SFL Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 19, 2025

Key Takeaways

  • Negative Sentiment: The Board reduced the quarterly dividend to $0.20 per share, marking an adjustment that may weigh on near-term shareholder returns.
  • Positive Sentiment: SFL secured new five-year charters with Maersk for three 9,500 TEU container vessels, adding $225 million to its backlog and with most upgrade costs covered by the charterer.
  • Positive Sentiment: The company’s charter backlog stands at $4.2 billion, with roughly two-thirds of contracts to investment-grade counterparties, enhancing revenue visibility.
  • Negative Sentiment: The Hercules drilling rig remained idle and warm-stacked in Q2 due to market delays, generating ongoing stacking costs and reducing near-term cash flow.
  • Positive Sentiment: SFL ended the quarter with strong liquidity—approximately $156 million in cash, undrawn credit lines and 15 unencumbered vessels valued at $192 million—supporting future investments.
AI Generated. May Contain Errors.
Earnings Conference Call
SFL Q2 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Hello, everyone. Welcome to SFL's second quarter twenty twenty five conference call. My name is Espinosoem, and I'm vice president of investor relations in SFL. Our CEO, Oleg Khtako, will start the call with an overview of the second quarter highlights. Then our Chief Operating Officer, Tim Scholle, will comment on vessel performance matters, followed by our CFO, Akce Odersen, who will take us through the financials.

Operator

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. 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.

Operator

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. 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.

Operator

Then I will leave the word over to our CEO, Ulya Khtakov, with highlights for the second quarter.

Speaker 1

Thank you, Espen. We are now announcing our 86% dividend and continue building our business as a maritime infrastructure company with a diversified fleet. We reported revenues of $194,000,000 this quarter, and the EBITDA equivalent cash flow in the quarter was $112,000,000 Over the last twelve months, the EBITDA equivalent has been $526,000,000 The second quarter result was impacted by several one off items, including a higher number of vessels in drydock and several of these with additional efficiency investments. Dry dockings are expensed when incurred, and the vessel's revenues were lower than when they are out of service. The drilling rig Hercules also remained idle in the quarter.

Speaker 1

We have, in recent quarters, taken decisive steps to strengthen our charter backlog by securing agreements with strong counterparties and deploying high quality assets. We have also made substantial investments in cargo handling and fuel efficiency upgrades across our existing fleet while divesting older, less efficient vessels. As part of this process, 557,000 deadweight dry bulk vessels built between 02/2012 have been sold recently. Four of the vessels have already been delivered to their new owners, and the last vessel is due to be delivered next month. The vessels were originally on long term charters but have been operated in the spot market the last several years.

Speaker 1

Due to a combination of age, design and fuel efficiency, we have not been able to find new long term charters for these vessels, and we have, therefore, decided to divest the vessels as part of our continuous fleet renewal process. Eight older Capesize bulkers to Golden Ocean and seven two thousand and two built container ships to MSC have also been redelivered in late June and early July, pursuing to the chartering agreements. As a result of this and also vessel efficiency investments, operational efficiency and fuel consumption profile of the fleet has improved materially, delivering benefits to both SFS and our customers. We have also advanced our commitment to new technology with 11 vessels now capable of operating on LNG fuel, including five newbuildings currently under construction. We are pleased to announce new five year charters for three nine thousand five hundred TEU container vessels on charter to Maersk.

Speaker 1

This adds $225,000,000 to our backlog from 2026 onwards. And the vessels will be upgraded with both cargo and fuel efficiency features similar to our other large container ships. Most of the upgrades will be compensated by the charterer through charter rate add ons. The drilling rig Hercules has been idle since the fourth quarter in 2024, and the recent market turmoil and oil price volatility has delayed new employment opportunities for the rig, which is impacting our near term financial result as we keep the rig warm stacked. We remain optimistic about finding new employment for the rig and continue to explore strategic opportunities for the rig in parallel, but it is difficult to give any guiding on timing for this.

Speaker 1

We have also recently redelivered several vessels pursuant to pre agreed purchase options and sold vessels employed in the spot market. And while this is increasing our available capital for new investments, it is reducing the near term cash flow generation. The Board has therefore decided to adjust the dividend to $0.20 per share for the second quarter. With this dividend, we have returned nearly $2,900,000,000 to our shareholders over eighty six consecutive quarters, and the $0.20 dividend represents the yield of approximately 9% based on share price yesterday. Our charter backlog is currently $4,200,000,000 and importantly, two third 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.

Speaker 1

Over time, we have consistently demonstrated our ability to renew and diversify the portfolio of assets and charters, supporting a sustainable long term capacity for shareholder distributions. And we have a strong liquidity position, including undrawn portions of credit line and also multiple unlevered vessels at quarter end, 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, Frim Schirle.

Speaker 2

Thank you, Ula. Our current fleet is made up of 60 maritime assets, including vessels, rigs and contracted newbuildings. Although a lot of material reduction in charter backlog, we have a reduction in fleet from last quarter after having disposed of 20 of our older vessels. These sales partly come as a result of end of lease vessels being sold back to charterers under option structures, but also due to fleet renewal. The average age of the vessels sold was about eighteen years, reducing the fleet average by about two years.

Speaker 2

Our backlog from owned and managed shipping assets stands at $4,200,000,000 and the fleet following Q2 is made up of three drybulk vessels, 30 containerships, 16 large tankers, two chemical tankers, seven car carriers and two drilling rigs. Now we have a diversified fleet of assets chartered out to first class customers on mostly long term charters, and the majority of our customer base is largely industrial end users. Container vessels dominate our backlog, accounting for about 71% of our portfolio. A key to remain an attractive partner is to ramp up investments in fleet renewal, new technology and vessel upgrades, which we are doing. Strict regulatory demands, particularly from the IMO and EU, aimed at cutting shipping emissions is another driving factor.

Speaker 2

By enhancing our fleet, we position ourselves for organic growth either by supplying new vessels to clients or extending the life of existing ones. In Q2, we had four container vessels in dry dock for special survey and major upgrades to cargo systems, energy saving technologies, propeller enhancements and hull modifications. On the back of already executed projects with Maersk, we have agreed new five year time charters on three of our 9,500 TEU container vessels, also including a similar investment scope. In Q2, 95% of charter revenues from all assets came from time charter contracts and only 5% from bareboats or dry leases. The charter revenue from our fleet was about $194,000,000 in the quarter, and we had a total of six thousand four hundred and seventy five operating days.

Speaker 2

Operating days being defined as calendar day, less technical off hire and dry dockings or stacking for rigs. Eight vessels have been in dry dock in the quarter, four of which were container ships undergoing major upgrade projects. And the time at the shipyard required for those upgrades beyond the fifteen days normal dry docking is for charterers account. This quarter, in addition to high number of vessels in drydock, the scope of repairs and upgrades was larger than usual. Thus, the drydock costs in the quarter was about $16,000,000 where we, in a normalized quarter, would average of 2.5 vessels in dry dock at a cost of around $5,000,000 We expect dry dock costs in Q3 and Q4 to taper down significantly.

Speaker 2

Our overall utilization across the shipping fleet in Q2 was 98.1%. Adjusted for unscheduled technical off hire only, the utilization of the shipping fleet was 99.9%, a testament to a high quality of our vessel management. Subsequent to quarter end, our car carrier, SVL Composer, had a collision in Denmark upon approaching Odense Pilot Station going in for her special survey drydocking at Fajard. Just before midnight on August 4, the vessel was hit from behind by an overtaking container vessel. Luckily, there were no injuries to personnel and no pollution as a result of the collision.

Speaker 2

The vessel went straight into dry dock after the incident and is currently scheduled for completion of all repairs by early September. Due to loss of higher insurance, we expect no impact to earnings. On the energy side, the Linus rig earned $22,600,000 in Q2, about 10% up from Q1 as the contract rate was adjusted up by 2% from May, and the rig had no downtime during the quarter. OpEx was 14,500,000 in Q2, up from 12,200,000.0 in Q1 as the U. S.

Speaker 2

Dollar weakened versus the NOK, thereby impacting personnel expense in dollars. The Hercules rig is currently warm stacked in Norway and being marketed for new contract opportunities. During the second quarter, the rig recorded $3,300,000 in revenues relating to contract payments from Equinor and equipment rental income. The majority of this equipment has been returned subsequent to quarter end, and we do not expect to receive further rental income. Rig OpEx was approximately EUR 4,900,000.0 in the second quarter.

Speaker 2

I will now give the word over to our CFO, Akhtar Olsson, who will take us through the financial highlights of the quarter.

Speaker 3

Thank you, Trim. On this slide, we have shown our pro form a illustration of cash flows for the second 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.

Speaker 3

The company generated a gross charter hire of approximately 194,000,000 during the second quarter, with approximately $2,000,000 coming from container fleet, including 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 the large container vessels as four vessels underwent scheduled dry docking during the quarter. Also, the company sold the 2,005 built 1,700 TEU container vessel HNAs. And just before quarter end, seven older container ships on bareboat charters to MSC were redelivered pursuant to the chartering arrangement. The car carrier fleet generated approximately NOK 26,000,000 of gross charter hire in the quarter, including profit share from fuel savings, which is slightly up from the last quarter.

Speaker 3

Our tanker fleet generated approximately NOK 41,000,000 in gross charter hire, which is down from approximately NOK 45,000,000 in the previous quarter as three vessels underwent scheduled drydockings. SFL has 14 dry bulk vessels, of which eight are employed on long term charters. The vessels generated approximately NOK 19,000,000 in gross charter hire in the second quarter. The seven vessels employed in the spot and short term market contributed with approximately $800,000 in net charter revenue compared to approximately $4,400,000 in the fourth quarter. During the quarter, the company agreed to sell its remaining four Supramax drybulk vessels.

Speaker 3

And subsequent to quarter end, the company delivered its eight Capesize dry bulk vessels on contract with Golden Ocean to them as part of the previously announced purchase option that was exercised in the first quarter. SFL owns two harsh environment driven rigs, the large jackup rig Linus and the ultra deepwater semisubmersible rig, Hercules. The rigs generated approximately NOK 26,000,000 of charter hire in the quarter. Our operating and G and A expenses for the quarter was approximately $83,000,000 up from approximately $78,000,000 in the first quarter. We had a relatively high number of vessels in scheduled drydock in the quarter, and dry dock expenses for ships are being expensed when incurred.

Speaker 3

Furthermore, the vessels are out of service during the dry dock period, reducing revenues temporarily. During the second quarter, we expensed approximately NOK 16,500,000.0 for vessels in dry dock compared to normalized average of approximately NOK 5,000,000 per quarter. This summarizes an adjusted EBITDA of approximately 112,000,000 compared to NOK 160,000,000 in the previous quarter. We then move on to the profit and loss statement as reported on The U. S.

Speaker 3

GAAP. For the second quarter, we report total operating revenues of approximately 192,000,000 compared to approximately SEK 187,000,000 in the previous quarter. The contribution from our vessels was approximately 167,000,000 compared to approximately SEK 171,000,000 in the previous quarter, while the rigs contributed with approximately SEK 26,000,000 compared to approximately SEK 22,500,000.0 in the previous quarter. Vessel operating expenses in the quarter was approximately $67,000,000 including approximately $16,000,000 related to scheduled dry dockings compared to approximately $58,000,000 in total in the previous quarter. Rig operating expenses in the quarter was approximately NOK 19,000,000 compared to approximately NOK 18,000,000 in the previous quarter.

Speaker 3

The net results in the second quarter was also impacted by nonrecurring or noncash items, including net gain on sale of assets of approximately SEK 4,200,000.0, negative mark to market effects from hedging derivatives of SEK 2,400,000.0 and negative mark to market effects from equity investments of approximately SEK 1,000,000. So overall and according to U. S. GAAP, the company reported a net profit of approximately SEK 1,500,000.0 or SEK $0.01 per share compared to a net loss of approximately SEK 32,000,000 or SEK $0.02 4 per share in the previous quarter. Moving on to the balance sheet.

Speaker 3

At quarter end, SFL had approximately 156,000,000 of cash and cash equivalents in addition to undrawn credit lines in the amount of approximately SEK 49,000,000. In addition, the company had 15 unencumbered vessels with a market value of approximately $192,000,000 at quarter end. During the quarter, the company received net proceeds of approximately $20,000,000 from the sale of one Supramax vessel and seven container vessels. And subsequent to quarter end, 12 of our 15 unencumbered vessels have been delivered to its new owners, including the eight Capesize dry bulk vessels to Golden Ocean, with a total net proceeds of approximately 150,000,000, further strengthening our liquidity position. So including available credit lines, we currently have available liquidity of more than SEK 300,000,000.

Speaker 3

During the quarter, the company entered into approximately SEK 84,000,000 of new financing arrangements for the two car carriers, SFL Conductor and SFL Composer. We also prepaid three debt facilities in a total amount of approximately 95,000,000 in addition to order installments of approximately NOK 59,000,000. As of the end of the quarter, the company had approximately $5,000,000 in remaining capital expenditures, mainly relating to efficiency upgrades on the large container vessels and the Hercules. We furthermore have remaining capital expenditures of $850,000,000 remaining on five container new rulings expected to be funded through pre and post delivery financing. So based on the Q2 numbers, the company had a book equity ratio of approximately 25.5%.

Speaker 3

Then to summarize. The Board has declared the eighty sixth consecutive cash dividend of $0.2 per share, which represents a dividend yield of approximately 9% based on the closing share price yesterday. Our charter backlog is currently 4,200,000,000 And importantly, approximately twothree 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. Furthermore, our strong balance sheet and liquidity position provides 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.

Operator

Thank you, Axel. We will now open for a Q and A session. And we will have our first question from Mr. Jeff Harvey. What's the status with the lawsuit with Seadrill?

Speaker 3

I think there's two lawsuits. The larger one relating to the redelivery of the Hercules that will be scheduled sometime in, hopefully, 2026, yes. And also, mean, as you know, we were awarded adjustment in the first instance of approximately 45,000,000 to $50,000,000 depending on kind of the currency rate. And we have also received a guarantee for that amount by Seadrill, including interest rates, yes.

Operator

Thank you, Aksar. We will now take our next question from Gregory Lewis. Please unmute your speaker to ask your question.

Speaker 4

Yes. Hi. Good afternoon, everybody, and thanks for taking my questions. I was hoping to get more of a kind of if you could kinda walk us through your your thought process on the decision to lower the dividend. You know, obviously, the 7¢, well, you know, called out.

Speaker 4

You know, know, is that, you know, clearly, you highlighted the rig as as kind of the main driver for that. But but I imagine it's not just that simple. So just kinda curious, you know, how you kinda set that 20¢ number and and how we should think about that moving forward as, you know, if our base case is that that rig goes back to work, I don't know, sometime next year.

Speaker 1

Thank you, Greg. It's Ola here. Yes. And we fully understand and appreciate that there is some disappointment on an adjustment to the dividend level. We guided in the first quarter that unless we saw a clear path onwards in near term for the Hercules that we might have just looked at the distribution, call it, longer term distribution capacity in the company.

Speaker 1

So it's clear that the rig is warm stacked. It's these assets are quite expensive to keep to make sure that they are effectively ready to drill when there are contract opportunities. But it looks like this market is continues to be relatively slow and the opportunities take longer to materialize than we had hoped for. So so that is, of course, one piece of it. And and while the rig is idle, we have a warm stack rate currently of in the region of $60,000 per day and and then, of course, also some interest and amortization on the financing relating to it.

Speaker 1

So that is something that we we we, of course, you know, you know, are focused on. But also bearing in mind that when the rig worked in when the last full quarter that the rig worked in the 2024, it a significant contribution. Just that one rig alone had an EBITDA contribution of around $35,000,000 or around $20,000,000 that quarter after interest and amortization. So it's a big it's a it's a, you know, it's a significant asset when it's working. But right now, we feel and the Board feels that it's very prudent to make sure that the distribution isn't effectively subsidized because that unit is out of service currently.

Speaker 1

We also have recently divested some of some of the assets that we noted, you know, some of the dry bulk vessels to Golden Ocean. And, you know, incidentally, we find it, you know, it's also a we call it a historic moment when when Golden Ocean first was sold, and then now the vessels were, you know, effectively repurchased based on the pre agreed purchase option. That was the last related party deal we had in our portfolio. So now all our transactions are with third party companies and customers out there. But both the sale of those vessels, the sale of some older container ships we had and also the bulkers, that is more from a timing perspective.

Speaker 1

We now have significant investment capacity from that, and that capital is hopefully redeployed when we see the right investment opportunities going forward. So the adjustment to $0.2 is seen as a whole, but you could also say that part of that is also illustrating the distribution capacity coming out from the other assets that we have in our portfolio, you know, currently, and then with investment capacity on the side and hopefully some good upside potential relating to the Hercules when that is back out working.

Speaker 4

Okay. Super helpful. And then just, you know, I'll ask just my two questions. And then the first one is pretty quick. You know, as we think about you called out the dry docking, which impacted tankers and container OpEx costs in the second quarter.

Speaker 4

As we think about the back half of the year, we be thinking around costs for those sub asset classes to look more like q one, in terms of costs or or maybe somewhere in in between q one and q two. And and then just and then I was hoping, you know, after that, you could talk, you know, you know, cash has gone up. Obviously, there's a lot of uncertainty in the market. But just kind of curious, broadly speaking, you know, how you're thinking about the the ability to, and and really what the market is telling you in in terms of the the the opportunities to acquire assets, because it does look like that's really what's gonna, you know, drive any pickup in the dividend going forward.

Speaker 2

So on dry dockings, we've had a high number

Speaker 3

of dry dockings both in

Speaker 2

q one and q two. Now in q three, we will have a couple of ships sort of scheduled. And in Q4, perhaps one, depending a little bit on timing. So the last two quarters this year will be we we expect the cost for for for dry docking and any positioning of vessels to be very low and sort of under the average so that this year, although more busy than a normal year, will still average out. So, and sort of per vessel docking, if it's a large containership, will be maybe around 2,000,000.

Speaker 2

If it's a small containership, maybe one and a half. And so for a car carrier, so I think in Q3, we might be looking at maybe three three point five million. And in Q4, maybe 1,000,000 to 2,000,000 on the drydocking side.

Speaker 1

And just for illustration, that is down from around 16,500,000 in the second quarter. It's because of the

Operator

high number of vessels in drydocking.

Speaker 3

Yes. I believe around 10,000,000 in the first quarter. It's the front half of there has been kind of pretty heavy on the dry dockings, and then it's going to normalize for the rest of the year. Yes.

Speaker 4

Okay. Super helpful. And then just on the opportunity the landscape for potential acquisitions.

Speaker 1

Yes, absolutely. I mean, yes, we are. We continue to look at opportunities. The market has been a little slower in terms of I think this has more to do with the general market uncertainty from April onwards. So I would say through second quarter, was slower in terms of new opportunities.

Speaker 1

So where we saw that there was some real window to get a transaction done, we are very focused on counterparties and counterparty strength, asset types, what kind of residual exposure we will be willing to take. And of course, that is bearing into the opportunities that we end up doing in the end. We have never guided in the past on on how much we are going to deploy in every single quarter. Just as an illustration, the last eighteen months in in 2024 and and first half twenty twenty five, I believe we added more than $2,000,000,000 to our charter backlog, invested north of well north of $1,000,000,000 So we have been quite active over time, but it's all about getting the right deal done. But we we definitely have investment capacity and not least now when we have had the the the transactions relating to both the Capesize bulkers, the Supramax bulkers, and also the container ships, which has given us a good net cash contribution.

Speaker 4

Super helpful. Thank you very much.

Operator

Yes. Thank you. Thank you. And we'll take our next question from Mr. Klimabala.

Operator

Please unmute your speaker to ask your question.

Speaker 5

Hi. Thank you for taking my questions. If I remember correctly, this is the first quarter in which you've provided the EBITDA contribution from your energy assets on a stand alone basis. If we strip out the $3,000,000 to $4,000,000 in rental income you mentioned you generated during the quarter, Should we expect the organic EBITDA contribution from the Energy side to come in at around EUR 3,000,000 per quarter until a new contract for the Health Board is secured?

Speaker 3

Yeah. I'm not yeah. Yeah.

Speaker 1

I'm not sure exactly which number you are looking at now, but we we have the two drilling rigs, Linus and Hercules. Linus is operated currently at a charter rate of around $230,000 per day as operating expense in the region of $140,000 per day. So there is around $90,000 per day net after OpEx.

Speaker 3

So in terms of kind of on the revenues on the energy side, I think it's slightly $3,000,000 higher than we should expect in the run rate rest of the year as revenues are mainly from the liners. And we had $3,000,000 call it, extra from the previous work for the Hercules that came in a bit later in this quarter. So we'll unfortunately continue to have kind of a negative drag from the Energy segment going forward, but we thought it would be good to highlight kind of the very solid contribution and cash flow we have from our shipping fleet. I'm just kind of making this clear for investors and also analysts,

Speaker 5

Yeah. I think I think that's helpful. And now I also wanted to ask a question, this one more on the modeling side. You still have around 850,000,000 in CapEx outstanding in for the containership newbuilds.

Speaker 3

Correct.

Speaker 5

And that's expected to be covered by that proceeds. Are the deliveries still expected in 2028?

Speaker 3

Correct. So in terms of the progress there, I mean, the yard will kind of commence with kind of the construction of these vessels approximately one year of effective construction time on the ship. So kind of you'll have installments starting one year before delivery of the ship. So Q1 in twenty twenty seven, we'll have some more installments, and then the ships are delivered throughout 2028, starting in Q1, yes.

Speaker 5

Makes sense. I'll turn it back. Thank you for taking my questions.

Speaker 1

Thank you.

Speaker 3

So we have a question here from Arne at Lunas Wolpolaris. Just a question on the Western Rig operating expenses. I think we addressed that already. So on the shipping side, we should expect that to be coming down. There's also a follow-up question on the Hercules in terms of the kind of stacking cost on that.

Speaker 3

I think we're continuously working on reducing that to an efficient number, preserving kind of the warm stack mode of the rig. And then hopefully, we can push that down to around 60 ish per day going forward, but always looking a way to increase decrease this further,

Operator

Okay. 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.

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