. So we sold it to older, you know, Chinese-built vessels. And if you look at the equity returns we generated on those with the implied profit split that we got out of it too, We're talking sort of high 20s in return on equity on those deals. So you could say it was a really strong deal and much better than we anticipated when we did that deal back in the days. And they also wanted to do the same with the other two vessels. But the other two, the Korean-built vessels, are more attractive for long-term charters. They're Korean-built. They're sort of eco design. They have scrubbers. We just had them through a dry dock. And we believe they are more attractive also for longer term charter opportunities. What we did not anticipate, you know, back in December was the way the market moved upward sharply. So over this two month period, both, you know, one year charter as indicated by brokers and also the index, the TD20 index that sort of is used for hedging this market is up 20 percent, you know, in that short period of time. A couple of reasons for that. I mean, you know, you have some trading pattern issues, but I think one very important underlying factor here on the tanker side, which I would call almost unprecedented in the market, at least, you know, in the history I've seen, is that you have one, you know, party or group of people who are working together who effectively control around a third of the available or traded tanker VLCC fleet out there. And we believe they are willing to hold back ships if they don't get the rate, charter rate where they want it to be, which implicitly would give also the other owners out there you know, confidence to hold back and not just drop their, you know, drop their pants, so to speak, and fix at lower levels. So I think that is a very, you know, what we say, fundamental shift in the market. And then we have to look at the correlation between the VLCC market and the Suezmax market, where over the last 25 years, the Suezmax has earned, you know, around 85% of the VLCC, you know, charter rate. So We believe that, you know, with the dynamics on the VLC market and also trading patterns, which is quite interesting for the Suezmax size, you know, we think the market could remain firm for some time. But our ultimate objective here is to find new longer term charters for these vessels. But then, of course, in the meantime, we enjoy the spot market. And just to be clear, I mean, we used to have four vessels. The two vessels, you know, that are remaining, you know, are generating more net cash flow than all four vessels did in the previous chartering arrangement. So so far, you know, we're generating more cash out of two vessels compared to four vessels in the past.

Yeah, no, it's definitely good to be a tanker owner at the moment. And then I was hoping, realizing that, you know, it's a board decision. There's lots of variables that go into how the company thinks about the dividend. But as we kind of think about, you know, I guess it'll be later this year. I think next quarter it'll be the dividend. It would have been lowered for about a year now. you know i i think at the time what one of the one of the drivers of that dividend was you know the lack of visibility on the hercules but you know to the sustainability of the model you know where the dividend is still below 50 of operating cash it's well covered on a net income basis um you know i i guess two questions here how are we thinking about the dividend over the next 12 months and and and and to that point um it is one of the To that point, how is the market looking for in the secondhand market, i.e. opportunities clearly in tankers, prices are high, charter rates are catching up to do. How is the opportunity for growth looking in kind of the container ship market, which seems to be maybe where numbers, the economics might look a little better in doing a purchase and charter out?

Yeah, thanks. I mean, to start with the dividend question, the board never guides on dividend going forward, but the underlying sort of structure or what goes into that evaluation is long-term sustainable cash flows. If you look at the last year, we did sell a number of vessels that were coming to the end of the charter period. We sold some older feeder container ships, etc., which freed up quite a bit of capital. And of course, to have a sustainable distribution, you have to have producing assets, call it generating assets. you know, those returns. So, so that's one thing. And, and also I would say last year, you know, for geopolitical reasons, you know, with that sort of, I would call it a trade war or at least trade friction, you know, mounting, we sense that many of the players out there were stepping a little bit back. They were very uncertain about how this all would involve. And then it's difficult to get the counterparties to commit long-term. So we sense now that the dynamics is better. We see more interest in engaging for new business, but we cannot really comment on anything before we potentially do it. From a board perspective, I mean, we try to be disciplined, try not to, what can we say, run out and just spend the money because we have capital available. It's all about trying to do the right deals, long-term deals. And then, you know, from time to time, you may get lucky like we did on the Suezmax tankers with a much stronger return than we expected. Yeah. So that's what you should expect from us. We should try to deploy the capital in a hopefully balanced way, build the distributable cash flow. We still have the drilling at Hercules idle. that used to produce a lot of cash flow for us in 2024. So there are a few factors here going into that. But still, we are looking at north of $100 million in dividends per year, even at this level. So we are paying a lot of, cash flow out to shareholders, it's more than $2.9 billion over the 88 quarters. So I think we've shown a disciplined approach to it. We've been standing firm through pretty rough cycles, and hopefully we will have a good capacity also going forward.

Super helpful. Thank you for taking my questions. Thank you.

Thank you. Then we'll also have a question from Mr. Clément Millat. Kindly unmute your speaker to ask your question.

Hi, Oli and Tim. Thank you for taking my questions. I joined a few minutes late, so you may have touched upon this, but I wanted to follow up on Greg's question on the charters you terminated. Could you remind us what was the rate on the previous contract? And secondly, could you talk a bit about the fixtures you have secured to date in the spot market?

Yes, we you know, this was a deal that was done back in 2022. The two Chinese built vessels were acquired for at that time around 46, 47 million dollars, if I'm not mistaken. We had a charter rates of around twenty seven thousand dollars per day. You know, for that period. And then we sold them now for $57 million net. So we've enjoyed, you know, strong cash flows, depreciated the assets and then sold them for, you know, 20% more gross than we bought them for three years earlier. You know, hence the very strong returns on that deal. A similar dynamics on the newer Korean-built vessels. They were more expensive. So we bought them for around 64-ish million dollars, if I'm not mistaken. And if you look at the broker reports now and... You have, for instance, the broker, you know, Fernlis, they just increased their, you know, valuations on tanker assets. And they now guide five-year-old Suezmax tankers at $85 million. So it's a significant uplift also for these assets. If you look at the spot market, we typically will not guide on spot market there and then. I mean, you can look up the brokers that will typically guide you on what the charter rates are. But just to give you a guiding right now, and this is just from a broker report, they guide that. A one-year TC for a modern Suez Maxx tankers would be, you know, in the high 40s, they guide 47,500. While if you use the Suez Maxx TD20 index, you know, you could do 12-month decades. 12 months now, in excess of $60,000 per day, you know, based on the index alone. So the market is quite strong. As I mentioned, we were below $30,000 in the old structure. I remember also on those vessels, or on the vessels, you know, you have to subtract operating expenses, you have to subtract interest and amortization on the loans. So we are now in this market generating... more than we did from the two vessels than we did from all four vessels combined on a net basis. I would mention though that Based on US GAAP, well, first of all, we had to expense the termination fee on the two modern vessels, despite having a very low book value level on those vessels, because we own them already. It had to be taken straight through P&L in the fourth quarter. So that had that effect. Also, when you trade vessels in the spot market, you know, being tankers or bulkers based on UNSCAP, you have to account for the revenues on a load-to-discharge basis. And typically, these assets, they go empty and ballast, as we call it, one way, and you load it, and then you go load it the other way. So you will see some volatility in the P&L effect for these assets, all depending on the position they are, whether they, you know, through the specific quarter were more loaded than empty in that rotation. When we got them back off the charter, and this is again a coincidence, but both vessels were just, you know, coming off a loaded journey and therefore, you know, started with some ballast days. But this is something that will balance and equal out over the year. But, you know, from quarter to quarter, there may be some, call it earnings volatility due to US cap.

Yeah, makes sense. Thank you. And after recent sales on the Drybulk side, you only have two remaining Panamaxes. Those seem clearly non-core. Is that a fair assessment? And secondly, there has seemingly been some interest from potential charters on long-term contracts on Newcastle Max Newguilds. What are your thoughts on potentially relocating some capital towards Drybulk?

Yeah, thanks. I mean, we've always been invested in the dry sector. And I would say it's more of a coincidence now that we're down to two vessels. We are segment agnostics, so we would look at deals in all the segments, including the dry book segment, and have looked at multiple transactions. To get to a deal, it has to make sense for us. One thing is the purchase price, the charter rate, the counterparty, the financing structure we can build around it. And of course, our charter would want to pay the charter rate we need to have to make that work for us. So this is sort of a balance. And you are correct, we're only two vessels left now. I wouldn't say they're a non-core. Those vessels were on 10-year time charters and have been over time quite profitable for us, but we are traded more in the short-term market currently. So we look at opportunities on the dry side as we do in other sectors. And as I said, agnostics, it's all about getting a good risk-adjusted return.

Thanks for the call. I'll turn it over. Thank you for taking my questions.

All right, then we have some written questions. Could you please share any updates on the Hercules?

Yes. The Hercules has remained idle since November 24. So it was idle through 2025. Generated very strong cash flows when it was working. Now it has remained idle. We have been looking for employment. That market has been a little slow, it's fair to say. But we now see signs, both from a consolidation perspective, where we had the big merger announced earlier this week, TransOcean and Volaris. And we also saw a drilling rig with, I would call it, similar sort of harsh environment, ultra deep water features that was recently fixed on a three-year charter with startup in 2027. So based on what we see from brokers, it looks like there is more market dynamics and more uh employment opportunities uh they are going forward but we cannot comment specifically on the rig or we cannot comment on discussions we may have uh on this rig specifically we will announce uh contracts uh if and when they materialize thank you uh

We also have another one here. How do you see the long-term evolution of the contracted revenue mix across the different shipping segments? Do the container new build orders signal the strategic direction the company intends to pursue?

The new-build container ships were done, or we ordered those vessels in 2024. It's typically what we like to do, long-term time charters to investment-grade counterparties. modern technology that enables where we, through the long-term charter, are able to amortize that investment down significantly. We are not specifically focused on one single segment, but we try to position us as logistics partners for strong industrial-focused partners. And then the container ship market has been an interesting market for us, but we would be happy also to look at other segments.

Related to different segments, what segment are you currently most optimistic about in relation to potential future growth, i.e. in what niche do you see the best economics?

I would say it's almost an impossible question. I mean, as we look across the board between the segments, we don't have any sort of favorite. What we have seen over time is that there have been more longer term charters in typically liner type assets, you know, container ships, car carriers. But we also see that from time to time on tankers where you see longer term charters and also on dry bulk. And we also have some, you know, chemical carriers. in our portfolio where we also have good interaction with logistics players so you know we look across the board um and hopefully we will we will build a portfolio uh you know in more than one segment thank you uh we also have a question what is the status of sfl composer

Right, I think I'll interpret that question as after the collision we had in Q3. So the vessel was going into dry dock when she was hit by another container vessel or by a container vessel. We were going into dry dock anyway at that time and we had a slot available so we didn't really lose any time. And all of the damage repairs were covered by insurance, including also the off-fire related to the incident. So for SFL, we did not lose really out on this at all. The vessel is now back in service with Volkswagen and operating in the Atlantic as normal.

Thank you, Tom. One last question here. Hi all, can you say something about the size of the new RIG financing facility?

Sure. So you are relating to the new Hercules facility that we've been kind of negotiating and preparing, and that's in the amount of $100 million. Thank you, Axel.

As there are no further questions from the audience, I would like to thank everyone for participating in this conference call. If you have any follow-up questions to the management, 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 all.