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Text: I would start the call by briefly going through the highlights of the quarter.
Private Securities Litigation Reform Act of 1995.
The announced dividend of $0.15 per share represents a dividend yield of around 8% based on closing price yesterday, and this is our 67th consecutive quarter with dividends.
In light of the continued uncertainty surrounding Seadrill and outcome of their pending financial restructuring, the Board decided to adjust the dividend down to $0.15 and thereby effectively exclude all contribution from offshore rigs for the time being.
We believe that the market has already discounted this in the SFL share price as we, prior to this dividend adjustment, were trading at more than 13% yield based on the prior dividend, which is a very high number in the current low interest rate environment.
When the Seadrill situation is resolved, the Board will reassess the situation and possibly reinstate contribution from the rigs and the dividend again.
And our focus will be on building the portfolio with accretive transactions in order to build the distribution capacity also by adding new assets going forward.
Over the years, we have paid more than $27 per share in dividends or $2.3 billion in total, and we have a significant and fixed rate charter backlog, supporting continued dividend capacity in the future.
The total charter revenues of $157 million in the quarter was in line with the previous quarter, with more than 90% of this from vessels on long-term charters and less than 10% from vessels employed on short-term charters and in the spot market.
The EBITDA equivalent cash flow in the quarter was approximately $117 million.
And last 12 months, the EBITDA equivalent has been approximately $481 million, similar to the situation the last 12 months in the prior quarter.
Excluding cash in the rig owning subsidiaries, the consolidated cash position at quarter end was more than $200 million, up from around $150 million at the end of the second quarter.
In addition, we had $33 million in marketable securities at quarter end.
And after quarter end, we have used some of the cash to take out the financing of the drilling rig West Taurus, but we still have a strong cash position with more than $100 million remaining.
Our fixed rate backlog stands at approximately $3.2 billion after recent charter extensions and vessel sales, providing significant cash flow visibility going forward.
Of this, $2.4 billion relates to shipping assets alone and excludes revenues from 16 vessels trading in the short-term market and also excludes future profit share optionality.
The profit share contribution, which I mentioned, adds optionality value was around $6 million in the third quarter.
This was primarily from the two VLCCs on charter to Frontline, but also from fuel savings from container vessels with scrubbers and a small contribution from bulkers.
Following the immediate impact of COVID-19, some trades, including the car carrier market came to a virtual halt.
We have two vessels in this market, and they were due to come off charters in May and in August this year.
And consequently, we put them in lay-up in order to save costs as we believed at the time that it would take some quarters before the market would recover again.
We are very happy to see that it happened much quicker than anyone anticipated and both vessels are now trading out chartered out again on one on 100-day charter and one for 11 months.
And the charter rates are essentially back to pre-COVID-19 levels already.
While the Seadrill restructuring is pending, we have already addressed the bank structures on two of the rigs.
We have repurchased all the debt on the idle rig West Taurus at the discount essentially limited to the $83 million corporate guarantee, the cash in the rig owning subsidiary, which was already pledged to the banks anyway for some margin.
We have also agreed to guarantee the financing on West Linus in exchange for more flexible financing terms.
And with a large fleet of assets, it will always be acquisitions and disposals, and the remaining vessel on charter to the Hunter Group has been repurchased by them and delivered earlier this month.
The Hunter deal was designed to give us a very high return on a low-risk profile in exchange for flexibility on Hunter's part.
This is a good example of cost of capital arbitrage, where we could utilize our premium access to low-cost funding, and at the same time, give flexibility that Hunter was willing to pay for.
The delivery took place yesterday and net cash to us is more than $10 million after repayment of the associated financing, and the proceeds are expected to be reinvested in new accretive transactions.
Excluding the drilling rigs, which I will cover on the next page, the backlog from shipping assets was $2.4 billion at the end of the quarter.
Over the years, we have changed both fleet composition and structure, and we now have 81 shipping assets in our portfolio and no vessels remaining from the initial fleet in 2004.
We have gone from a single asset class chartered to one single customer to a diversified fleet and multiple counterparties.
And over time, the mix of the charter backlog has varied from 100% tankers to nearly 60% offshore at one stage to container market being the largest right now.
In addition, we have 16 vessels traded in the short-term market, which we define as up to 12-month charters and also from time to time, as I mentioned earlier, significant contributions from profit shares on assets.
We do not have a set mix in the portfolio.
Focus is on evaluating deal opportunities across the segments and try to do the right transactions from a risk-reward perspective.
Over time, we believe this will balance itself out, but we try to be careful and conservative in our investments and not invest just because money is burning in our pocket.
Our strategy has been to maintain a strong technical and commercial operating platform in cooperation with our sister companies in the Seatankers group.
This gives us the ability to offer a wider range of services to our customers, from structured financings to full serve risk time charters, which is the bigger part of our portfolio.
But more importantly, we also believe it gives us unique access to deal flow in our core segments.
And with full control over vessel maintenance and performance, including energy efficiency and emission minimizing efforts, we can impact improvements to our vessels through the life of the assets and not only be passively owning vessels employed on bareboat where the customers may not always have an incentive to make such improvements.
So unlike most of the companies with a financing profile in the maritime world, more than three-fourths of our shipping charters revenues comes from vessels on time charter and a smaller proportion from bareboat chartered assets.
And even if we include the drilling rigs, which are all on bareboat charters, the time charter portion is still more than two-thirds.
SFL owns three drilling rigs chartered to subsidiaries of Seadrill.
All three rigs were employed on bareboat charters of Seadrill and generated approximately $24 million in charter hire in the third quarter.
Net of interest and amortization, the contribution was approximately $8 million or around $0.07 per share.
The harsh-environment jack-up rig West Linus has been subchartered to ConocoPhillips until the end of 2028, while the harsh-environment semisubmersible rig West Hercules is employed on consecutive subcharters to Equinor in the North Sea.
The semisubmersible rig West Taurus has been stacked since 2015.
Seadrill has disclosed that it is currently engaged in discussions with its financial stakeholders with regard to a comprehensive restructuring of its balance sheet and that such a restructuring may involve the use of a court supervised process similar to the 2017 restructuring.
At that time, the loan balance on the rigs was much higher and we have reduced leverage by more than 50% in this three-year period as we illustrate on this slide.
At the end of the second quarter, Seadrill reported a cash position of $1 billion, and while Seadrill did pay full charter hire in the third quarter, no charter hire has been received so far in the fourth quarter.
Seadrill has also not paid interest on its bank debt recently and announced a forbearance agreement with its financial banks and some other stakeholders in mid-September, which was subsequently extended through October.
The nonpayment of charter hire by Seadrill does constitute an event of default under the leases and in certain of the corresponding financing agreements.
Unless cured away, this could result in enforcement of such default provisions.
From the start of the transaction with Seadrill all the way back from 2008, all the revenues from the subcharters of these assets, and in this instance, more importantly here now from the two drilling rigs that are working, the West Linus and West Hercules, the revenues from the subcharter have been paid into accounts pledged to SFL's rig owning entities and refinancing banks.
As a result of the current event of default situation caused by Seadrill, Seadrill will need prior approval to access these funds to pay for operating expenses and other expenses, and we'll have to source this from their cost cash position until the situation is resolved.
The gross hire is significantly higher than the bareboat hire to us and keep accumulating on the pledged account for now.
We can, unfortunately, not make any further comments relating to the pending restructuring.
But our objective is, as always, to maximize long-term value for our shareholders.
In the meantime, we have adjusted the quarterly distribution to exclude all distribution from these offshore assets.
And when the Seadrill situation is resolved, the Board will reassess the situation and possibly reinstate contribution from the rigs in the future.
And with that, I will give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.
On this slide, we have shown a pro forma illustration of cash flows for the third quarter.
GAAP and also net of extraordinary and noncash items.
The company generated gross charter hire of approximately $157 million in the third quarter, with more than 90% of the revenue coming from our fixed charter rate backlog, which currently stands at $3.2 billion.
And while the current charter backlog relating to our offshore assets may be impacted by the pending Seadrill restructuring, the backlog from our shipping portfolio stands at a solid $2.4 billion, providing us a strong visibility on our cash flow going forward.
At quarter end, SFL has a liner fleet of 48 container vessels and two car carriers.
The liner fleet generated gross charter hire of approximately $80 million.
Of this amount, approximately 98% was derived from our vessels on long-term charters.
At quarter end, SFL's liner fleet backlog was approximately $1.8 billion, with an average remaining charter term for approximately four and a half years or approximately seven years if weighted by charter revenue.
Approximately 84% of the liner backlog is the world's largest liner operators, Maersk Line and MSC, with a balance of approximately 16% to Evergreen.
Our tanker fleet generated approximately $24 million in gross charter hire during the quarter, including $4.8 million in profit split contribution from our two VLCCs on charters to Frontline.
The vessels are fixed on profitable subcharters until the end of the quarter, ensuring stability on a quarterly profit split also for the fourth quarter.
The net contribution from the company's two Suezmax tankers was approximately $3.3 million in the third quarter, and the vessels are traded in the short-term market for the time being.
On November 11, the company redelivered the last VLCC to the Hunter Group after declaration of a purchase option.
After repayment of associated financing, the transaction increased SFL's cash balance by approximately $10.7 million.
In the third quarter, our dry bulk fleet generated approximately $28.4 million in gross charter hire.
Of this amount, approximately 70% was derived from our vessels on long-term charters.
During the quarter, the company had 10 Handysize vessels employed in spot and short-term markets.
The vessels generated approximately $7 million in net charter hire compared to $2.4 million in the previous quarter.
At the end of the third quarter, SFL owned three drilling rigs.
All of our drilling rigs are long-term bareboat charters to fully guaranteed affiliates of Seadrill Limited and generated approximately $24.4 million in charter hire during the quarter.
This summarizes to an adjusted EBITDA of approximately $170 million for the third quarter or $1.08 per share.
We then move on to the profit and loss statement as reported under U.S. GAAP.
As we have described in previous earnings calls, our accounting statements are different from those of a traditional shipping company.
And as our business strategy focuses on long-term charter contracts, a large part of our activities are classified as capital leasing.
As a result, significant portions of our charter revenues are excluded from U.S. GAAP operating revenues and instead booked as revenues classified as repayment of investments in finance leases and vessel loans, results in associate and long-term investments and interest income from associates.
So for the third quarter, we report total operating revenues according to U.S. GAAP, approximately $160 million, which is less than approximately $157 million of charter hire actually received for the reasons just mentioned.
In the quarter, the company reported profit split income of $4.8 million from our tanker vessels on charter to Frontline and $800,000 from profit split arrangements related to fuel savings on some of our large container vessels.
Beginning in 2020, assets classified as financial assets, including several of SFL's vessels and rigs on long-term leases, are subject to general credit loss provisions similar to those requirements for banks and financial institutions.
The net change in such provisions is recorded in the income statement each quarter.
In the third quarter, the credit loss provisions increased by approximately $6.2 million, primarily in wholly owned nonconsolidated subsidiaries.
Furthermore, the company recorded nonrecurring and noncash items, including negative mark-to-market effects relating to interest hedging, currency swaps and equity investments of $600,000 and amortization of deferred charges of $2.3 million.
So overall, and according to U.S. GAAP, the company reported a net profit of $16 million or $0.15 per share.
Moving on to the balance sheet.
At quarter end, SFL had approximately $206 million of cash and cash equivalents, excluding $22 million of cash held in wholly owned nonconsolidated subsidiaries.
Furthermore, the company had marketable securities of approximately $33 million, based on market prices at the end of the quarter.
This included 1.4 million shares in Frontline, four million shares in ADS Crude Carriers and other investments in marketable securities, in connection with the sale of 3 older VLCCs to ADS Crude Carriers back in 2018 as well to shares in the company as part payment.
ADS has now sold all the vessels at attractive prices.
And it's expected that the net proceeds from the vessel sales will be returned to investors.
When including the dividend received, the value is estimated approximately $12 million illustrating how SFL, from time to time, takes steps to maximize value for our shareholders.
At quarter end SFL had five debt-free vessels with a combined charter value of approximately $40 million based on average broker appraisals.
So based on Q3 2020 figures, the company had a book equity ratio of approximately 26%.
Then to summarize, the Board has declared a cash dividend of $0.15 per share for the quarter.
This represents a dividend yield of approximately 8% based on the closing share price yesterday.
This is the 67th consecutive quarterly dividend, and since inception of the company in 2004, more than $27 per share or $2.3 billion in aggregate have been returned to shareholders through dividends.
And while we continue to collect revenue from our fixed charter rate backlog, we also have upside from profit split arrangements from our VLCCs in addition to profit split arrangements related to fuel savings on some of the large container vessels.
Despite a relatively volatile market in 2020, we have added more than $250 million per fixed charter rate backlog over the last 12 months.
And we actively continue to explore new business opportunities.
And while risk premiums on energy and shipping investments have increased with the recent volatility in financial markets, SFL has, at the same time, with new attractive financing, has expanded its group of lending banks, especially in the Far East to now represent more than 40% of our lending volume.
SFL's business model has been continuously tested throughout its 16 years of existence and has previously been highly successful in navigating periods of volatility.

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compname reports preliminary q3 2020 results and quarterly cash dividend of $0.15 per share.
sfl - preliminary q3 2020 results and quarterly cash dividend of $0.15 per share.
board has decided to effectively exclude all cash flow earned from offshore assets for time being.

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