SFL Corporation Q3: A Dividend Company Of Choice

Introduction

SFL Corporation Ltd. (NYSE: SFL) released its third quarter 2023 results on November 14, 2023. This article updates my August 21, 2023, article.

I have followed SFL’s quarterly Seeking Alpha results since September 2014 and have been a shareholder for over a decade. Despite my long-term optimism and recent solid earnings results, I am not as enthusiastic about the short-to-medium-term outlook.

SFL is versatile and active in tankers, dry bulk, offshore, car carriers, and containers, which is a huge advantage for investors. Compared to a company that concentrates on a particular shipping segment, SFL can respond more quickly, thanks to its diverse portfolio. Also, Trym Sjolie said in the conference call:

Most of our vessels are on long-term charters that we have over the last 10 years completely transformed the company’s operating model and have moved away from financing type bareboat charters and instead assume full operating exposure. This makes us relevant for large industrial end users like Volkswagen, Maersk, Hapag-Lloyd and others.

The company performed well in 2023. I compare SFL to three other companies that I follow. Teekay Tankers (TNK), Frontline plc (FRO), and Scorpio Tankers (STNG). Since SFL is not a pure tanker company, unlike the other three, this comparison is not foolproof, but it is the best I could come up with. SFL is up 16% on a one-year basis, offering an 8.63% dividend.

This shipping company has regularly provided me with a high dividend return in good and bad times, a key component of my long-term bullish view. By the way, September’s distribution will be the company’s 78th consecutive payout, yielding 8.63%.

However, if someone assumes that this extremely volatile industry will lead to continuous balance sheet improvement without major setbacks along the way, it would be prudent to thoroughly reevaluate this assumption and implement an adjusted trading and investing strategy.

I won’t clutter my article with unnecessary historical details regarding SFL, but one thing is obvious: the industry is unpredictable and inconsistent. By examining my graphic above, you can easily see how the immediate consequence of this uncertainty has impacted the distribution over the last nine years.

One drawback of SFL is that it belongs to the Fredricksen group. As we have seen with the Seadrill cooperation, SFL might be willing to invest in problematic and risky ventures. Some investors hold a different perspective and view Fredricksen’s engagement as beneficial.

The close connection between Frontline and Seadrill with the company illustrated this controversial issue a few years ago. Nevertheless, SFL appears more autonomous due to the favorable short-term market, which should boost earnings in the fourth quarter and eliminate any concerns.

So, the investment thesis remains the same as in my previous article, and I suggest SFL as a long-term investment with a significant and secure dividend payment. However, I recommend trading short-term SFL employing at least 40% of your whole position to profit from this volatile and constantly shifting business.

CEO Ole Hjertaker said in the conference call:

The short-term market is red piping hot right now and we have secured a very attractive interim charter from the shipyard in Asia to Europe generating around $8.5 million in EBITDA per vessel over a period of only two months. In the third quarter, 94% of charter revenues from all assets came from time charter contracts and only 6% from bare boats or dry leases.

Seadrill’s emerging from bankruptcy last year was an important positive event for SFL.

One important element that contributed to improving the balance sheet was the final resolution of the company’s offshore segment, with Seadrill Limited (SDRL) emerging from Chapter 11 on February 23, 2022.

After emerging from bankruptcy, there has been a major reduction in the interaction between the new Seadrill and SFL since the West Linus and the West Hercules were reassigned from Seadrill to an SFL affiliate. The West Hercules is chartered to Seadrill and is managed by Odfjell Drilling.

SFL owns two rigs. Seadrill has chartered the harsh environment, Semisub West Hercules, and the Harsh Environment Jackup West Linus since 2008 and 2014, respectively.

The Semisub West Hercules is contracted until 3Q24 with Exxon, and the Jackup West Hercules is contracted until 4Q28 with ConocoPhillips, offering great visibility and a backlog of $544 million, or 16% of the total backlog of $3.4 billion in 3Q23, as shown below:

As of September 30, 2023, and adjusted for subsequent transactions, the estimated fixed rate charter backlog from the Company’s fleet of 73 wholly or partly owned vessels and newbuildings under construction was approximately $3.4 billion with a weighted remaining charter term of 5.9 years (press release).

The rigs brought in around $64 million in contract revenues in the third quarter, up from about $19 million in the second quarter.

Since Seadrill’s two bankruptcies excluded the offshore drilling portion, the backlog from H2 2020 to December 31, 2021, was reduced.

Note: Recently, West Hercules completed its five-year SPS, which included a thorough renewal and upgrades that cost around $100 million, which significantly affected H1 2023. Although Odfjell Drilling manages West Hercules on behalf of Seadrill, SFL Corporation assumes full responsibility for all costs associated with the five-year SPS. The rig is in Namibia, preparing for its new contract with Exxon.

1–3Q23 Results Snapshot and commentary

SFL Corporation Ltd. reported a quarterly income of $0.23 per diluted share, compared to $0.37 in the same quarter a year ago.

It was a record quarter for the SFL Corporation. The company’s total consolidated U.S. GAAP Charter Hire revenues were $214 million in 3Q23, and the total operating revenues were $204.89 million, up from $166.89 million last year.

The company declared a quarterly dividend of $0.25 per share this quarter, or an increase of 4.2% sequentially. The dividend yield is now 8.63%.

Although SFL did not purchase any shares in 3Q23, the company does have a share buyback program. According to the news release:

The Company’s Board of Directors authorized the repurchase of up to an aggregate of $100 million of the Company’s common shares, which is valid until June 30, 2024. Thus far, the Company has repurchased an aggregate of approximately 1.1 million shares at an average price of approximately $9.27 per share, which leaves approximately $90 million remaining available under the program.

Consolidated adjusted EBITDA increased from $125.58 million reported in the same quarter last year to $130.24 million (including the 49.9% owned affiliated firms).

This graphic clearly shows the progress in the offshore drilling segment, which in H1 2023 was generating little to no revenue.

On the negative side, the free cash flow was negative in 3Q23. The cash flow from operations dropped from $149.91 million in 2Q23 to only $31.21 million in 3Q23, despite a reduced CapEx of $65.62 million this quarter.

The change in operating assets and liabilities was negative $53.3 million this quarter from a positive $83.5 million in 2Q23. Even though the free cash flow may not accurately reflect the soundness of the balance sheet for a company constantly engaged in financing, like SFL, it isn’t very pleasant and is cause for concern.

It failed at this point because free cash flow is typically used to assess whether a business can afford to pay a distribution. One explanation is that SFL paid off a 2018 bond loan denominated in Norwegian kroner in full during the third quarter with $48 million left at maturation. This was settled out of the company’s available cash.

In 3Q23, the trailing 12-month free cash flow (“ttm”) was negative $58.6 million, with a free cash flow of negative $34.41 million for the quarter.

Finally, on the debt front, the situation is nearly unchanged. However, another concern is the sharp decline in total cash of almost 38% sequentially to $145.67 million, whereas total debt was reduced a little from $2,110 million in 2Q23 to $2,066.4 million in 3Q23.

In 2023, the company signed fresh finance deals worth over $1 billion. Furthermore, the company has fully obtained favorable long-term financing for all three new facilities. As a result, we can conclude that SFL has a great debt profile.

CEO Ole Hjertaker said in the conference call:

We have recently raised significant amounts in the new debt funding at very attractive terms in Asia and don’t see a need to refinance the recently repaid bond loan with new financing in the near-term.

* Note: The total cash includes investment in marketable securities and investment in sales-type, direct financing, and leaseback assets, the current portion.

Technical Analysis (Short-Term) And Commentary

Note: The graph has been adjusted for the dividend.

SFL develops a rising channel pattern, with support at $10.90 and resistance at $11.40. At 59, the RSI suggests a potential breakout above the first resistance between $11.85 and $12.

An ascending channel is a typical pattern with a sequence of higher highs and higher lows. It suggests a bullish outlook for the market and a slow but steady increase in price. It does, however, generally end with a consolidation phase.

The idea is to have a core long-term holding and use about 40% of your capital to trade LIFO while you wait for a higher target closing price and take advantage of a substantial payout. The trading strategy is to sell 40% between $11.35 and $11.50, with higher resistance around $11.85. The next action is to wait for a retracement in the range of $11.06 to $10.70, with a lower support level at $10.25 to come back into play. Repeat after rinsing.

Warning: The TA chart must be updated frequently to be relevant. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.