SFL Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2025

Key Takeaways

  • SFL reported Q1 revenues of $193 million and EBITDA equivalent cash flow of $116 million, but recorded a net loss of $32 million ($0.24 per share) due to one-off impairments and an idle drilling rig.
  • The company recognized $34 million in impairments on seven older dry bulk vessels and has sold two of them after failing to secure new long-term charters amid market volatility.
  • The Hercules drilling rig remained warm-stacked in Q1, incurring roughly $80,000 per day in OpEx and delaying new contract opportunities amid oil price and market uncertainty.
  • SFL’s charter backlog stands at $4.2 billion, with over two-thirds tied to investment-grade customers and shipping fleet utilization of 98.6%, providing strong cash flow visibility.
  • The company declared its 85th consecutive dividend of $0.27 per share (∼13% yield) and repurchased $10 million of shares below $8 as part of a strategy supported by $174 million in cash and $48 million of undrawn credit.
AI Generated. May Contain Errors.
Earnings Conference Call
SFL Q1 2025
00:00 / 00:00

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Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

Of Investor Relations in SFL. Our CEO, Ulya Htakka, will start the call with an overview of the first quarter highlights, and then our Chief Operating Officer, Tim Scholle, will comment on vessel performance matters, followed by our CFO, Axel Olesen, 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 and 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 U. S.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

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 results to differ include, but are not limited to, conditions in the shipping, offshore and credit markets.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

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 results and our financial condition. Then I will leave the word over to our CEO, Ulyak Dackel, with highlights for the first quarter.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Thank you, Asven. We are now announcing our eighty fifth dividend and continue building our business as a maritime infrastructure company with a diversified fleet. We reported revenues of $193,000,000 this quarter and the EBITDA equivalent cash flow in the quarter was $116,000,000 Over the last twelve months, the EBITDA equivalent has been $545,000,000 The first quarter's result was impacted by several one off items, including impairments on some older dry bulk vessels traded in the spot market and also the drilling in Hercules being idle in the quarter. We therefore recorded a net loss in the quarter of $32,000,000 or $0.24 per share. With a dividend of $0.27 per share, we have returned more than $2,800,000,000 to our shareholders over eighty five consecutive quarters, and the latest dividend represent a yield of approximately 13% based on share price yesterday.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

We have also been active repurchasing shares in the recent market softness and have bought back $10,000,000 worth of shares below $8 per share over the last few weeks. This is based on our overall capital allocation strategy with the aim to maximize long term distribution capacity per share. The seven dry bulk vessels between 139,000 deadweight ton were previously on long term charters and have thereafter been employed in the spot market. The vessels are built in China between 02/2009 and 02/2012, and we have not been able to find new long term charters for these vessels due to a combination of age, design, and fuel efficiency. The recent market volatility and recession fears after the recently implemented tariffs makes it even more difficult to trade the vessels profitable in the spot market, and we have now sold one of the vessels and agreed to sell another.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

While the impairments are $34,000,000 in aggregate, the actual cash on cash returns from the investments in these these vessels have actually been quite decent and in the 12 to 15% range on a level levered basis for two of the Supramax bulkers we have agreed to sell. The reason is that the vessels were on high charters initially, but according to US GAAP, we have had to amortize the vessels on straight line basis from new. For other assets like the container ships and car carriers, the charter free values were around a billion dollar higher than carrying cost at quarter end, so we have a significant buffer steer. The drilling in Hercules has been idle since the fourth quarter of twenty twenty four, and the recent market turmoil and oil price volatility has delayed new employment opportunities for the rig, which is impacting our near term financial results. We remain optimistic about finding new employment for the rig and continue to explore strategic opportunities for the rigs in parallel, but it is difficult to give any guiding or timing for this.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

The rest of the portfolio on long term charters is performing very well, and we have upgraded several vessels in the quarter boosting both cargo intake and fuel efficiency in connection with charter extensions at higher rates than before. Our charter backlog is currently $4,200,000,000, and importantly, more than two thirds of this is to customers with investment grade rating, giving us a unique cash flow visibility and resilience in light of the current market volatility. And we have a strong liquidity position, including undrawn portion on credit lines and also multiple unlevered vessels, which should enable us to continue investing in new accretive assets. And with that, I will leave the word over to our Chief Operating Officer, Trim Schirle.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Thank you, Ula. Our current fleet is made up of 79 maritime assets, including vessels, rigs and contracted newbuildings. In April, we sold the supermarkets for Yukon, and in May, we will be selling of our two old 1,700 TEU container ships, the Asian Ace. She is scheduled to be delivered to buyers later this week. Another Supramax is also in the process of being sold.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

As previously reported, Golden Ocean, the charterer for our eight Capesize bulk carriers, have declared their purchase option, and we expect the vessels to be delivered to Golden Ocean in July. Our backlog from owned and managed shipping assets stands at $4,200,000,000 and the fleet in Q1 was made up of 15 dry bulk vessels, 38 container ships, 16 large tankers, two chemical tankers, seven car carriers and two drilling rigs. We have a diversified fleet of assets chartered out to first class customers and mostly long term charters, and the majority of our customer base is large industrial end users. Container vessels dominate our backlog, accounting for about 67% of our portfolio. Key to remain an attractive partner is to ramp up investments in fleet renewal, new technology and vessel upgrades, which we are doing.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Stricter regulatory demands, particularly from the IMO and the EU, aimed at cutting shipping emissions, is another driving factor. By enhancing our fleet, we position ourselves for organic growth, either by supplying new vessels to clients or extending the life of existing ones. And container operators, in particular, are receptive to collaborative projects involving major upgrades like cargo capacity increases, energy saving technologies, propeller enhancements and hull modifications. These investments deliver significant cost savings and emissions reductions, benefiting both our operations and our clients. In Q1, '90 '5 percent of charter revenues from all assets came from time charter contracts and only 5% from bareboats or dry leases.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

The charter revenue from our fleet was about $193,000,000 in the quarter. We had a total of almost six thousand six hundred operating days, defined as calendar days less technical off hire and dry dockings or stacking. Six vessels have been in dry dock in the quarter, including major upgrade projects. It's worth mentioning that the time at the shipyard required for these containership upgrades beyond the fifteen days required for a normal dry docking is for charterers account. Our overall utilization across the shipping fleet in Q1 was 98.6%.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Adjusted for unscheduled technical off hire only, the utilization of the shipping fleet was 99.8%, a testament to a high quality of our vessel management. When including the drilling rigs, utilization was 97.2%, mainly due to the Hercules rig being idle in the quarter. The Trump administration's recent imposition of fees on Chinese built and operated ships has garnered significant attention lately. These fees originate from a 2024 Section three zero one investigation under the Biden administration, which scrutinized China's dominance in global shipbuilding, maritime and logistics industries. Initially proposed in February 2025 by The U.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

S. Trade Representative, the fees target Chinese built and Chinese owned vessels docking at U. S. Ports in an effort to bolster U. S.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Shipbuilding and reduce dependence on China's maritime infrastructure. For SFL, the relevant provisions are Annex two covering Chinese built vessels and Annex three addressing foreign built car carriers, a new addition not part of the original February proposal. This effectively applies to nearly all non U. S. Flagged vehicle carriers.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

So of our 79 vessel fleet, approximately 27 will be affected by these fees in our estimation, primarily car carriers and tankers, with potential impacts on larger container ships later depending on our fleet composition going forward. However, since our vessels are on long term charters, these fees will be passed on to charterers. We are currently investigating the practical implementation of these fees, particularly the payment processes, which we are discussing with our charterers. On the energy side, the Linus rig earned 20,300,000 in Q1, more or less flat from Q4 with three days of downtime in the quarter. Due to good performance, the rig was recognized as ConocoPhillips' rig of the month for all three months in the quarter.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

OpEx was SEK 12,200,000.0 in Q1, slightly down from Q4. Subsequent to quarter end, the market index rate of liners have been adjusted up by 2% from May 1. The Hercules rig is currently warm stacked in Norway and being marketed for opportunities later in 2024 and 2025 and 2026. During the first quarter, the rig recorded $2,000,000 in revenue relating to equipment rental income. The majority of this equipment has been returned to SFL subsequent to quarter end, and we do not expect to receive further rental income.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Rig OpEx was approximately SEK 6,000,000 in the quarter, reflecting warm stacking costs of the rig. I will now give the word over to our CFO, Oksr Oelsson, who will take us through the financial highlights of the quarter.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

Thank you, Trim. On this slide, we have shown a pro form a illustration of cash flows for the first quarter. Please note that this is only a guideline to assess the company's performance and is not in accordance with U. S. GAAP and also net of extraordinary and noncash items.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

The company generated gross charter hire of approximately $193,000,000 during the first quarter, with approximately $85,000,000 coming from our container fleet, including approximately $1,700,000 in profit share related to fuel savings on seven of our large container vessels. As in the previous quarter, revenue was impacted by scheduled dry dockings and efficiency upgrades on some of our large container vessels. The car carrier fleet generated approximately $25,000,000 of gross charter hire in this quarter, including profit share from fuel savings, which is slightly down from the previous quarter as one vessel underwent a scheduled drydocking during the quarter. Our tanker fleet generated approximately $43,000,000 in gross charter hire, slightly up from the previous quarter as all five tanker vessels acquired in 2024 for the first full quarter of revenue as well as 15 dry bulk vessels, of which eight are employed on long term charters. The vessels generated approximately $18,000,000 in gross charter hire in the first quarter.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

The seven vessels employed in spot and short term market contributed with approximately $4,400,000 in net charter revenue compared to approximately $7,200,000 in the fourth quarter. SFL owns two harsh environment drilling rigs, the large tanker rig Linus and the ultra deepwater semisubmersible rig Hercules. The rigs generated approximately $22,400,000 of charter hire in the quarter. Our operating and G and A expenses for the quarter was approximately $78,000,000 down from approximately $104,000,000 in the fourth quarter as operating expenses on the Hercules is reduced in the current form stacking mode compared to in full operating mode when the rig is on contract. Going forward, we estimate operating expenses of approximately $80,000 per day for the Hercules in the current warm stacking mode, excluding potential upgrades.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

This summarizes to an adjusted EBITDA of approximately NOK 116,000,000 compared to NOK 132,000,000 in the previous quarter. We then move on to the profit and loss statement as reported on The U. S. GAAP. For the first quarter, we reported total operating revenues approximately 187,000,000 compared to approximately NOK $229,000,000 in the previous quarter.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

The contribution from our vessels was approximately NOK 171,000,000 compared to approximately $177,000,000 in the previous quarter, while the rigs contributed with approximately $22,400,000 down from approximately $54,900,000 in the previous quarter as Hercules was idle in the first quarter. Vessel operating expenses in the quarter was approximately $58,000,000 including $10,000,000 related to scheduled dry dockings compared to approximately $64,000,000 in the previous quarter, including $14,000,000 related to scheduled dry dockings. Dry dock expenses for ships are being expensed when incurred, and the vessels are out of service during the dry dock period, reducing revenues temporarily. The net result in the first quarter was also impacted by nonrecurring or noncash items, including investment impairments of SEK 34,100,000.0 relating to seven noncore dry bulk vessels trading in the spot market. So overall and according to U.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

S. GAAP, the company reported a net loss of approximately $1,900,000 or $0.24 per share compared to a net profit of approximately $20,200,000 or $0.15 per share in the previous quarter. Moving on to the balance sheet. At quarter end, SFL had approximately $174,000,000 of cash and cash equivalents in addition to undrawn credit lines in the amount of approximately $48,000,000 In addition, the company had unencumbered assets with a market value of approximately $187,000,000 at quarter end. The company has conducted share repurchases of approximately $10,000,000 and approximately 40% of this had been acquired by quarter end.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

During the quarter, the company repaid these facilities in the amount of approximately $47,000,000 in addition to ordinary loan installments of approximately $65,000,000 We also had vessel upgrades related to some of the large container approximately $20,000,000 during the quarter, most of which will be reimbursed through charter rate increases. We furthermore had remaining capital expenditure of about $850,000,000 remaining on five large container vessels, expected to be funded through pre and post delivery funding. Those vessels are expected to be delivered in 2028. So based on the Q1 numbers, the company had a book equity ratio of approximately 26%. Then to conclude, the Board has declared the eighty fifth consecutive cash dividend.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

With a dividend of $0.27 per share, we have returned more than $2,800,000,000 to our shareholders over the years. We also have been active repurchasing shares in the recent market softness as part of our overall capital allocation strategy with the aim to maximizing long term distribution capacity per share. Our charter backlog is currently $4,200,000,000 and importantly, more than twothree of this is the customers with investment grade rating, giving us a unique cash flow visibility and resilience in the light of the current market volatility. Furthermore, our strong balance sheet and liquidity position provide us flexibility in the current market environment and enables us to pursue new investment opportunities. And with that, I give the word back to the operator, who will open the line for questions.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

Thank you, Axel. We will now open for a Q and 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 and ask your question. Thank you.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

And we will have our first question from Gregory Lewis. Greg, please unmute your speaker to ask your question.

Gregory Lewis
Managing Director at BTIG

Yes. Thank you, and good afternoon, everybody, and thanks for taking my questions. I was hoping for a little bit more color on kind of vessel and rig operating expenses. I mean, clearly, that was their nice step down sequentially. I'm assuming that's a little bit around maybe some cost savings at the Hercules.

Gregory Lewis
Managing Director at BTIG

But you you did mention some some dry dockings. I'm kinda curious as as we look out over, you know, the rest of the year, you know, q two, q '3, q '4. Any any kinda color around planned out of service days around dry dockings? And then in the event that we were able to or when we do get work on, eventually get work on the Hercules, how should we think about the rescaling of of of OpEx related to that rig?

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Hi, Gregory. Tim Shirley here. I think relating to your question on dry dockings and OpEx, we this year is a very busy dry docking year. I think we're looking at I mean, some dates can move, but up to sort of 17 vessels, which in a if you just straight line it, sort of an average year would be 10. So it's more than usual.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

And we had a heavy drydock scheduled in Q1, and Q2 will also be as a more than usual, and then it will taper off in Q3 and Q4 and into next year. So the brunt of the sort of dry dock related costs are sort of taken in Q1 and Q2 this year. I'll leave it to Ole to give some color on the Hercules. That's a little bit of a different issue. So I think was that clear enough on the drydocking question? Or would you

Gregory Lewis
Managing Director at BTIG

No. That's super helpful.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Okay.

Gregory Lewis
Managing Director at BTIG

Thank you.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

And maybe Ule, on the Hercules?

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Well, the we have both rigs incurring OpEx. Linus, the regular OpEx has been working, has had a very high utilization through the charter, has been rig of the month, every month during the first quarter, which is with Koneko Philips, which is very good. The Hercules remain stacked in Norway, awaiting new contract opportunities. We cannot be specific. I mean we are discussing opportunities, but we cannot be specific on that.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

We have to we will report that when we have concluded something. While the rig is there, we are keeping it warm stacked, which means that there is a run rate cost for the rig. It's in the region of around $80,000 per day to keep a rig like that warm, so it's ready to go out on very short notice. We're also doing some upgrades on the rig to ensure that it's a very attractive rig in the market. But in light of the recent market volatility and oil price volatility, we have seen that all companies, and this is both onshore and offshore, are a little careful with their investments.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

And therefore, we've seen several oil companies guiding that their CapEx is adjusted downwards given the uncertainty. We but at the same time, that specific rig is one of relatively few rigs with capabilities of drilling in harsh environment during winter. So we we we do believe there will be good demand for the rig down the road, but we cannot be specific on exactly when. Yeah.

Gregory Lewis
Managing Director at BTIG

Yes. Super helpful. And just following up on that, in the you know, if I were to think just if I pick a date for the rig to go to work, is is it kind of safe to I mean, you're you're we're spending money to keep the rig hot, active, ready to go. Is is it safe to just assume that, you know, in the quarter leading up before work before putting that rig back to work, maybe there's a couple of million dollar impact to OpEx or something even Yes.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

So Greg, Axel here. Absolutely correct. So I would assume in quarter before it goes on the contract, it's more like run rate contract as per on a normal contract. Yes. So there's a step up in that period.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yes. You basically have to put more people on the rig, and they have to prepare. And you typically earn the charter rate when the rig starts drilling. So in the weeks ahead of that, you have always a ramp up of OpEx up to run rate, levels. So that's just the normal part of that.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

Yeah. That's why we get the mobilization cost Yeah. Effectively. Right? Yeah.

Gregory Lewis
Managing Director at BTIG

Yeah. Perfect. Okay. And then and then just, you know, clearly, there's a lot of uncertainty out there, you know, you know, around, you know, I guess, there's multiple issues happening. You know, I I guess what I wonder is, you know, just given the the the the business model of of redeploying capital, you know, on accretive deals, how have what is kind of, I guess, in terms of asset sale opportunities and I mean or I should say asset acquisition opportunities for SFL.

Gregory Lewis
Managing Director at BTIG

You know, how has that changed over the last few months? And then and then, really, what has been the appetite for for customers to actually, you know, look to charter in tonnage longer term just because, you know, for for SFL, you know, you you need you need to be able to get your hands on the asset, and then you also need to be able to contract the asset. Just kinda curious how that's kind of evolved over the last few months and and yeah. I'll stop there.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yeah. Well, I think, you know, there was a distinct difference between, what do say, February, early March and and, you know, what was it going into April with with all the noise around the tariffs, you know, and board fees and and whatnot. So my you know, our sense is that particularly in in April, everyone in the market were a little hesitant because nobody could see had visibility on what was actually going to happen in the various segments. And so it's basically across the board. High higher uncertainty means that decision processes take longer.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

At the same time, you know, the customers then if you look at our our core fleet and where our strategy is, which is long term charters to very strong industrial players, you know, as you know, we have, like, two thirds of our backlog to investment grade companies. These are not companies that are that sort of live or dies on the spot market rate. These are companies who have a more longer term logistics mindset and, therefore, aren't necessarily so dependent on the short term market. So we see already now that, what we say, discussions we had earlier in the year where we that sort of went a little slowed down for a period is now picking up again. So we think that with some more stability and predictability in around world trade and tariffs in particular, we'll we hope that will you know, lead to more business, call it, executable business transaction.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Also, on along alongside with that, you had a very hot year last year and the year before on the new building side where shipyards, what do we say, kept rising the prices. So with a little lower activity, maybe you can also see some softening on price expectation, which also comes nicely together with investment opportunities. And we have quite decent capital available, both as cash. We have undrawn facilities and also some assets available. And I think importantly, we've built up a standing over more than twenty years now as a very reliable, call it, customer for funding institutions, banks, particularly in Asia.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

And we are very active in the Japanese market, for instance. So with long term predictability, we're there. We always perform means that we think we have pretty good access to capital in four new projects now. And and, you know, that is, you know, at least based on our interaction. But as always, we will never guide, you know, on how much we will do in any specific quarter beforehand.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

You know, we report deals as we do them. And historically, as you've seen, some quarters, we are very active, others quarters, are not. It's all about trying to do the right deals and not, you know, just do it on a program basis to get the right deals.

Gregory Lewis
Managing Director at BTIG

Super helpful. Thanks very much, gentlemen.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yes. Thank you.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

All right. Then we will take our next question from and sorry if I'm mispronouncing your name, Clement Mullah. Please unmute your speaker to ask your question.

Analyst

Hi. Good afternoon. Thank you for taking my questions. I wanted to start by following up on Greg's question on the Hercules. You've been clear it's difficult to provide any guidance regarding when the asset will come back.

Analyst

But would you talk a bit more on the upgrades you're conducting under expected cost?

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yeah. I'm sorry. Know, upgrades to to the Hercules specifically, you mean?

Analyst

Yeah. Exactly. Yeah.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yeah.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yeah. So so what we're doing, you know, as right as we speak, we are you know, when when the rig is is idle or or or hot stacked like now, You know, for instance, we are doing some work on the flooring, which is which is, you know, effectively part of the of the claim, you know, with with Seadrill that where we were awarded, know, to order money from Seadrill, that's, you know, one of the items there was that the flooring in the living quarters there was not maintained as it should, and therefore, it needs to be redone. And that's very difficult to do when the rig is working because then you have to shut down sections of the living quarters. So that is something that we're doing now. We're talking a couple of hundred thousand dollars expense to do that.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

But that is something that's that we hopefully, when the Seadrill court case is finalized in the end, that's part money we will be effectively compensated for. We also upgraded the drilling control system to the state of the art controls, fully automated systems, which is something you typically need in the harshest of environments when the rig is working. And the cost level for that is $7,000,000 8 million dollars We're also replacing some electrical systems at the same time to make ensure that it's more reliable, which are also expenses that will come some of them later in the year with a couple of million. Dollars. So we are active on the rig.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

We are making sure that it's very attractive for oil companies to use and make sure that it's a safe and warm asset. These are assets that if you put a rig in what they call cold stack, I. E, you leave it there and with minimal manning, if any, and don't keep running the equipment and maintaining it, it takes relatively short time until it becomes very expensive to reactivate the rig. And and we believe that it's better value for us to to do these, call it, investments, including keeping the warm stack costs, which will then hopefully enable us to find work for the rig. We have to remember that this is this rig is legacy asset in SFL.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

We were never supposed to own and operate call it never supposed to operate the rig. Seadrill, back in the day, had a purchase obligation. There was really a financing structure. So after two rounds of Chapter 11s in Seadrill, we ended up taking it back. We were awarded around $48,000,000 by a court after we sued them for, call it, the lack of maintenance.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

That has been appealed. That case is coming up next year. So we believe we still we believe we have a very strong case as supported by the first round. But we have not recorded anything in our accounts. We have expensed legal fees along the way and have nothing in our accounts as, call it, value for that potential court final court award when that comes up.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

If you look at the other assets we have in our portfolio, which is really our core assets, there we control the maintenance ourselves, and we can do all the preventive maintenance we need to do and therefore have a very different dynamics in terms of what it costs to keep these vessels as we go with customers like Maersk, Hapag Lloyd, Volkswagen, Kline and others.

Analyst

That's very helpful. Thank you. I actually also wanted to ask about the $35,000,000 in remaining CapEx you mentioned, which is attributable to efficiency upgrades on the container ships. How should we think about the cadence for those?

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

I think when they will I mean Yeah, exactly.

Analyst

So like when will you incur into the

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

I think most of the costs remaining, which is for the container ships, it's around have to check base around SEK18 million at the moment for the upgrades and they will be incurred in Q2 and Q3.

Analyst

Thanks for the color.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

And will be on these vessels, that we are talking about, they will be 100% covered by a rate increase on the charter. And it also includes the off hire that we incur due to the longer dock duration over and above a normal drydocking of about fifteen days.

Analyst

Makes sense. Thank you. And final question from me. The Board decided to maintain the dividend despite the Hercules remaining open. Could you provide an update on how you view the, let's say, long term distribution potential? And how do you balance that with share repurchases?

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yes. We the dividend is set on a quarterly basis. So we never provide any guiding on the dividend as a matter of principle and never have. But the dividend typically or I would say the mindset behind the dividend is a long term sustainable level based on cash flow, net cash flow produced by the assets we own. So the comment relating to Hercules here and the employment was really in the context of a prolonged layup and therefore associated costs and no revenues for that rig for the long run.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

But we felt that it was appropriate to mention that depending on how long that will take, that will have an impact on the cash flow to the company and therefore, eventually, also the distribution capacity that we have. If you look at capital allocation, it's a combination of investments, debt issuance, debt repayments, share buyback and dividends. So that is really how that is allocated between those is really a question of maximizing long term distribution per share and effectively overseen by the Board. So like the share buyback we did, it's around $10,000,000 I mean, if you look at the dividend now, it's more than $30,000,000 So it's not a huge proportion relative to the dividend. But we've but the board felt that it was a very attractive level.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

It was below $8 on average. And we we've done we also bought back some shares in in 2023. So that is a part of that toolbox that the company has to maximize returns over time. And it could be any combination of these elements.

Analyst

Before

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

we go to Mr. Baldoni, I see we've gotten some questions in here via text. So I guess the first question is, are container vessels still the preferred segment for building the contract backlog going forward?

Ole Hjertaker
Ole Hjertaker
CEO at SFL

Yes. We look at many segments in parallel. We have a diversified, call it, the market approach in maritime space. So we look at have we look at container ships that we have done a few car carriers in the past. We're looking at tankers.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

We were looking at chemical carriers, and we were also looking looked at the gas carriers recently. So I cannot guide specifically on that. But what's important there, Harry, for us is high high end assets, modern high end assets to very strong counterparties where we can have a real value for them, you know, in their value chain. And and and the reason why we have built up a number of ships in the containership segment is that we can do just that. We have very strong operational performance and can combine that with access to attractive financing structures and can therefore be competitive, you know, for for these companies, you know, and and and add on in their, you know, value proposition.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

You know? And and part of the value proposition is, you know, to run the ship as efficiently as possible. So part of the investments that Trim mentioned on on the container ships are investments that are that are making, you call it, moving boxes more efficient. And we calculate on on these vessels around 20% efficiency improvement, which is a combination of both hull modifications, maybe new propeller, the increasing cargo intake, and all of that are bringing down the fuel effective fuel cost per box, which is creating a better value for for a liner company or or in other segments that could be, you know, an energy company if you look at the tankers. So this is something we always work on. And we cannot guide on specific segment allocation.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

Thank you, Ola. And another one here.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

Given your backlog to diversified majority investment grade counterparties and the fact that you've become an energy infrastructure company now, can you work to decrease your debt interest costs, in particular, your credit spreads over SOFR? Your recent refinance debt still has a rather large credit spread versus your diversified long term backlog and strong cashbalance sheet.

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

Sure. Thank you for that. I'll just observe I think if you look historically in terms of where we have, again, the margins we obtain in the market, I think at least in the six years I've been here, it's been coming in quite significantly, especially over the last twelve to twenty four months in terms of what we're achieving in both the conventional, call it, commercial bank market, but also when doing a Japanese operating leases. So it's almost a good price to very competitively, at least on the asset backed financing that we're achieving, Also in terms of, call it, profiles, covenants, etcetera, that are very low. They're partly guaranteed they're partly guarantees we do on most of these facilities. So yes.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

Thanks, Marcelo. And then we'll go to CJ Baldoni. Please unmute your speaker to ask your question.

Analyst

Hi. Good morning. Can you hear me okay? Hi. Okay.

Analyst

Can you sorry. Another question on the Hercules. How long can it remain warmed warm stacked?

Ole Hjertaker
Ole Hjertaker
CEO at SFL

With, with the stacking, call it the methodology or or or the, you know, because the stacking plan we have, on that rig, it can it can that can remain, you know, stacked for for quite some time without causing a problem. Part of what we've done, for instance, in the stacking now is that we are doing work that will effectively delay the next SPS or dry dock, call it, position on on the key equipment onboard onboard the rig. But that's also, you know, a a reflection of of the capital or or the the stacking costs that we are spending on the rig to ensure that it is remarked for. If we had dropped that, of course, you can drop it down significantly, but then you are running into a situation where you may have to replace a lot of equipment on the rig to bring it back out working. And then you would need a much longer contract at high levels to justify that.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

So I would say, for now, we can keep it like that for several quarters. But of course, we are we look at that continuously. And from our perspective, it's always a question of investing capital versus getting capital back. So this is something that's that we spent quite a bit of time on since it's a costly asset and the stacking costs are relatively high.

Analyst

Yeah. Understood. I just, for some reason, thought that maybe there was a time limit, so to speak, where I understand there's a lot of different factors involved. And I suspect that you wouldn't be spending the money if you didn't think that there were opportunities to recontract it. You're absolutely right. We

Ole Hjertaker
Ole Hjertaker
CEO at SFL

what we have seen in the past, if you we've seen companies who are dropped, call it, we have sort of what was cold stacked rigs. And then you're then you're talking a matter of months before it's almost not remarketable. And because what we what we have to remember is that, you know, a drilling a drilling rig is a very different, call it, concept really than than a ship. A ship, that's basically where you carry cargo, you know, on the ship. But a but a drilling rig is really just a a a a, you know, the the platform or whatever where you put all the drilling equipment.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

So so for an oil company who are extremely focused on safety, and performance and operational issues, you know, they they would be very careful on taking in a rig where the the system hasn't been maintained and run properly. We are working together with Odfjell Drilling here. They are the manager for us on the Hercules. Rigas had a very strong performance first for Exxon in Canada, then for Gulp in Namibia, then back for Ecuador in Canada. So so they pride themselves in in having very high end standards, which is, of course, also helping us in the marketing of the rig, you know, with oil majors because they know that, okay, this rig, you know, has been capped at the highest standards.

Ole Hjertaker
Ole Hjertaker
CEO at SFL

You know, this rig is being effectively maintained and systems are run, which means that there is a lower risk of taking the rig out compared to something that's been mothballed for for a long period.

Analyst

Right. Right. And I and I also suspect, you know, that there's multiple, you know, solutions, you know, to this, and and, you know, some of them might, you know, involve some creativity, you know, to kind of insulate the broader company at a whole. So can leave it at that, but thanks. And then so you mentioned that, you know, the new build spend.

Analyst

I mean, most of the remaining 800 and odd million dollars is going to need to be placed closer to delivery, or are there still more payments to be made?

Aksel Olesen
Aksel Olesen
Chief Financial Officer at SFL

No. Yes. I think the remaining I mean, so far, we paid approximately $150,000,000 last year. And then you have some additional predelivery installments starting twelve months before each ship is delivered, so starting in Q1 twenty twenty seven, which we are in discussions with kind of various banks and financial institutions in terms of fully funding in a combination of, call it, predelivery and then post delivery financing, yes.

Analyst

Okay. And could you elaborate maybe on the Annex II and III, 27 vessels impacted? So are those how many of those are and they're impacted if they trade to United States? Can you just elaborate on that?

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

In our fleet, we have 38 now Chinese built vessels. And then we have the car carriers that are not four of them are Chinese built and three of them are sorry, five Chinese built and two not. But all the car carriers are sort of and when we say impacted, mean that they would be impacted by calling The U. S. So and some of the vessels are exempt like they can be Chinese built, but below a certain size like small container ships or below 4,000 TEU and bulkers below a certain size.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

So when well, when we look at the numbers and based on the way that our ships trade, we see that right now, the most affected sectors are car carriers and tankers in the SFL fleet. Our container ships are not really impacted because they're either not built in China, which is most of them, or they are smaller. So and if you just give you some idea of what we are talking about for us, if you look at SFL's trading pattern last year and our U. S. Calls, we would incur about $26,000,000 in port fees given the 2025 sort of fee schedule if you sort of impose them on what we did last year.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

Now we believe that our charterers will probably change their trading pattern slightly due to this, but don't see much change for the car carriers actually because it applies to all car carriers. So the only thing that can reduce that number is less trade to The U. S. In general. We do not expect that, though.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

And it's important to say that it's we look at this as charterers cost. And the only thing that and the thing that we are sort of looking at is how the fees will be handled in practice, I. E, who have to pay them? Is it part of the clearance of the vessel into the port or how is it actually going to work? And it's too early to say.

Trym Sjølie
Trym Sjølie
Chief Operating Officer at SFL

So we are working with our charterers to find out exactly how it's going to be handled in practice.

Analyst

Okay. Great. Thank you for that. I appreciate it. That's all I have.

Espen Gjøsund
Espen Gjøsund
Vice President, Finance & Investor Relations at SFL

Thank you. Then 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 web page, www.sflcorp.com. Thank you all for listening.

Executives
    • Espen Gjøsund
      Espen Gjøsund
      Vice President, Finance & Investor Relations
    • Ole Hjertaker
      Ole Hjertaker
      CEO
    • Trym Sjølie
      Trym Sjølie
      Chief Operating Officer
    • Aksel Olesen
      Aksel Olesen
      Chief Financial Officer
Analysts
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