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Ship Finance Cruises on Strong Cash Flow and a Healthy Order Backlog

By Asit Sharma - Aug 22, 2019 at 5:35PM

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The ship-leasing company turned in decent numbers in the second quarter while acquiring new liner vessels and signaling its appetite for further asset acquisitions.

Bermuda-based Ship Finance International (SFL -0.98%) continued to reap rewards from a diversified asset base in its earnings report released on Aug. 20. The maritime specialist, which leases out a fleet of 89 vessels and rigs under long-term charter contracts, also added to its multibillion-dollar revenue backlog while maintaining its impressive quarterly dividend streak.

Below, let's review the details of the enterprise's last three months. Note that all comparative numbers that follow refer to those of the prior-year quarter.

Ship Finance results: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $110.9 million $116.5 million (4.8%)
Net income $28.1 million $33.6 million (16.3%)
Diluted earnings per share $0.26 $0.31 (16.1%)

Data source: Ship Finance International.

What happened with Ship Finance this quarter?

An oil tanker sails in blue-green waters.

Image source: Getty Images.

  • Ship Finance's liner fleet of 48 liners and two car carriers accounted for the bulk of the company's top line, generating $80.5 million in charter-hire revenue during the quarter. The company noted that forecasted demand growth in this segment remains uncertain due to global trade tensions. Nonetheless, subsequent to quarter-end, Ship Finance acquired three container vessels that ranged from 2,400 to 4,400 TEU (twenty-foot equivalent unit, a measure of a ship's cargo-carrying capacity). The company promptly leased these out on 5.5 year bareboat charters until 2025.
  • The organization's nine crude oil, chemical, and product tankers generated $15.2 million in charter-hire revenue during the quarter. Crude oil tanker rates declined over the last three months as new capacity came into the market.
  • Of Ship Finance's 22 dry bulk carriers, 13 are under long-term charter contracts while nine generate income in the short-term market. Dry bulk vessels contributed $26.4 million to total revenue in the second quarter.
  • Ship Finance's three drilling rigs and five support vessels contributed $30.1 million in revenue during the period.
  • Note that, due to complex accounting rules involving the company's leases, the segment revenue numbers above do not add up to total company revenue for the quarter and are presented for general reference. Some of the revenue delineated in Ship Finance's segment information doesn't hit the income statement; rather, it's booked as lease interest income and repayment of investments in finance leases on the statement of cash flows. Between these amounts in the second quarter, which totaled $40.5 million, and operating cash flow of $45 million, the company enjoyed a healthy boost of $85.5 million in cash flow this quarter.  
  • Ship Finance's backlog of future charter revenue grew by $200 million in the quarter, to $3.7 billion.
  • The company declared a dividend of $0.35, its 62nd consecutive quarterly dividend. Even after a stock increase of nearly 13% since the second-quarter release, Ship Finance's dividend still yields nearly 10% on an annualized basis.
  • Ship Finance notched $91 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from consolidated operations and $30 million in adjusted EBITDA from non-consolidated subsidiaries.

What management had to say

In the company's earnings press release, CEO Ole Hjertaker stressed the long-term characteristics that make Ship Finance a solid investment, especially for dividend investors, in a variety of economic environments:

Over years, SFL has solidified its position in the maritime industry with a diversified portfolio of assets supported by a strong technical and commercial operating platform. This gives us the ability to offer a wide range of services to our customers, from structured financing to full service time charters.

We are careful and selective in our investments, and with our portfolio approach we have been able to time our investments in each segment through the market cycles. Our consistent ability to access attractively priced capital has allowed us to continuously renew our fleet and pursue profitable growth opportunities. As a result, $2.2 billion has been returned to shareholders through dividends since 2004, and we have a significant charter backlog supporting future distribution capacity.

Looking forward

Ship Finance doesn't provide forward quarterly or annual guidance. However, the company observed in its earnings report that the current tough banking environment for shippers, combined with low asset prices, may result in reduced-risk investment opportunities for Ship Finance.

In other words, in the coming quarters, the company may be able to pick up new vessels at attractive pricing and charter the assets in stable, long-term contracts, further boosting its cash-generation ability.

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