SFL Corporation Ltd. Q1 FY2026 earnings call

• Overall Financial and Dividend Performance

  • Reported Q1 2026 GAAP total operating revenue of $174.5 million, adjusted EBITDA equivalent cash flow of $108 million, and GAAP net income of $26 million (20 cents per share)
  • Declared an 89th consecutive quarterly dividend, increased 10% to 22 cents per share, representing a 7.5% dividend yield at current share prices; the firm has returned $3 billion ($30+ per share) in aggregate dividends since 2004
  • Total available liquidity as of quarter end exceeds $280 million, combining $128 million in cash and $160 million in undrawn credit facilities, with a book equity ratio of 27%
  • Completed an opportunistic $75 million tap issuance of 2030 senior unsecured bonds at 103.5% of par, for an implied yield of 6.8%, extending the firm's liquidity runway

• Fleet and Backlog Update

  • Current fleet totals 57 maritime assets: 2 dry bulk vessels, 30 container ships, 16 large tankers, 2 chemical tankers, 7 car carriers, and 2 drilling rigs, after delivery of two sold older Suezmax tankers to new owners earlier this year
  • Total contracted charter backlog stands at $3.7 billion, with over two-thirds of the backlog contracted to investment-grade counterparties, providing strong earnings visibility
  • Secured a new 400-day firm contract for the Hercules ultra-deepwater harsh environment drilling rig, starting in Canada Q1 2027, adding ~$170 million to the backlog with additional extension options available
  • Successfully refinanced facilities for both the Hercules and Linus rigs on favorable terms, confirming ongoing access to bank lending for high-quality offshore assets
  • Three Maersk S-class container vessels completed or are undergoing dry dock and significant upgrades, as part of new five-year charters with Maersk to maintain long-term asset quality

• Strategic and Operational Update

  • Terminated charters for two newer 2020-built Suezmax tankers for $11.5 million compensation per vessel, and sold two older vessels from the original four-vessel charter for $52 million in net aggregate proceeds after debt repayment
  • The two spot-traded Suezmax tankers delivered Q1 time charter equivalent earnings of ~$54,000 per day, well above the sub-$20,000 per day cash break-even after debt service; net cash flow from the two vessels alone now exceeds the combined cash flow from all four original vessels under the prior charter
  • Remaining capital commitments for five contracted new container vessels total $850 million, expected to be funded via a combination of pre- and post-delivery financing, with strong lender interest already confirmed
  • SFL continues systematic deleveraging, making $56 million in scheduled loan amortization during the quarter, bringing year-to-date amortization to over $220 million

Container segment: Generated approximately $81 million in gross charter hire, representing 46% of total gross charter hire. All 30 container vessels achieved 100% utilization, with long-term contracted portfolio delivering stable strong cash flows, including additional profit share from fuel savings on seven large vessels. Car carrier segment: Generated approximately $26 million in gross charter hire, equal to 15% of total gross charter hire. All seven vessels achieved 100% utilization, with all vessels contracted to high-quality counterparties delivering consistent earnings visibility, matching performance from the prior quarter. Tanker segment: Generated approximately $46 million in gross charter hire, equal to 26% of total gross charter hire, marking a meaningful sequential improvement from $42 million in the prior quarter. 16 total tankers achieved 99% utilization; two Suezmax tankers trading on the spot market captured strong favorable rates and drove the sequential improvement. Dry bulk segment: Generated approximately $2 million in gross charter hire, equal to 1% of total gross charter hire, down from $3 million in the prior quarter. The segment holds two remaining vessels after strategic divestment, both trading on the short-term market, and achieved 99% utilization; the dry bulk market has shown encouraging improvement entering the second quarter. Energy (drilling rig) segment: Generated approximately $23 million in gross charter hire, equal to 13% of total gross charter hire. Utilization hit 50% as the Hercules rig remains warm-stacked in Norway in preparation for its 2027 contract; all revenue came from the Lion (Linus) rig, which is on a long-term contract with ConocoPhillips running through May 2029.

• Management did not issue full-year formal quantitative guidance, but provided qualitative forward expectations:
  • The second quarter of 2026 is expected to deliver very strong results from the two spot-traded Suezmax tankers, even though the average full-quarter rate will be lower than the $185,000 per day average for the 53% of vessel days already booked, due to U.S. GAAP revenue recognition rules for spot voyages and remaining ballast days
  • Management expects continued significant demand for high-specification harsh environment deepwater semi-submersible drilling rigs through the end of the 2020s, supported by increased energy production activity in the Northern Hemisphere
  • The dry bulk market has shown encouraging improvement, with improving day rates observed so far in Q2 2026
  • Management intends to redeem the full $150 million 2029 senior unsecured bonds maturing in May 2026 using available existing liquidity, and is fully positioned to complete this redemption

• Forward-looking statements are inherently uncertain, and key factors that could cause actual results to differ materially from expectations include volatility in shipping, offshore, and credit market conditions
  • Spot market tanker rates are volatile, and the current historically high market is partially driven by unpredictable geopolitical disruption from the war in the Middle East, which may not be sustained
  • Securing new long-term charters for spot-traded vessels depends on market conditions and availability of qualified counterparties, with no guarantee of favorable terms or timely execution
  • Capital expenditure requirements for the Hercules rig upgrades could change as the contract start date approaches, which could impact cash flow plans

Q: With strong current spot tanker rates and some tanker contracts expiring/extending later this year, how should investors think about SFL’s plans to extend existing charters or add new longer-term contracts to grow the backlog? / A: Management did not expect the current spot market to firm to this unprecedented level, which stems from a combination of Middle East war-related supply disruptions and significant supply-side consolidation for large tankers. SFL core business model is focused on long-term charters, and the firm will seek longer-term charters for the two spot Suezmax vessels in due course while continuing to capture strong spot rates for now. Most expiring tanker contracts have extension options, and management expects most will be extended for another 1-2 years, with no unplanned spot exposure in the tanker segment for now. The firm is also evaluating new tanker opportunities but will not comment until deals are finalized.

Q: What drove the 10% dividend increase this quarter, given the board could have approved a larger payout if desired? / A: The dividend increase reflects the board’s growing confidence in long-term portfolio cash flow, driven by multiple factors: new contract clarity for the Hercules rig requires lower capital expenditure than alternative competing opportunities, the two spot Suezmax vessels have already delivered incremental quarterly cash flow of ~2 cents per share, and the broader portfolio has delivered near-100% utilization with strong cash flow from high-quality counterparties. SFL’s core long-term objective is returning capital to shareholders, which guided the decision to lift the payout.

Q: How much capital expenditure is planned for Hercules rig upgrades ahead of the new Canadian contract, and why is the required spend lower than other alternatives? / A: Required upgrades are relatively small tactical equipment replacements to extend the rig’s long-term harsh environment capability. Because the rig most recently worked in Canada and already holds a valid Canadian safety case, very little major upgrades are required from SFL; the customer will cover the cost of any custom upgrades they want for their operations. Total Hercules capex makes up half of SFL’s current guided aggregate capex for all assets, which is small relative to SFL’s total asset base. Staffing will be gradually increased ahead of the Q1 2027 contract start as the rig moves from warm-stacking to full operational status.

Q: What is SFL’s plan for the two spot-traded Capesize dry bulk vessels: will the firm seek long-term charters or is sale more likely? / A: It is difficult to secure long-term charters (longer than 1 year) for medium-sized Capesize vessels, and 1-year charters are not attractive for SFL’s business model, as charterers would capture most of the premium via hedging. The firm prefers to retain the vessels and capture the spot market margin itself rather than accept short-term charters. Management will continue to watch the market opportunistically for longer-term opportunities, but no timeline or terms are set currently.