Ship Financial Keeps Going And Going

Summary

• Revenues were $93.67 million compared to $97.85 million a year ago and down $0.55 million sequentially. Net income was $20.09 million and $152 million of total charter revenues.
• SFL announced that it has succeeded in reaching a global settlement with unsecured bondholders and other major creditors in Seadrill Chapter 11 cases.
• I recommend SFL as a hold.

Source: World Maritime News

Investment Thesis

Ship Finance International (NYSE:SFL) is a dependable and versatile shipping company that should hold a definitive place in your long-term portfolio. I have been recommending this company as a long-term investment for many years, and it always delivered outstanding results.

The company sailed through some harsh winds - from the tankers slowdown to the offshore drilling segment collapse and the financial meltdown of Seadrill (SDRL) and North Atlantic Drilling (OTCPK:NADLQ) - I believe I have read it all.

Meanwhile, the stock is still holding its ground despite some recent weakness and pays 9.7% in dividend.

SFL data by YCharts

SFL - The raw numbers: Fourth-quarter 2017

Ship Finance International (SFL)	1Q'15	2Q'15	3Q'15	4Q'15	1Q'16	2Q'16	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17
Total Revenues in $ Million	90.09	92.03	110.71	113.91	117.58	103.99	93.53	97.85	96.88	94.22	93.67	96.10
Net Income in $ Million	33.11	67.94	45.49	54.29	46.80	38.81	32.27	28.53	32.28	20.11	28.73	20.09
EBITDA $ Million	66.77	102.85	56.96	93.33	76.99	79.63	53.02	92.33	66.01	64.81	61.64	64.41
Profit margin % (0 if loss)	36.8%	73.8%	41.1%	47.7%	39.8%	37.3%	34.5%	29.2%	33.3%	21.3%	30.7%	20.9%
EPS diluted in $/share	0.32	0.73	0.43	0.58	0.42	0.42	0.30	0.31	0.32	0.22	0.31	0.20
Operating cash flow in $ Million	65.6	38.0	66.1	88.7	42.7	81.1	56.1	50.2	45.5	55.6	32.0	44.7
Capital Expenditure in $ Million	87.4	43.5	272.0	93.7	82.9	93.7	5.7	5.8	11.3	1.2	69.2	0.0
Free Cash Flow in $ Million	-21.9	-5.5	-205.9	-5.0	-40.3	-12.7	50.5	44.4	34.3	54.4	-37.2	44.7
Cash and short term investments $ Million	49.7	99.7	98.0	269.8	117.3	233.6	209.5	213.2	222.3	359.8	361.7	246.9
Long term Debt in $ Million	1543	1462	1776	1666	1600	1617	1565	1553	1538	1672	1712	1504
Dividend per share in $	0.42	0.43	0.44	0.45	0.45	0.45	0.45	0.45	0.45	0.35	0.35	0.35
Shares outstanding (Basic) in Million	93.41	93.45	93.47	93.47	93.47	93.50	93.50	93.51	93.50	93.50	93.50	102.93 [103.6 As of March]
Backlog details	1Q'15	2Q'15	3Q'15	4Q'15	1Q'16	2Q'16	3Q'16	4Q'16	1Q'17	2Q'17	3Q'17	4Q'17
Fixed rate Backlog in $ billion	4.1	4.2	4.0	4.4	4.2	4.0	3.9	3.9	3.9	3.4	3.3	3.0

Click to enlarge

(Source: SFL filings and Morningstar)

Trends and Charts: Revenues, Earnings Details, Free Cash Flow and Shipping Segments

1 - Revenues

Revenues were $96.10 million compared to $97.85 million a year ago and up 2.6% sequentially. The company had net income of $20.09 million and $152 million of total charter revenues for the fourth quarter 2017.

SFL EPS missed consensus by $0.06

2 - Free cash flow
Free cash flow is an essential financial indicator that should always be carefully evaluated when looking at a long-term investment. FCF should be adequate and positive if the business model can be considered as stable.

Accordingly, it must be sufficient enough to compensate for the distribution, reduce debt, and pay for eventual shares buyback. SFL has passed the FCF test with FCF of $47.2 million ("TTM"). It is an impressive accomplishment due to attractive long-term contracts. Dividend payout is now $145 million based on 103.6 million shares which are higher than the free cash flow ("TTM").

Conclusion: SFL is not passing the FCF test.

3 - Net debt

SFL net debt is now $1.26 billion using cash and cash equivalent plus available securities for sale.

To appraise what the debt load represents regarding business strength, I usually take the Debt to EBITDA ratio as a defining guide:

Long-term debt is $1.504 billion, and EBITDA on a yearly basis is $257 million (please see table above).

SFL has a Debt/EBITDA of 5.9, which is robust and nearly 40% lower than the shipping industry in general.

SFL strengthened its balance sheet with early conversion of $121 million of convertible notes.

On October 10, 2017, SFL announced:

The Company is strengthening its balance sheet by converting approximately $121 million aggregate principal amount of the Notes held by such holders into shares of common stock of the Company ("Shares") at prevailing market prices. The number of issued and outstanding Shares following these conversions is estimated to be approximately 103 million.

On February 2018, we learned also:

Subsequent to quarter end, the remaining outstanding of approximately $63 million principal amount of the Notes were settled, with the principal amount paid in cash, and the balance in approximately 650,000 newly issued shares. The number of shares economically outstanding following these conversions is approximately 103.6 million.

4 - Backlog

Note: As of December 31, 2017, and adjusted for subsequent divestments, the fixed rate charter backlog from the Company's fleet of 69 vessels and rigs was approximately $3.1 billion, with an average remaining charter term of nearly five years, or more than eight years if weighted by charter revenue.

This quarter, container ships were its largest revenue base with $828 million of revenue due from charter contracts of these vessels.

Tankers of various types came second with $546 million in contracted revenue, and dry bulk carriers held the third place, with $497 million of revenue due from charter contracts.

Ship Finance also has four rigs, three of the four rigs are chartered out on bareboat charters to fully guaranteed affiliates of Seadrill, where Seadrill is responsible for operating and maintenance costs. The 2007-built drilling rig Soehanah is currently employed under a one-year drilling contract with a national oil company in Asia until June 2018, with an option to extend the charter until June 2019. The rig is debt free, and the EBITDA contribution from the charter is approximately $0.9 million per quarter.

5 - September agreement with Seadrill

On September 13, 2017, SFL announced the following:

Ship Finance and its relevant subsidiaries have agreed to reduce the contractual charter hire by approximately 30% for a 5-year period starting in 2018, with the reduced amounts added back in the period thereafter. The leases for West Hercules and West Taurus will also be extended for a period of 13 months until December 2024.

Concurrently, the banks who finance the three rigs have agreed to extend the loan period by approximately four years, with reduced amortization in the extension period compared to today's level. The net cash flow from the three rigs in the extension period is estimated to approximately $29 million per year, or approximately $0.08 per share per quarter, net of loan interest and amortization.

Ole Hjertaker, the CEO, said on the conference call:

Yesterday, we also had some positive news relating to the Seadrill Chapter 11 restructuring. We have now succeeded in reaching a global settlement with unsecured bondholders and other major creditors in Chapter 11 cases. As a result of this settlement, approximately 78% of Seadrill's unsecured bondholders have now signed an agreement to support restructuring.

There is no change in the terms for our leases. And with the new agreement, there is hope that the Chapter 11 proceedings can be finalized and become effective relatively soon.

Commentary and Technical analysis (short term)

The container shipping business is recovering, and it is a comforting sign for the company because it holds a significant exposure in that sector which surpasses any other part of its shipping business.

Liner Ship Finance has a fleet of 22 container vessels and two car carriers. The container market has strengthened during 2017, and most of the operators announced positive results in the fourth quarter. We also see higher activity in the chartering market, both for modern eco-type vessels, and also for feeder size vessels trading in the short term market.

Ship Finance may eventually expand exposure to dry bulk, given the fact that the freight market has recovered from all-time lows in early 2016.

The Company owns 22 dry bulk carriers, 15 which are employed on long term charters and seven trading in the spot market. The chartering market for dry bulk carriers improved significantly from the third to the fourth quarter ... And according to market sources, the charter rate for Capesize dry bulk carriers could be above the profit share threshold in the next few quarters.

The tanker markets are expected to stage a cyclical recovery later this year despite a weak situation right now.

Tankers The Company currently owns 14 crude oil, product and chemical tankers, 12 of which are employed on long term charters. The crude oil tanker market improved from the previous quarter, yet rates remained at insufficient levels for the vessels chartered to Frontline Shipping Limited to earn average daily rates above the contracted base charter rate of $20,000 per day.

Additionally, a weak cycle in the offshore sector has depressed asset values across the board, but a nascent recovery seems taking place early 2018.

SFL is forming an ascending triangle pattern. The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern.

We are testing the line support as we speak, and the next few days will tell if the 14-14.50 support is holding (buy flag). If support is holding, the next target is $15.75 with a potential triple top (sell flag).

However, if the support is not holding and the stock crosses $14.25 (negative breakout), we may go down to the next support at $13.30 (buy signal).

I recommend SFL as a hold.

Important note: Do not forget to follow me on SFL. Thank you for your support, it is appreciated.

Analyst’s Disclosure: I am/we are long SFL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I trade the stock often as well.