SFL Corporation Ltd

NYSE:SFL

Q4-2025 Earnings Call

[Espen Nilsen Gjosund, executive]

Welcome to SFL's Fourth Quarter 2025 Conference Call. My name is Espen Nilsen, and I'm Vice President of Investor Relations in SLF. Our CEO, Ole Hjertaker will start the call with an overview of the fourth quarter highlights, then our Chief Operating Officer, Trym Sjolie will comment on this on performance matters on the call by our CFO, Oxy Olesen, who will take us through the financials. The conference call will be concluded by opening up for questions, and that will explain the procedure to do so prior to the Q&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 anticipates, intends, estimates or similar expressions are intended to identify these forward-looking statement statements. Please note that forward-looking statements are not guarantees of future performance. These statements are based on our current clients and expectations and are hardly 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 statement 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 are therefore not only is 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 financials.

[Ole Hjertaker, executive]

[Audio Gap] Transaction has been very profitable for us with an annualized return on equity above 25%. In parallel, we also agreed to release the charters on 2 other 2020 built Suezmax tankers against a compensation of $11.5 million per vessel instead of selling the vessels in the market to a third party. Similar to the 2 other vessels, the return on this investment has been very strong based on prevailing values at the time of the agreement in December. We decided to keep these vessels as they are Korean built and very fuel efficient. They're also newly dry-docked and more attractive for new potential long-term charters compared to the 2 older vessels.

Based on U.S. GAAP accounting rules, the full settlement compensation was expensed as a cost in the fourth quarter, which turned a net profit into a net loss for the quarter despite the very strong return on investment so far. The positive side of this is that we have the vessels on our books at only $55 million, while charter free values according to ship brokers is currently in excess of $80 million. The vessels are currently traded in the spot market, and the market has strengthened significantly since the deal was agreed only with less than 2 months ago.

Net cash flow contribution is currently higher from these 2 vessels alone than all 4 vessels in the original the charter agreement. I would note that the charter hire from masses in the spot market is accounted for on a low to discharge basis based on U.S. GAAP. So we can expect some volatility in the profit and loss statement from quarter-to-quarter due to vessel positioning. We will look for new long-term charter opportunities in due course and market analysts predict a very strong tanker market next few quarters. We have seen an unprecedented consolidation recently in the supply side for the larger 2 million-barrel VLCCs and very high charter rates in that segment, which is expected to also have a positive spillover effect on the 1 million-barrel Suezmax market as these 2 segments over time has shown a high correlation.

Turning to our offshore assets. The harsh environment drilling rig lines performs very well on the long-term contract with Conoco while the harsh environment drilling rig Hercules remains warm stacked in Norway pending new employment. The offshore drilling sector is gaining tangible structural support, driven by recent strategic industry developments that underscores higher day rates, extended contract duration and rising demand for premium high-specification rigs. First, the announced all-stock merger between Transocean and Valaris announced earlier this week marks a pivotal consolidation in the space. And secondly, a recent new 3-year contract for the Noble GreatWhite drilling rig in Norway with start-up in 2027, illustrates the strengthening contract fundamentals. With this backdrop, we remain optimistic about securing new employment for Hercules in due course.

So with the announced $0.20 dividend, SFL has now returned more than $2.9 billion to shareholders over 88 consecutive quarters. This represents a dividend yield of around 9% based on yesterday's share price. And our charter backlog stands at $3.7 billion, with 2/3 contracted to investment-grade counterparties, providing strong cash flow visibility. Over time, we have consistently demonstrated our ability to renew and diversify their asset base, supporting a sustainable long-term capacity for shareholder distributions. Our solid liquidity position, including undrawn credit lines and unlevered assets at quarter end, ensures that we remain well positioned to continue investing in accretive growth opportunities.

And with that, I will now hand the call over to our Chief Operating Officer, Trym Sjolie.

[Trym Sjølie, executive]

Thank you, Ole. 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 with large industrial end users. After the sale of 2 Suezmaxes in Q4, our current fleet is made up of 57 maritime assets, including vessels, rigs and contracted newbuildings. Our backlog from owned and managed shipping assets stands at approximately $3.7 billion. And the fleet following Q4 is made up of 2 dry bulk vessels, 30 container ships, 14 large tankers, 2 chemical tankers, 7 car carriers and 2 drilling rigs.

Our charter backlog is mainly derived from time charter contracts. And with the exception of 4 containerships on bareboat leases, the rest are on time charter or in the short term or spot market. The charter revenue from our fleet was about $176 million, and we had a total of 4,808 operating days in the quarter. Our overall utilization across the shipping fleet in Q4 was about 98.6% and adjusted for unscheduled technical off-hire only, the utilization of the shipping fleet was about 99.8%. This quarter, we had 2 vessels in scheduled dry dock at a cost of about USD 4.2 million. Furthermore, we had a chemical tanker in shipyard to carry out upgrades to the LNG dual fuel system to better handle gas boil-off. A sister vessel will have the same upgrade done in Q1.

This is part of our drive to ensure we can fully utilize our dual fuel capabilities. All of our 6 LNG dual-fuel vessels are actually operating on LNG. which aligns with our ambitions to reduce greenhouse gas emissions from our fleet.

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

[Aksel Olesen, executive]

Thank you, Tim. Turning to this slide, we present a pro forma illustration of our cash flows for the quarter. Please note that this is on a guideline to assist the company's underlying performance. It is not prepared in accordance with U.S. GAAP and excludes extraordinary and noncash items. The company generated approximately $176 million of charter hire during the quarter. Of this, around $1 million came from our container fleet including profit share related to fuel savings on 7 of our large container vessels. The car carrier fleet generated approximately $26 million of charter hire compared to $23 million in the prior quarter reflecting that all vessels were fully back in service during the period, following a scheduled drydocking last quarter. In tankers, the fleet generated approximately $42 million of charter hire, down from around $44 million in the previous quarter due to a scheduled dry locking.

In dry bulk, we have divested the majority of the fleet over recent quarters. and now have 2 Kamsarmax vessels remaining, both trading in the short-term market. Revenue from these vessels was approximately $2.7 million or the equivalent of approximately $15,000 per day per vessel. Revenue from our energy assets was approximately $23 million, mainly generated by the liners, which is in a long-term contract with ConcoPhilips through May 2029. Net operating and G&A expenses for the quarter were approximately $67 million, broadly in line with the previous quarter. Overall, this resulted in an adjusted EBITDA of approximately $109 million, which is in line with the third quarter.

Turning now to the profit and loss statement and the U.S. GAAP. For the quarter, we reported total operating revenues of approximately $176 million compared to $178 million in the previous quarter. The net result for the quarter was impacted by several nonrecurring and noncash items, including a gain of sale of Suezmax tankers of approximately $11.3 million. settlement compensation of $23 million relating to 2 Suezmax tankers positive mark-to-market effects from hedging derivatives of $600,000 positive mark-to-market effects from equity investments of $700,000 and an increase in credit loss provisions of 200,000. As a result of U.S. GAAP, the company reported a net loss of approximately $4.7 million.

[Audio Gap] partly cash dividend of $0.10 per share tending a dividend yield of approximately 9%. Charter backlog stands at approximately $3.7 billion with more than 2/3 linked to customers with investment-grade ratings, providing strong cash flow visibility. With a solid balance sheet and liquidity position, we remain well positioned to act on accretive investment opportunities.

With that, I will hand the call back to Espen, who will open the line for questions.

[Espen Nilsen Gjosund, executive]

Thank you, Aksel. [Operator Instructions] And we will have our first question from Mr. Gregory Lewis. Gregory, please unmute your speaker to ask your question.

[Gregory Lewis, analyst]

Thanks for highlighting the activity in Suezmax with your Suezmax ships. I guess I'd be curious how you're thinking about those vessels. Clearly, the crude tanker spot market seems to be surprising to the upside, everybody's expectations rates are strong. I know the focus is on putting out long-term charters. We've definitely seen some short, I guess, 12-month charters for some of the larger vessels, some these -- but I'm just kind of curious, just given the strength in rates and where we are in the first part of 2026. Are we starting to see signs or interest from customers or charters around multiyear contracts? Or is it as we think about these vessels, should we just be thinking more, hey, the spot market is good, the outlook is good for the next couple of years, and we're just going to use this kind of as a trade?

[Ole Hjertaker, executive]

Yes. Greg, and thanks. Yes, we find that market segment quite interesting right now for a couple of reasons. And just to also be clear about that, we -- when this transaction, call it, opportunity came about, this was based really backed by the agreement we had there with this customer where we, after a certain period of time, gave them the opportunity to effectively trigger a sale with a profit share as long as we were over a level that gave us a very good return in the first place. And then the market has been moving up, and they were interested in doing that. So we sold it to older Chinese-built vessels. And if you look at the equity returns we generated on that those with the implied profit split that we got out of it too, we're talking sort of high 20s in return on equity on those deals.

So I would say it was a really strong deal and much better than we anticipated when we did that deal back in the days. And they also wanted to do the same with the other 2 vessels. But the other 2, the Korean built vessels are more attractive for long-term charters. They are Korean built. They're sort of eco-design. they have scrubbers. We just had them through a dry dock. And we believe they are more attractive also for longer-term charter opportunities. What we did not anticipate back in December was the way the market moved upward sharply. So over this 2-month period, both 1-year charter, as indicated by brokers and also the index, the TD 20 index that sort of is used for hedging in this market is up 20% in that short period of time.

A couple of reasons for that. I mean you have some trading pattern issues. But I think one very important underlying factor here on the tanker side, which I would call almost unprecedented in the market, at least in the history, I've seen is that you have one party or a group of people who are working together who effectively control around 1/3 of the available or traded tanker VLCC fleet out there. And we believe they are willing to hold back ships if they don't get the rate -- charter rate where they want it to be, which implicitly would give also the other owners out there, confidence to hold back and not just drop their plan, so to speak, and fix at lower levels.

So I think that is a very -- I would say, fundamental shift in the market. And then we have to look at the correlation between the VLCC market and the Suezmax market where over the last 25 years, the Suezmax have earned around 85% of the VLCC charter rate. So we believe that with the dynamics on the VLCC market and also trading patterns, which is quite interesting for the Suezmax size we think the market could remain firm for some time. But our ultimate objective here is to find new longer-term charters for these vessels. But then of course, in the meantime, we enjoy the spot market.

And just to be clear, I mean, we used to have 4 vessels. The 2 vessels that are remaining are generating more net cash flow than all 4 vessels did in the previous chartering arrangement. So far, we are generating more cash out of 2 vessels compared to 4 vessels in the past.

[Gregory Lewis, analyst]

Yes. No, it's definitely good to be a tanker owner at the moment. And then I'll -- I was hoping realizing that it's always -- it's a Board decision. There's lots of variables that go into how the company thinks about the dividend. But as we kind of think about, I guess it will be later this year. And I think next quarter, it will be the dividend would have been lowered for about a year now. I think at the time, one of the drivers of that dividend was the lack of visibility on the Hercules but to the sustainability of the model, the dividend is still below 50% of operating cash, it's well covered on a net income basis.

I guess 2 questions here. How are we thinking about the dividend over the next 12 months? And to that point, is one of the -- to that point, how is the market looking for in the secondhand market, i.e., opportunities, clearly, in tankers, prices are high. chart rates are catching up to do. How is the opportunity for growth looking in kind of the containership market, which seems to be maybe where numbers, the economics might look a little better in doing purchase in charter out.

[Ole Hjertaker, executive]

Yes, thanks. I mean to start with the dividend, call it, question, the Board never guide some dividend going forward. But the underlying sort of structure or what goes into that evaluation is long-term sustainable cash flows. If you look at the last year, we did sell a number of vessels so that we're coming to the end of the charter period. We sold some older feeder container shapes, et cetera. So which freed up quite a bit of capital. And of course, to have a sustainable distribution, you have to have producing assets, call it, generating those returns. So that's one thing.

And also, I would say, last year, for geopolitic reasons with that sort of we call it a trade war or at least trade friction mounting, we sensed that many of the players out there were stepping a little bit back. They were very uncertain about how this all would evolve. And then it's difficult to get, call it, counterparties to commit long term. So we sense now that the dynamics is more -- is better. We see more interest in engaging for new business, but we cannot really comment on anything before we potentially do it.

And from a Board perspective, I mean it's very -- we try to be disciplined try not to -- what can we say, run out and just spend the money because we have capital available. It's all about trying to do the right deals, long-term deals, and then from time to time, you may get lucky like we did on the Suezmax tankers with a much stronger return than we expected. So that's what you should expect from us. We should try to deploy the capital in a hopefully balanced way, build distributable cash flow. We still have the drilling at Hercules idle, that used to produce a lot of cash flow for us in 2024, so there are a few factors here going into that. But still, we are looking at north of $100 million in dividends per year, even at this level.

So we are paying a lot of cash flow out to shareholders. It's more than $2.9 billion over the 88 quarters. So I think we've shown a disciplined approach to it that we've been standing firm through pretty rough cycles. And hopefully, we will have good capacity also going forward.

[Espen Nilsen Gjosund, executive]

Then we'll also have a question from Mr. [indiscernible]. Kindly unmute your speaker to ask your question.

[Unknown Analyst]

I joined a few minutes late, so you may have touched upon this, but I wanted to follow up on Greg's question on the charters you terminated. Could you remind us what was the rate on the previous contract? And secondly, could you talk a bit about the fixtures you have secured to date in the spot market?

[Ole Hjertaker, executive]

Yes. We -- this was a deal that was done back in 2022. The 2 Chinese-built vessels were acquired for, at that time, around $46 million, $47 million, if I'm not mistaken. We had on charter rates of around $27,000 per day for that period. And then we sold them now for $57 million net. So we've enjoyed strong cash flows, depreciated the assets and then sold them for 20% more gross than we bought them for 3 years earlier, hence, the very strong returns on that deal.

Similar dynamics on the newer Korean build vessels. They were more expensive. So we bought them for around $64-ish million, if I'm not mistaken. And if you look at the broker reports now, and you have, for instance, the broker firm lease they just increased their valuations on Tucker assets and the no guide 5-year-old Suezmax tankers at $85 million. So it's a significant uplift also for these assets.

If you look at the spot market, we typically will not guide on spot market there and then. I mean you can you can look after the brokers, they will typically guide you on what the charter rates are -- but just to give you a guiding right now, and this is just from a broker report the guide at a 1-year TC for a modern Suezmax tankers would be in the high 40s, they guided 47,500. While if you use the Suezmax TD20 index, they -- you could do 12 months now in excess of $60,000 per day based on the index alone. So the market is quite strong as a guide. As I mentioned, we were below $30,000 in the old structure. And remember also on those vessels -- on the vessels, you have to subtract operating expenses, you have to subtract interest and amortization on the loans.

So we are now in this market generating more than we did from the 2 vessels that we did from all 4 vessels combined on a net basis. I would mention though that based on U.S. GAAP, well, first of all, we had to expense the termination fee on the 2 modern vessels. despite having a very low book value level on those vessels, because we own them already, it has to be -- had to be taken straight through P&L in the fourth quarter. So that had that effect. Also, when you trade vessels in the spot market being tankers or bulkers based on U.S. GAAP, you have to account for the revenues on a low to discharge basis. And typically, these assets, they go empty and balanced as we call it, one way and you load it and then you go load it the other way. So you will see some volatility in the P&L effect for these assets, all depending on the position they are, whether they -- through the specific quarter were more loaded than empty in that rotation.

When we got them back off the charter, and this is again a coincidence, but both vessels were just coming off a loaded journey and, therefore, started with some balance days. But this is something that will balance and equal out over the year. But from quarter-to-quarter, there may be some, call it, earnings volatility due to U.S. GAAP.

[Unknown Analyst]

Yes, makes sense. And after recent sales on the dry bulk side, you only have to remain in Panamaxes. Those seem clearly noncore. Is that a fair assessment? And secondly, there has seemingly been some interest from potential charters on long-term contracts on new [indiscernible] newbuilds. What are your thoughts on potentially reallocating some capital towards driving?

[Ole Hjertaker, executive]

Yes. Thanks. I mean we've always been invested in the dry sector. And you can say, I would say it's more of a coincidence now that we are down to 2 vessels. We are segment agnostics. So we would look at deals in all the segments and -- including the dry bulk segment and have looked at multiple transactions. But to get to a deal, it has to make sense for us from a -- one thing is the purchase price, the charter rate, the counterparty, the financing structure we can build around it. And of course, our charter would want to pay the charter rate we need to have to make that work for us. So this is sort of a balance. And you are correct. We are only 2 vessels left now.

I wouldn't say they are noncore. Those vessels were on 10-year time charters and have been, over time, quite profitable for us, but we are traded more in the short-term market currently. So we look at opportunities on the dry side as we do in other sectors. And as I said, agnostics, it's all about a good risk-adjusted return.

[Espen Nilsen Gjosund, executive]

All right. Then we have some written questions. Could you please share any updates on the Hercules?

[Ole Hjertaker, executive]

Yes. The Hercules has remained idle since November '24. So it was idled through 2025. generated very strong cash flows when it was working. Now it has remained idle. We are -- we have been looking for employment. That market has been a little slow. It's fair to say, but we now see signs both with -- from a consolidation perspective, where we had the big merger announced earlier this week, Transocean and Volaris. We also saw a drilling rig with, I would call it, similar sort of harsh environment ultra-deepwater features, that was recently fixed on a 3-year charter with start-up in 2027. .

So based on what we see from brokers, it looks like there is more market dynamics and more employment opportunities there going forward. But we cannot comment specifically on the rig or we cannot comment on discussions we may have on this rig specifically. We will announce contracts if and when they materialize.

[Espen Nilsen Gjosund, executive]

Thank you. We also have another one here. How do you see the long-term evolution of the contracted revenue mix across the different shipping segments due to the container newbuild orders signaled the strategic direction the company intends to pursue?

[Ole Hjertaker, executive]

The new build container ships were done or we were ordered those vessels in 2024. It's typically what we like to do long-term time charters to investment-grade counterparties, modern technology that enables where we -- through the long-term charter are able to amortize that investment down significantly. So we are not specifically focused on one single segment. But we try to position us as logistics partners for strong industrial-focused partners, and then the containership market has been an interesting market for us. But we would be happy also to look at other segments.

[Espen Nilsen Gjosund, executive]

And related to different segments, what segment are you currently most optimistic about in relation to potential future growth, i.e., in what niche do you see the best economics?

[Ole Hjertaker, executive]

It's -- I would say, it's almost an impossible question. I mean, as we look across the board between the segments, we don't have any sort of favorite. What we have seen over time is that there have been more longer-term charters in typically liner type assets, container ships, car carriers, but we also see that from time to time on tankers where you see longer-term charters and also on dry bulk. And we also have some chemical carriers in our portfolio where we also have good interaction with logistics players. So we look across the board. And hopefully, we will build the portfolio in more than one segment. .

[Espen Nilsen Gjosund, executive]

We also have a question. What is the status of SFL Composer?

[Aksel Olesen, executive]

Right. I think I'll interpret that question as after the collision we had in Q3 the vessel was going into dry dock when she was hit by another container vessel or by a container vessel. She -- we were going into dry dock anyway at that time. And we had a slot available, so we didn't really lose any time. And all of the damage repairs were covered by insurance, including also the off-hire related to the incident. So for SFL, we did not lose really out on this at all. The vessel is now back in service with Volkswagen and operating in EMEA Atlantic as normal.

[Espen Nilsen Gjosund, executive]

One last question here. all can you say something about the size of the new rig financing facility?

[Aksel Olesen, executive]

Sure. So you are relating to the new Hercules facility and that being kind of negotiating and prepared, and that's in the amount of $100 million.

[Espen Nilsen Gjosund, executive]

Thank you, Aksel. 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 web page, www.sflcorp.com. Thank you all.