SFL (NYSE:SFL) Q3 2026 Earnings Call

0:00 Welcome to SFL's third quarter 2026 conference call. My name is Espen Nilsen and I'm Vice President of Investor Relations in SFL. Our CEO Ole Hjertaker will start the call with an overview of the third quarter highlights, then our Chief Operating Officer Trym Sjølie will comment on vessel performance matters, followed by our CFO Aksel 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&A session. Before we begin our presentation, I would like to note that this conference call will contain four liquid statements within the meaning of the US Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these four liquid statements.

0:49 Please note that forward-looking statements are not guarantees of future performance. These statements are based on our current plans and expectations and are happily 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 resource 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 four 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 Ole Hjertaker with highlights for the third quarter.

1:36 Thank you Espen. Last quarter we celebrated our 90th dividend and the 22 cent payout and we continue at the same pace this quarter. Nearly $33 per share have now been returned to shareholders, which means more than $3 billion accumulated since 2004. And with the recent growth initiatives and backlog additions to very strong customers, we have firmly positioned SFL as a maritime infrastructure company with a diversified high-quality fleet and with a unique long-term cash flow visibility. In the third quarter, we reported revenues of $202 million and an EBTA equivalent cash flow of $122 million. And over the past 12 months, aggregate EBTA has been $469 million, reflecting the continued strength and stability of our operations.

2:29 Net income in the quarter was $37 million, or 26 cents per share, and the dividend declared is 22 cents per share. The backlog has been building massively this year and is now up to $5 billion with a very strong counterparty profile where most of the backlog is to customers with investment grade rating. In fact, if we include a backlog to a customer with credit rating just one notch below investment grade, it would cover nearly 80% or $4 billion of the backlog. At the beginning of the third quarter, we announced four new-built car carriers and also long-term charters for two of the vessels. We covered this in more detail in the second quarter presentation in August, but this deal added $150 million in backlog on the two vessels with charters, which could increase to $300 million if the optional periods are declared.

3:25 Two vessels are still unfixed, but with quite attractive delivery positions in 2029, we expect to secure long-term charters in due course. In September, we announced a significant charter extension for six 15,400 TU container vessels with Hapag-Lloyd. The vessels were originally on a five-year charter ending in 2028 and 2029, and we have now agreed to extend the charters by an additional seven years. The vessels are then chartered until 2035 and 2036, and this adds approximately $750 million to our fixed-rate charter backlog. and we have done more business in the container segment lately. Lastly, we announced the acquisition of two 8,800 container vessels in combination with eight-year firm charters to an existing investment grade customer.

4:19 Acquisition cost is around $256 million and the vessel will have scheduled delivery already in 2027. This transaction adds around $250 million to our backlog and maybe more if options are exercised. The extension options are two times two years and the Charter will also have purchase options in year 8 and also in year 10 and 12 if the extension options are exercised. The options are at the level where we will have a strong return on our invested capital and it includes a profit share feature on top which may be valuable to us when we get there. We have also recently ordered three very large ammonia carriers with a cargo capacity of 93,000 cubic meters. The vessels will be able to carry a wide range of petrochemical gases and will have dual fuel propulsion and the latest technology for fuel efficiency and cargo intake optimization.

5:16 Delivery is scheduled in the second and third quarter of 2028 and the aggregate yard construction cost is expected to be approximately $336 million. All the vessels have been chartered out on long-term time charters from delivery, with two vessels going to an oil major and one to a global leader in the commodities industry, adding around $250 million to our fixed-rate charter backlog. The exact duration of the initial charter period for the vessels to the oil major will be determined within the next six months, and the backlog may increase at that point if they choose seven years and not five years initially. The Charter will also have options to extend the Time Charter by up to four years. The period for the vessel to the commodities trading company is fixed at five years plus two one-year extension options. We have also added a flexible sales clause in this deal where we may agree to develop a sale of the vessel during the last two years of the fixed period subject to a profit share mechanism with SFL.

6:21 We have seen in the past that these arrangements have been very profitable for us. And this was actually demonstrated in October when we announced the agreement to sell four 2014 and 2015 built LR2 product tankers and three 2019 built Suezmax tankers we have had on time chartered to Trafigura since 2021 and 2022. These charters, similar to the gas carrier mentioned earlier, had a profit share mechanism in the event of a profitable sale. The actual sale price per vessel is confidential, but we will have significant net cash proceeds from the transaction, estimated at $275 million after repayment of associated debt. And the aggregate book gain is estimated to approximately $175 million, indicating a stellar return on invested capital.

7:14 The gains will be recorded in the quarter the vessels are delivered, so some of it already now in the fourth quarter. This last quarter, we have also had significant benefits of having two modern Suezmax tankers employed in the spot market. These vessels were previously on a long-term charter at around $30,000 per day per vessel until December last year. We have now chartered one of the vessels to an investment-grade oil major for a period of three years at a charter rate that is higher than what both vessels earned combined last year. This means that the charter rate from the other vessel is a net incremental cash flow for us. In the third quarter, the vessels earned around $80,000 per day on average, and so far into the fourth quarter, we have covered two-thirds of the vessel days at an average charter rate in excess of $200,000 per day.

8:08 But please note that charter hire for vessels in the spot market is accounted for on a load-to-discharge basis pursuant to US GAAP, where we only recognize revenues when there is cargo onboard the vessels. So the final reported number will depend on trading towards the end of the quarter, including ballast days. And the drilling rig Hercules is in the process of preparing for a 400-day drilling campaign in Canada from March onwards next year. Having zero revenues on the rig this quarter is of course weighing on the reported results, but this is changing next year when the rig is expected to generate significant revenues. And with that, I will now hand the call over to our Chief Operating Officer, Trym Sjølie.

8:54 Thank you. As I already mentioned, this has been a very active period for us, and I would like to spend a moment on what the recent transactions mean for the shape of the portfolio. Including the new buildings we have ordered, our portfolio now comprises 66 maritime assets, 32 container vessels, 11 car carriers, 3 gas carriers, 16 tankers, 2 drilling rigs and 2 dry bulk vessels. 7 of the tankers have been agreed sold to Trafigura, as explained, and are scheduled to leave the fleet over the fourth and first quarter. The three ammonia carriers take us into a new sector and broaden the diversification of the fleet further. The majority of our customers remain large industrial end users, and this is where we continue to focus.

9:44 Looking at contract duration, the weighted average remaining charter term on the container fleet is now 8.3 years, a direct result of the Hapagloid extensions and the new 8800 TEU vessels. The car carriers follow at 5.7 years, the gas carriers at 5 years, and the tankers at 3.2 years, while the energy sector is at 1.9 years, and the dry bulk vessels are on short-term employment. It is worth noting that these figures exclude our charter's extension options, so they are a conservative measure of how long the assets are likely to stay employed. On the right-hand side, our fixed rate backlog stands at approximately $5 billion. Container vessels make up around 71% of this, car carriers 11%, the rigs 7%, and gas carriers and tankers around 5% each.

10:38 The weight towards containers reflects both the size of the vessels and the length of the charters, and it gives us a very stable core of earnings well into the next decade. The backlog figure also excludes the dry bulk vessels, charters options, and any future profit share, so there is additional earnings potential on top. Around 58% of the contracted revenue is with investment grade counterparties. The remaining part is mainly with large, well-established industrial operators that we have long relationships with. And as Ole mentioned, a significant share of it is with a customer rated just one notch below investment grade. Now, turning to the operational performance. With the exception of four container vessels on bare boat charter, Representing around 9% of the container revenue, our entire fleet is employed on time charter or voice charter, where we provide crew and technical management to the charter.

11:34 This means operational performance feeds directly into our earnings and is a key part of the service our customers pay for. We had a total of approximately 4670 operating days across the fleet in the quarter, and utilization was strong across the shipping sectors. Container vessels and tankers both ran at 100%, car carriers at 98% and dry bulk at 97%. The slightly lower figure for the car carriers reflects the fourth special survey dry docking of SFL conductor which was completed during the quarter. The energy sector ran at 50% with Linus operating through the quarter while Hercules is being prepared for its campaign in Canada.

12:19 Charter revenue from the feat was around $194 million in the quarter, and container vessels contributed $85 million, tankers $56 million, car carriers $27 million, the rigs $23 million, and dry bulk $3 million. The tanker contribution was supported by the strong spot earnings on our two Suezmax tankers that Ole just mentioned. Operating expenses for the shipping fleet, excluding emission allowances, came in at about $36 million, over which $15 million on the container vessels, $12 million on tankers, $7 million on the car carriers, and $2 million on dry bulk. And the car carrier figure includes approximately $2.3 million of dry docking costs related to the asphalt conductor.

13:09 I will now give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter. Thank you Trym. Turning now to our cash flow overview. This slide provides a clear view of the fleet's underlying operating performance, excluding certain non-cash items and items we consider non-recurring. Before walking through the numbers, a brief reminder. This presentation includes non-GAAP measures that management uses to assess underlying performance. These measures are not prepared in accordance with US GAAP and should not be considered in isolation or as a substitute of GAAP measures. A full reconciliation of the most direct comparable GAAP measures is included in our earnings release file this morning. With that context, let me take you through the performance of our fleet.

14:00 Across the fleet, we generated approximately 195 million in gross charter hire during the quarter. Our container fleet accounted for approximately 85 million, remaining our largest contributor. Turning to car carriers, our seven vessels generated approximately 27 million in gross charter hire, a slight improvement from the previous quarter. The tanker fleet generated approximately 56 million in gross charter hire, compared to 62 million in the previous quarter. The decrease was mainly due to lower recorded revenue from our 2,000 max tankers trading in the spot market, partly reflecting the timing of Voyage revenue recognition. As a reminder, under US GAAP, Voyage revenue is recognized on a low-to-discharge basis, with revenue allocated on the days when cargo is on board.

14:53 Our two Kamsomax tribal carriers continue to trade in the short-term market, generating approximately 3 million in revenue. The average daily time chart equivalent was approximately 15,400 per vessel, compared to 16,100 in the previous quarter. Moving to energy. The harsh environment that could break Linus generated approximately 23 million in revenue, broad in line with the previous quarter. The rig remains contracted to Konica Phillips until May 2029, which gives good visibility on future cash flows. The Hercules is preparing for its upcoming contract in Canada, which is expected to commence in March 27. As preparation progresses, we expect elevator rig operating expenses in the fourth and first quarter.

15:44 Vessel & Rig operating expenses, together with G&A, totaled approximately 73 million, compared to 69 million in the previous quarter. As a result, adjusted EBITDA was approximately 122 million, compared with 130 million in the previous quarter. Turning to our results on US GAAP. Total operating revenues were approximately 202 million, in line with the previous quarter. Operating expenses were approximately 8-5 million, up from 74 million in the previous quarter. The increase was mainly due to higher operating expenses for Hercules, reflecting the ongoing mobilization for the contract with Suncor in Canada, as well as higher voyage expenses and scheduled drylockings.

16:33 The results included non-cash, mark-to-mark gains of approximately 13.3 million on derivatives and 1 million on equity investments. We show these separately so that investors can distinguish valuation movements from underlying operating performance. Including these gains, net profits was approximately 37 million or 26 cents per share compared with 34 million or 25 cents per share in the previous quarter. Turning to the balance sheet, we had approximately 112 million in cash-in-cash equivalents at quarter-end, and a further 160 million available on the on-drone credit facilities. This gave us total available liquidity of more than 270 million.

17:19 At quarter-end, we agreed to sell seven tankers currently on Time Charger 2 Trafigura. After settlement of profit share obligations and repayment of associated debt, we expect aggregate net cash proceeds of approximately 275 million. The vessels are expected to be delivered to the buyers during the fourth and first quarter, and we expect to recognize an aggregate book gain of approximately 175 million as they are delivered. Following our recent announcements, remaining capital commitments under our new billing program totals approximately 1.7 billion. Of our 40 new billings, 12 have long-term charges in place, representing an aggregate charter backlog of approximately 1.9 billion.

18:05 Deliveries are scheduled from the second half of 27 throughout the end of 2029. We expect to fund the commitments through a combination of existing cash and primarily pre- and post-delivery credit facilities. Before handing the call back to Espen, let me close with a few key points. The board has declared our 91st consecutive quarterly cash dividend, or 22 cents per share. Our charter backlog stands at approximately 5 billion after additions of more than 1.6 billion so far this year. This gives us substantial visibility on future cash flows and supports both shareholder distribution and continued investment.

18:50 The sale of the Trafigura tankers crystallizes value not previously reflected in our book values and releases significant capital. The gains will be recognized over the next two quarters as the vessels are delivered, strengthening our capacity to fund further growth alongside our new building program. With our diversified fleet, strong access to capital, and disciplined approach to investments, we remain focused on generating attractive long-term returns for our shareholders. Thank you for joining us this morning. I'll now hand it back to Espen for questions. Thank you, Aksel. We will now open for a Q&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.

19:37 When your name is called out, click on your speaker to ask your question. Thank you. And we will have our first question from Mr. Franklin Sherman. With one of the SWAT vessels now coming on a time charter contract, is the plan to get the other vessel on the time charter contract as well? Thank you. We had a plan of effectively hedging those two vessels in the market. We have already charted out the one vessel at a charter rate more than double what both vessels earned before in 2025. We see a booming market and we believe this extreme market could last for some while.

20:25 So the plan is to keep it in the spot market for now. But we have to remember that incremental cash flow, every single dollar in charter rate on that vessel is incremental charter rate cash flow for us. So just as an illustration, I believe we earned net contribution after OPEX and debt service on those vessels before used to be around 2 to 3 cents. With the revenues that we recorded in the third quarter, the contribution per SFL share was around 8 cents. and this is growing exponentially if the market should be higher as I indicated you know the market now depending on who you talk to you know the in the broker reports day some some quote around three hundred thousand dollars per day some quote maybe four hundred thousand dollars per day of course what matters is you know what will the ship earn over time but we're talking astronomical sort of cash flows so for now we think we will keep Thank you, Ole.

21:27 Another question from Tiffany Johnson. With the increased backlog that you've added this quarter, when are the next vessels coming off the contract and what are your plans on those vessels? Yeah, thanks. We have, you know, then effectively three vessels in the sport market. You know, the one Suez Max we just mentioned, and also two Camso Maxes that are being traded there. They earn around $15,000 per day in the third quarter. And so far this quarter, we're north of $20,000 per day, but they are André Reppen, Jannicke Eilertsen, Thecla Panagides A booming market in that segment, you know, I would say partly or to a significant degree driven by exports out of China. So we are quite comfortable with those positions.

22:59 And, you know, as you have seen, we have added massively to our backlog so far this year. And of the $5 billion, we've added 1.6, 1.7 just this year alone. So it's been a very active year. And a part of that has been rechartering or extending charters on vessels that we already had on charters. And we expect that to continue going forward. Thank you, Ole. 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.

23:52 Thank you for listening.