The forward-looking statements herein are based upon various assumptions, many of which are based, in turn, upon further assumptions, including, without limitation, management’s examination of historical operating trends, data contained in the Company’s records and other data available from third parties. Although the Company believes that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond its control, the Company cannot assure you that it will achieve or accomplish these expectations, beliefs or projections.
Such statements reflect the Company’s current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company is making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated. In addition to these important factors and matters discussed elsewhere herein, important factors that, in the Company’s view, could cause actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to:
This report may contain assumptions, expectations, projections, intentions and beliefs about future events. These statements are intended as forward-looking statements. The Company may also from time to time make forward-looking statements in other documents and reports that are filed with or submitted to the Commission, in other information sent to the Company’s security holders, and in other written materials. The Company also cautions that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual results and the differences can be material. The Company undertakes no obligation to publicly update or revise any forward-looking statement contained in this report, whether as a result of new information, future events or otherwise, except as required by law.
PART I
| |
ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable.
| |
ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable.
ITEM 3. KEY INFORMATION
Throughout this report, the "Company", "Ship Finance","SFL ", "we", "us" and "our" all refer to Ship Finance International LimitedSFL Corporation Ltd. and its subsidiaries. We use the term deadweight ton, or dwt, in describing the size of the vessels. Dwt, expressed in metric tons, each of which is equivalent to 1,000 kilograms, refers to the maximum weight of cargo and supplies that a vessel can carry. We use the term twenty-foot equivalent units, or TEU, in describing container vessels to refer to the number of standard twenty foottwenty-foot containers that the vessel can carry, and we use the term car equivalent units, or CEU, in describing car carriers to refer to the number of standard cars that the vessel can carry. Unless otherwise indicated, all references to "USD," "US$" and "$" in this report are to, and amounts are presented in, U.S. dollars.
A. SELECTED FINANCIAL DATA[RESERVED]
Our selected income statement and cash flow statement data with respect to the fiscal years ended December 31, 2017, 2016 and 2015 and our selected balance sheet data with respect to the fiscal years ended December 31, 2017 and 2016 have been derived from our consolidated financial statements included in Item 18 of this annual report, prepared in accordance with accounting principles generally accepted in the United States, which we refer to as US GAAP.
The selected income statement and cash flow statement data for the fiscal years ended December 31, 2014 and 2013 and the selected balance sheet data for the fiscal years ended December 31, 2015, 2014 and 2013 have been derived from our consolidated financial statements not included herein. The following table should be read in conjunction with Item 5. "Operating and Financial Review and Prospects" and our consolidated financial statements and the notes to those statements included herein.
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| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
|
| (in thousands of dollars except common share and per share data) |
Income Statement Data: | | | | | | | | | |
Total operating revenues | 380,878 |
| | 412,951 |
| | 406,740 |
| | 327,487 |
| | 270,860 |
|
Net operating income | 154,626 |
| | 168,089 |
| | 166,046 |
| | 145,146 |
| | 117,366 |
|
Net income | 101,209 |
| | 146,406 |
| | 200,832 |
| | 122,815 |
| | 89,206 |
|
Earnings per share, basic | $ | 1.06 |
| | $ | 1.57 |
| | $ | 2.15 |
| | $ | 1.32 |
| | $ | 1.00 |
|
Earnings per share, diluted | $ | 1.03 |
| | $ | 1.50 |
| | $ | 1.88 |
| | $ | 1.24 |
| | $ | 0.99 |
|
Dividends declared | 152,907 |
| | 168,289 |
| | 162,594 |
| | 152,142 |
| | 109,114 |
|
Dividends declared per share | $ | 1.60 |
| | $ | 1.80 |
| | $ | 1.74 |
| | $ | 1.63 |
| | $ | 1.17 |
|
|
| | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2017 |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
|
| (in thousands of dollars except common share and per share data) |
Balance Sheet Data (at end of period): | | | | | | | | | |
Cash and cash equivalents | 153,052 |
| | 62,382 |
| | 70,175 |
| | 50,818 |
| | 58,641 |
|
Vessels and equipment, net (including newbuildings) | 1,762,596 |
| | 1,770,616 |
| | 1,681,466 |
| | 1,464,700 |
| | 1,215,624 |
|
Investment in direct financing and sales-type leases (including current portion) | 618,071 |
| | 556,035 |
| | 511,443 |
| | 746,531 |
| | 903,408 |
|
Investment in associated companies (including loans and receivables) | 328,505 |
| | 330,877 |
| | 495,479 |
| | 399,488 |
| | 571,702 |
|
Total assets | 3,012,082 |
| | 2,937,377 |
| | 3,032,554 |
| | 3,004,596 |
| | 3,004,505 |
|
Short and long term debt (including current portion) | 1,504,007 |
| | 1,552,874 |
| | 1,634,205 |
| | 1,695,501 |
| | 1,695,401 |
|
Capital lease obligations (including current portion) | 239,607 |
| | 122,403 |
| | — |
| | — |
| | — |
|
Share capital | 1,109 |
| | 1,015 |
| | 93,468 |
| | 93,404 |
| | 93,260 |
|
Stockholders' equity | 1,194,997 |
| | 1,134,095 |
| | 1,241,810 |
| | 1,153,492 |
| | 1,191,933 |
|
Common shares outstanding (1) | 110,930,873 |
| | 101,504,575 |
| | 93,468,000 |
| | 93,404,000 |
| | 93,260,000 |
|
Weighted average common shares outstanding (1) | 95,596,644 |
| | 93,496,744 |
| | 93,449,904 |
| | 93,330,622 |
| | 89,508,233 |
|
| | | | | | | | | |
Cash Flow Data: | |
| | |
| | |
| | |
| | |
|
Cash provided by operating activities | 177,796 |
| | 230,073 |
| | 258,401 |
| | 132,401 |
| | 140,124 |
|
Cash provided by (used in) investing activities | 48,362 |
| | 39,399 |
| | (205,782 | ) | | (21,940 | ) | | (73,982 | ) |
Cash used in financing activities | (135,488 | ) | | (277,265 | ) | | (33,262 | ) | | (118,284 | ) | | (68,043 | ) |
Note 1: The number of common shares outstanding at December 31, 2017 and 2016 includes 8,000,000 shares issued as part of a share lending arrangement relating to the issue in October 2016 of senior unsecured convertible bonds. These shares are owned by the Company and will be returned on or before maturity of the bonds in 2021. Accordingly, they are not included in the weighted average number of common shares outstanding at December 31, 2017 and 2016.
B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable.
D. RISK FACTORS
Our assets are primarily engaged in transporting crude oil and oil products, dry bulk and containerized cargos,cargoes, freight of rolling cargo, and in offshore drilling and related activities. The following summarizesrisk factors summarized in the Cautionary Statement Regarding Forward Looking Statements and Summary of Risk Factors and detailed below, summarize certain risks that may materially affect our business, financial condition or results of operations. Unless otherwise indicated in this annual report on Form 20-F, all information concerning our business and our assets is as of March 26, 2018.14, 2024.
Risk Factors Summary
The principal risks that could adversely affect, or have adversely affected, our Company’s business, operation results and financial conditions are categorized and detailed below.
–Risk Relating to Our Industry
Our assets operate within a variety of markets that are volatile and unpredictable. Several risk factors including but not limited to our global and local market presence will impact our widespread operations. We are exposed to regulatory, statutory, operational, technical, counterpart, environmental and political risks, and other developments and regulations applicable to us and our industry that may impact and or disrupt our business. Details of specific risks relating to our industry are described below.
–Risks Relating to our Company
Our Company is subject to a significant number of external and internal risks. We are an entity incorporated in Bermuda with operations in different jurisdictions, markets and industries and, with numerous employees, shareholders, customers and other stakeholders having varying interests, and this broad exposure subjects us to significant risks. We also engage in activities, operations and actions that could result in harm to our Company, and adversely affect our financial performance, position and our business. Details of specific risks relating to our Company are described below.
–Risk Relating to our Common Shares
Our common shares are subject to a significant number of external and internal risks. The market price of our common shares has historically been unpredictable and volatile. As a holding company, we depend on the ability of our subsidiaries to distribute funds to satisfy our financial and other obligations. As we are a foreign corporation, our shareholders may not have the same rights as a shareholder in a U.S. corporation may have. In addition, our shareholders may not be able to bring suit against us or enforce a judgement obtained in the U.S. against us since our offices and the majority of our assets are located outside of the U.S. Furthermore, sales of our common shares or conversions of any future convertible notes could cause the market price of our common shares to decline. Details of specific risks relating to our common shares are described below.
Some risks are static while other risks may change and will vary depending on global and corporate developments that may occur now or in the future. The risk factors below identify risks relating to our industry, Company and common shares. These risks may not cover all and future applicable risk factors applicable to the Company.
Risks Relating to Our Industry
The seaborne transportation industry is cyclical and volatile, and this may lead to reductions in our charter hire rates, vessel values and results of operations.
The international seaborne transportation industry is both cyclical and volatile in terms of charter hire rates and profitability. The degree of charter hire rate volatility for vessels has varied widely. A worsening of current global economic conditions may cause the charter rates applicable to our vessels to decline and thereby adversely affect our ability to charter or re-charter our vessels and any renewal or replacement charters that we enter into, may not be sufficient to allow us to operate our vessels profitably. In addition, armed conflicts, including those in Ukraine, in Israel and Gaza and in the Red Sea, disrupt energy production and trade patterns, including shipping in the Black Sea and elsewhere, and its impact on energy demand and costs is expected to remain uncertain. Fluctuations in charter hire rates result from changes in the supply of and demand for vessel capacity and changes in the supply of and demand for energy resources, commodities, semi-finished and finished consumer and industrial products internationally carried at sea. If we enter into a charter when charterhirecharter hire rates are low, our revenues and earnings will be adversely affected. In addition, a decline in charterhirecharter hire rates is likely to cause the market value of our vessels to decline. We cannot assure you that we will be able to successfully charter our vessels in the future or renew our existing charters at rates sufficient to allow us to operate our business profitably, meet our obligations or pay dividends to our shareholders. The factors affecting the supply and demand for vessels are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable.
Factors that influence demand for vessel capacity include:
•supply of and demand for and seaborne transportation of energy resources, commodities, and semi-finished and finished consumer and industrial products;
•national policies regarding strategic oil inventories (including if strategic reserves are set at a lower level in the future as oil decreases in the energy mix);
•changes in the exploration for and production of energy resources, commodities, semi-finished and finished consumer and industrial products;
•changes in the locationproduction levels of regionalcrude oil (including in particular production by OPEC, the U.S. and globalother key producers);
•any restriction on crude oil production imposed by OPEC and manufacturing facilities;non-OPEC oil producing countries;
•the location of consuming regions for energy resources, commodities, semi-finished and finished consumer and industrial products;
•the location of regional and global exploration, production and manufacturing facilities;
•competition from, supply of and demand for alternative sources of energy;
•the globalization of production and manufacturing;
•global and regional economic and political conditions, developments in international trade, including armed conflicts, terrorist activities, embargoesthe increased vessel attacks and strikes;piracy in the Red Sea in connection with the conflict between Israel and Hamas and fluctuations in industrial and agricultural production;
•economic slowdowns caused by public health events;
•disruptions and developments in international trade;
•regional availability of refining capacity and inventories compared to geographies of oil production regions;
•changes in seaborne and other transportation patterns, including the distance cargo is transported by sea;
environmental and other regulatory developments;
currency exchange rates; and
weather and natural disasters.
Factors that influence the supply of vessel capacity include:
the number of newbuilding deliveries;
the scrapping rate of older vessels;
sea, changes in the price of steelcrude oil and vessel equipment;
related benchmarks, and changes in trade patterns;
•changes in governmental and maritime self-regulatory organizations’ rules and regulations or actions taken by regulatory authorities;
•environmental concerns and otheruncertainty around new regulations thatin relation to, amongst others, new technologies which may limitdelay the useful livesordering of new vessels;
vessel casualties;•international sanctions, embargoes, import and export restrictions, nationalizations, piracy, terrorist attacks and armed conflicts, including the conflicts between Russia and Ukraine and between Israel and Hamas;
•changes in government subsidies of shipbuilding;
•construction or expansion of new or existing pipelines or railways; and
•currency exchange rates, most importantly versus the number of vessels that are out of service; andUnited States Dollar, or USD.
port or canal congestion.
Demand for our vessels and charter hire rates are dependent upon, among other things, seasonal and regional changes in demand and changes to the capacity of the world fleet. We believe the capacity of the world fleet is likely to increase, and thereThere can be no assurance that global economic growth will be at a rate sufficient to utilize thisexisting or new capacity. Continued adverse economic, political or social conditions or other developments including inflationary pressure and the conflicts between Russia and Ukraine and between Israel and Hamas, could further negatively impact charter hire rates, and therefore have a material adverse effect on our business, results of operations and ability to pay dividends.
Factors that influence the supply of vessel capacity include:
•supply and demand for energy resources and oil and petroleum products;
•demand for alternative energy sources;
•the number and size of newbuilding orders and deliveries, including slippage in deliveries, as may be impacted by the availability of financing for shipping activity;
•the degree of scrapping or recycling of older vessels, depending, among other things, on scrapping or recycling rates or international scrapping or recycling regulations;
•the price of steel and vessel equipment;
•product imbalances (affecting the level of trading activity) and developments in international trade;
•changes in environmental and other regulations that may limit the useful lives of vessels;
•the number of vessels that are out of service, namely those that are laid-up, dry-docked, arrested, awaiting repairs after damage or accident, or otherwise not available for hire;
•availability of financing for new vessels and shipping activity;
•changes in national or international regulations that may effectively cause reductions in the carrying capacity of vessels or early obsolescence of tonnage;
•changes in environmental and other regulations that may limit the useful lives of vessels or require costly overhauls;
•the number of vessels used as storage units;
•port and/or canal congestion, and weather delays;
•business disruptions, including supply chain disruptions and congestion, due to natural and other disasters;
•sanctions (in particular sanctions on Russia, Iran and Venezuela, among other countries and individuals); and
▪technological advances in vessel design, capacity, propulsion technology and fuel consumption efficiency.
In addition to the prevailing and anticipated freight rates, factors that affect the rate of newbuilding, recycling and laying-up include newbuilding prices, secondhand vessel values in relation to recycling prices, costs of bunkers and other operating costs, costs associated with classification society surveys, normal maintenance costs, insurance coverage costs, the efficiency, age and sophistication profile of the existing fleet in the market, and government and industry regulation of maritime transportation practices, particularly environmental protection laws and regulations. These factors influencing the supply of and demand for shipping capacity are outside of our control, and we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.
An over-supply of vessel capacity may lead to reductions in charter hire rates, vessel values and profitability.
The supply of vessels generally increases with deliveries of new vessels and decreases with the scrappingrecycling of older vessels, conversion of vessels to other uses, such as floating production and storage facilities, and loss of tonnage as a result of casualties. An over-supply of vessel capacity, combined with a decline in the demand for such vessels, may result in a reduction of charter hire rates. Upon the expiration or termination of our vessels'vessels’ current charters, if we are unable to re-charter our vessels at rates sufficient to allow us to operate our vessels profitably or at all itsuch inability, would have a material adverse effect on our revenues and profitability.
Our business is affected by macroeconomic conditions, including rising inflation, interest rates, market volatility, economic uncertainty and supply chain constraints.
Various macroeconomic factors could adversely affect our business and the results of our operations and financial condition, including changes in inflation, interest rates and overall economic conditions and uncertainties such as those resulting from the current and future conditions in the global financial markets. For instance, inflation has negatively impacted us by increasing our labor costs, through higher wages and higher interest rates, and operating costs. Supply chain constraints have led to higher inflation, which if sustained could have a negative impact on our product development and operations. If inflation or other factors were to significantly increase, our business operations may be negatively affected. Interest rates, the liquidity of the credit markets and the volatility of the capital markets could also affect the operation of our business and our ability to raise capital on favorable terms, or at all, in order to fund our operations.
Increased inflation, including rising prices for items, such as fuel, parts and components, freight, packaging, supplies, labor and energy increases the Company’s operating costs. The Company does not currently use financial derivatives to hedge against volatility in commodity prices. The Company uses market prices for materials, fuel, parts and components. The Company may be unable to pass these rising costs onto its customers. To mitigate this exposure, the Company attempts to include cost escalation clauses in its longer-term marine transportation contracts whereby certain costs, including fuel, can largely be passed through to its customers. Results of operations and margin performance can be negatively affected if the Company is unable to mitigate the impact of these cost increases through contractual means and is unable to increase prices to sufficiently offset the effect of these cost increases.
Materials, components, and equipment essential to the Company’s operations are normally readily available, and shortages as a result of supply chain disruptions can adversely impact the Company’s operations, particularly where the Company has a limited number of suppliers. Many of the items essential to the Company’s business require the use of shipping services to transport them to the Company’s facilities. Shipping delays or disruptions may result in operational slowdowns, especially where materials, components, or equipment are necessary to complete an order for the Company’s customers, particularly in the marine transportation segment. These constraints could have a material adverse effect on the Company and contribute to increased buildup of inventories. In addition, price increases imposed by the Company’s vendors for materials and shipping services used in its business, and the inability to pass these increases through to its customers, could have a material adverse effect on the Company.
The world economy continues to face a number of actual and potential challenges, including the war between Ukraine and Russia and between Israel and Hamas, current trade tension between the United States and China, political instability in the Middle East and the South China Sea region and other geographic countries and areas, terrorist or other attacks, war (or threatened war) or international hostilities, such as those between the United States and China, North Korea or Iran, and epidemics or pandemics, such as COVID-19, banking crises or failures, such as the recent notable regional bank failures in the United States, and real estate crises, such as the crisis in China. In addition, the continuing conflict in Ukraine led to increased economic uncertainty amidst fears of a more generalized military conflict or significant inflationary pressures, due to the increases in fuel and grain prices following the sanctions imposed on Russia. Furthermore, the intensity and duration of the war between Israel and Hamas is difficult to predict and its impact on the world economy is uncertain. Whether the present dislocation in the markets and resultant inflationary pressures will transition to a long-term inflationary environment is uncertain, and the effects of such a development on charter rates, vessel demand and operating expenses in the sector in which we operate are uncertain.
The current state of the worldglobal financial markets and current economic conditions may result in a general reduction in the availability of equity and debt finance, which would have a material adverseadversely impact on our results of operations,operation, financial condition, and cash flows and could causeability to obtain financing or refinance our existing and future credit facilities on acceptable terms, which may negatively impact our business.
Major market disruptions and adverse changes in market conditions and regulatory climate in China, the market price ofUnited States, the European Union and worldwide may adversely affect our common sharesbusiness or impair our ability to decline.
Globalborrow amounts under credit facilities or any future financial arrangements. Credit markets and economic conditionsthe debt and equity capital markets have at times in the past been distressed and continue to be, volatile. The amountthere is uncertainty surrounding the future of available capital from commercial lenders remains below levels seen before the global financial crisis. There has been a general decline in the willingness by banks and other financial institutions to extend credit markets, particularly infor the shipping and offshore industries, due to the historically volatile asset values of vessels and drilling units. As the shipping and offshore industries are highly dependent on the availability of credit to finance and expand operations, it has been and may continue to be negatively affected by this decline.industry.
Also, as a result of concerns about the stability of financial markets generally, and the solvency of counterparties specifically, the availability and cost of obtaining money from the public and private equity and debt markets hasmay become more difficult. Many lenders have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at all or on terms similar to current debt, and reduced, and in some cases ceased, to provide funding to borrowers and other market participants, including equity and debt investors, and some have been unwilling to invest on attractive terms or even at all. Due to these factors, we cannot be certain that financing will be available if needed and to the extent required, or that we will be able to refinance our existing and future credit facilities, on acceptable terms.terms or at all. If financing or refinancing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due or we may be unable to enhance our existing business, complete additional vessel acquisitions or otherwise take advantage of business opportunities as they arise.
Continuing concerns over inflation, rising interest rates, energy costs, geopolitical issues, including acts of war and the availability and cost of credit have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with volatile oil prices, declining business and consumer confidence, have precipitated fears of a possible economic recession. Domestic and international equity markets continue to experience heightened volatility and turmoil. The weakness in the global economy has caused, and may continue to cause, a decrease in worldwide demand for certain goods and, thus, shipping.
As of December 31, 2017,2023, we had total outstanding indebtedness of $2.3$2.2 billion under our various credit facilities, lease debt financing and bond loans includingand a further $0.4 billion of finance lease obligations. In addition, we had a further $0.2 billion of finance lease obligations in our equity-accounted subsidiaries.associated companies.
If economic conditions throughout the world deteriorate or become more volatile, it could impede our operations.
Our ability to secure funding is dependent on well-functioning capital marketsoperations inside and on an appetite to provide funding to the shipping industry. At present, capital markets are well-functioning and funding is available for the shipping industry. However, if global economic conditions worsen or lenders for any reason decide not to provide debt financing to us, we may not be able to secure additional financing to the extent required, on acceptable terms or at all. If additional financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due, or we may be unable to enhance our existing business, complete additional vessel acquisitions or otherwise take advantage of business opportunities as they arise.
The world economy faces a number of challenges, including the effects of volatile oil prices, continuing turmoil and hostilities in the Middle East, the Korean Peninsula, North Africa and other geographic areas and countries. If one or more of the major national or regional economies should weaken, there is a substantial risk that such a downturn will impact the world economy. There has historically been a strong link between the development of the world economy and demand for energy, including oil and gas.
In Europe, large sovereign debts and fiscal deficits, low growth prospects and high unemployment rates in a number of countries have contributed to the rise of Eurosceptic parties, which would like their countries to leave the Euro. The exitoutside of the United Kingdom fromStates expose us to global risks, such as political instability, terrorist or other attacks, war, international hostilities, economic sanctions restrictions and global public health concerns, which may affect the European Unionseaborne transportation industry, and potential new trade policies inadversely affect our business.
We are an international company and primarily conduct our operations outside of the United States, further increase the risk of additional trade protectionism.
In China, a transformation of the Chinese economy is underway, as China transforms from a production-driven economy towards a service or consumer-driven economy. The Chinese economic transition implies that we do not expect the Chinese economy to return to double digit GDP growth rates in the near term. The quarterly year-over-year growth rate of China's GDP was approximately 6.9% for the year ending December 31, 2017, and despite slightly increasing from approximately 6.7% for the year ended December 31, 2016, continues to remain below pre-2008 levels. Furthermore, there is a rising threat of a Chinese financial crisis resulting from massive personal and corporate indebtedness.
While the recent developments in Europe and China have been without significant immediate impact on our charter rates, an extended period of deterioration in the world economy could reduce the overall demand for our services. Such changes could adversely affect our future performance,business, results of operations, cash flows, financial condition and financial position.ability to pay dividends, if any, in the future may be adversely affected by changing economic, political and government conditions in the countries and regions where our vessels or rigs are employed or registered. Moreover, we operate in a sector of the economy that is likely to be adversely impacted by the effects of political conflicts.
Credit markets
Currently, the world economy continues to face a number of actual and potential challenges, including the war between Ukraine and Russia and between Israel and Hamas, current trade tension between the United States and China, political instability in the Middle East and the South China Sea region and other geographic countries and areas, terrorist or other attacks, war (or threatened war) or international hostilities, such as those between the United States and China, North Korea or Iran, and epidemics or pandemics, such as COVID-19, banking crises or failures, such as the recent notable regional bank failures in the United States, and Europe havereal estate crises, such as the decreasing real estate values in China.
In the past, political instability has also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the past experienced significant contraction, de-leveragingArabian Gulf region and reduced liquidity, and there is a risk that U.S. federal government and state governments and European authorities continue to implement a broad variety of governmental action and/or new regulation of the financial markets. Global financial markets and economic conditions have been, and continue to be, volatile.
We face risks attendant to changes in economic environments, changes in interest rates and instabilitymost recently in the bankingBlack Sea in connection with the conflict between Russia and securities markets aroundUkraine and in connection with the world, among other factors. We cannot predict how longrecent attacks by the current market conditions will last. TheseHouthi movement in the Red Sea following the recent conflicts between Israel and developing economicHamas. Acts of terrorism and governmental factors maypiracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia. Any of these occurrences could have a material adverse effect on our results of operations and financial condition and may cause the price of our common shares to decline.
Prospective investors should consider the potential impact uncertainty and risk associated with the development in the wider global economy. Further economic downturn in any of these countries could have a material effect on our future performance, results of operations,operation, cash flows and financial position.
Beginning in February of 2022, President Biden and several European leaders announced various economic sanctions against Russia in connection with the aforementioned conflict in the Ukraine, which may adversely impact our business, given Russia’s role as a major global exporter of crude oil and natural gas. The United States has implemented the Russian Harmful Foreign Activities Sanctions program, which includes prohibitions on the import of certain Russian energy products into the United States, including crude oil, petroleum, petroleum fuels, oils, liquefied natural gas and coal, as well as prohibitions on all new investments in Russia by U.S. persons, among other restrictions. Furthermore, the United States has also prohibited a variety of specified services related to the maritime transport of Russian Federation origin crude oil and petroleum products, including trading/commodities brokering, financing, shipping, insurance (including reinsurance and protection and indemnity), flagging, and customs brokering. These prohibitions took effect on December 5, 2022, with respect to the maritime transport of crude oil and took effect on February 5, 2023 with respect to the maritime transport of other petroleum products. An exception exists to permit such services when the price of the seaborne Russian oil does not exceed the relevant price cap but implementation of this price exception relies on a recordkeeping and attestation process that allows each party in the supply chain of seaborne Russian oil to demonstrate or confirm that oil has been purchased at or below the price cap. Violations of the price cap policy or the risk that information, documentation, or attestations provided by parties in the supply chain are later determined to be false may pose additional risks adversely affecting our business.
In addition, on February 24, 2023, the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued a new determination pursuant to Section 1(a)(i) of Executive Order 14024, which enables the imposition of sanctions on individuals and entities who operate or have operated in the metals and mining sector of the Russian economy. Increased restrictions on the metals and mining sector may pose additional risks adversely affecting our business.
Our business could also be adversely impacted by trade tariffs, trade embargoes or other economic sanctions that limit trading activities by the United States or other countries against countries in the Middle East, Asia or elsewhere as a result of terrorist attacks, hostilities or diplomatic or political pressures, including as a result of the current conflict between Israel and Hamas.
Safety, environmental and other governmental and other requirements expose us to liability, and compliance with current and future regulations could require significant additional expenditures, which could have a material adverse effect on our business and financial results.
Our operations are affected by extensive and changing international, national, state and local laws, regulations, treaties, conventions and standards in force in international waters, the jurisdictions in which our tankers and other vessels operate, and the country or countries in which such vessels are registered, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions, and water discharges and ballast and bilge water management. These regulations include, but are not limited to, the U.S. Oil Pollution Act of 1990, or OPA, requirements of the U.S. Coast Guard, or the USCG, and the U.S. Environmental Protection Agency, or EPA, the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Water Act, the U.S. Maritime Transportation Security Act of 2002, and regulations of the International Maritime Organization, or IMO, including the International Convention for the Safety of Life at Sea of 1974, or SOLAS, the International Convention for the Prevention of Pollution from Ships of 1973, or MARPOL, including the designation thereunder of Emission Control Areas, or ECAs, the International Convention on Civil Liability for Oil Pollution Damage of 1969, or CLC, and the International Convention on Load Lines of 1966. In particular, IMO’s Marine Environmental Protection Committee ("MEPC") 73, amendments to Annex VI prohibiting the carriage of bunkers above 0.5% sulfur on ships took effect March 1, 2020 and may cause us to incur substantial costs. Compliance with these regulations could have a material adverse effect our business and financial results.
In addition, vessel classification societies and the requirements set forth in the IMO'sIMO’s International Management Code for the Safe Operation of Ships and for Pollution Prevention, or the ISM Code, also impose significant safety and other requirements on our vessels. In complying with current and future environmental requirements, vessel owners and operators may also incur significant additional costs in meeting new maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Government regulation of vessels, particularly in the areas of safety and environmental requirements, can be expected to become stricter in the future and require us to incur significant capital expenditures on our vessels to keep them in compliance, or even to scraprecycle or sell certain vessels altogether.
Many of these requirements are designed to reduce the risk of oil spills and other pollution, and our compliance with these requirements can be costly. These requirements can also affect the resale value or useful lives of our vessels, require reductions in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports.
Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, natural resource damages and third-party claims for personal injury or property damages, in the event that there is a release of petroleum or other hazardous substances from our vessels or otherwise in connection with our current or historic operations. WeA failure to comply with applicable environmental laws and regulations, or to obtain or maintain necessary environmental permits or approvals, or a non-compliant release of oil or other hazardous substances in connection with our drilling contracts could also incur substantialsubject us to significant administrative and civil fines and penalties, fines and other civil or criminal sanctions, includingremediation costs for natural resource damages, third-party damages, material adverse publicity and, in certain instances, seizure or detention of our vessels, as a result of violations of or liabilities under environmental laws, regulations and other requirements. vessels.
Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. For example, OPA affects all vessel owners shipping oil to, from or within the United States. Under OPA, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil in U.S. waters, including the 200 nautical mile exclusive economic zone around the United States. Similarly, the CLC, which has been adopted by most countries outside of the United States, imposes liability for oil pollution in international waters. OPA expressly permits individual states to impose their own liability regimes with regard to hazardous materials and oil pollution incidents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA. Coastal states in the United States have enacted pollution prevention liability and response laws, many providing for unlimited liability.
Furthermore, if a major industry incident, such as the 2010 explosion of the drilling rig Deepwater Horizon, which is unrelated to Ship Finance,in the Macondo Prospect of the U.S. Gulf of Mexico and the subsequent release of oil, into the Gulf of Mexico, or otherwhich is unrelated to SFL, was to occur again, this could lead to a regulatory response which may result in further increased operating costs and exposures. Such events have resulted in increased, and may result in further, regulation of the shipping and offshore industries and modifications to statutory liability schemes, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. These safety regulations may impact our operations and financial results by adding to the costs of exploring for, developing and producing oil and gas in offshore settings. For instance, in 2016, the U.S. Bureau of Safety and Environmental Enforcement’s (“BSEE”) published a final rule that sets more stringent design requirements and operational procedures for critical well control equipment used in offshore oil and gas drilling and separately announced a risk-based inspection program for offshore facilities. Additionally, the BSEE published the final Well Control Rule, effective October 23, 2023, which aims to enhance worker safety and prevent offshore blowouts in oil and gas drilling rigs. In 2016, the U.S. Bureau of Ocean Energy Management ("BOEM") issued a final Notice to Lessees and Operators imposing more stringent supplemental bonding procedures for the decommissioning of offshore wells, platforms and pipelines. These regulations, which may result in additional costs for us, have since become the subject of additional review and possible revision by BSEE and BOEM and, as a result, we cannot predict their impact on our future operations. The EU also has undertaken a significant revision of its safety requirements for offshore oil and gas activities through the issue of the EU Directive 2013/30 on the Safety of Offshore Oil and Gas Operations. These other future safety and environmental laws and regulations regarding offshore oil and gas exploration and development may increase the cost of our operations, lead our customers to not pursue certain offshore opportunities and result in additional downtime for our drilling rigs.
We may incur substantial losses and be subject to liability claims as a result of catastrophic events, such as oil spills, that we may not be insured for, or our insurance may be inadequate to protect us against these risks.
Our operations are subject to all of the hazards and operating risks associated with drilling for and production of oil and natural gas, including natural disasters, the risk of fire, explosions, blowouts, surface cratering, uncontrollable flows of natural gas, oil and formation water, pipe or pipeline failures, abnormally pressured formations, casing collapses and environmental hazards such as oil spills, natural gas leaks, ruptures or discharges of toxic gases, all of which could cause substantial financial losses.
An oil spill could also result in significant liability, including fines, penalties, criminal liability and remediation costs for natural resource damages under other international and U.S. federal, state and local laws, as well as third-party damages, and could harm our reputation with current or potential charterers of our vessels. We are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover certain environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will not have a material adverse effect on our business, results of operations, cash flows and financial condition and available cash.
Some laws may expose us to liability for the conduct of, or conditions caused by, third parties (including customers and subcontractors), or for acts that were in compliance with all applicable laws at the time they were performed. Further, some of these laws and regulations may impose direct and strict liability, rendering a company or a person liable for environmental damage without regard to negligence. We are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents and the insurance may not be sufficient to cover all such risks and may at times become materially more costly to acquire.
We have generally been able to obtain some degree of contractual indemnification pursuant to which our customers agree to hold harmless and indemnify SFL against liability for pollution, well and environmental damage. However, generally in the oil and natural gas services industry there is increasing pressure from customers to pass on a larger portion of the liabilities to contractors, as part of their risk management policies. Further, there can be no assurance that we can obtain indemnities in our contracts or that, in the event of extensive pollution and environmental damage, its customers would have the financial capability to fulfil their contractual obligations. Further, such indemnities may be deemed legally unenforceable based on relevant law, including as a result of public policy.
The insurance coverage we currently hold may not be available in the future, or we may not obtain certain insurance coverage. Even if insurance is available and we have obtained the coverage, it may not be adequate to cover our liabilities, may not be available on satisfactory terms and/or subject to high premiums, or our insurance underwriters may be unable to pay compensation if a significant claim should occur. Any of these scenarios could have a material adverse effect on our business, operating results and financial condition.
The IMO 2020 regulations may cause us to incur substantial costs and to procure low-sulfur fuel oil directly on the wholesale market for storage at sea and onward consumption on our vessels.
Effective January 1, 2020, the IMO implemented a new regulation for a 0.50% global sulfur cap on emissions from vessels (the “IMO 2020 Regulations”). Under this new global cap, vessels are required to use marine fuels with a sulfur content of no more than 0.50% against the former regulations specifying a maximum of 3.50% sulfur in an effort to reduce the emission of sulfur oxides into the atmosphere.
We have incurred increased costs to comply with these revised standards. Additional or new conventions, laws and regulations may be adopted that could require, among others, the installation of expensive emission control systems and could adversely affect our business, results of operations, cash flows and financial condition.
We continue to work closely with suppliers and producers on alternative mechanisms with a view to secure availability of qualitative compliant fuel oil and mitigate exposure to volatility in prices between high sulfur fuel oil and low sulfur fuel oil. The procurement of large quantities of low sulfur fuel oil has introduced a commodity price risk with fluctuations in the prices of the procured commodity between the time of the purchase and the consumption. While we may implement financial strategies with a view to limiting the risk, we cannot give any assurances that such strategies will be successful in which case we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operation and cash flows. The onward consumption on our vessels of the procured commodity requires us to blend, co-mingle or otherwise combine, handle or manipulate such commodities which implies certain operational risks that may result in loss of or damage to the procured commodities or to the vessels and their machinery.
While over three years have passed since the IMO 2020 Regulations became effective, it is still uncertain how the availability of high-sulfur fuel around the world will be affected by implementation of these regulations. Both the availability of compliant fuel and the price of high-sulfur fuel generally and the difference between the cost of high-sulfur fuel and that of low-sulfur fuel are also uncertain. As of March 14, 2024, 29 of our owned or leased vessels and four vessels that are included in our associated companies are equipped with exhaust gas cleaning systems ("EGCS" or "scrubbers"). As of January 1, 2020, we have transitioned to burning IMO compliant fuels in our vessels where scrubbers have not been installed. We continue to evaluate different options in complying with IMO and other rules and regulations. Our fuel costs and fuel inventories have increased as a result of these sulfur emission regulations. Low sulfur fuel is more expensive than standard marine fuel containing 3.5% sulfur content and may become more expensive or difficult to obtain as a result of increased demand. If the cost differential between low sulfur fuel and high sulfur fuel is significantly higher than anticipated, or if low sulfur fuel is not available at ports on certain trading routes, it may not be feasible or competitive to operate our vessels on certain trading routes without installing scrubbers or without incurring deviation time to obtain compliant fuel. Scrubbers may not be available to be installed on such vessels at a favorable cost or at all if we seek them at a later date. Further, there is risk that if the fuel spread between high sulfur fuel oil and low sulfur fuel oil decreases, we may not be able to recover the investments we have made in our scrubbers within our expected timeframes or at all.
Fuel is a significant, if not the largest, expense in our shipping operations when vessels are under voyage charter and is an important factor in negotiating charter rates. Our operations and the performance of our vessels, and as a result our results of operations, cash flows and financial position, may be negatively affected to the extent that compliant sulfur fuel oils are unavailable, of low or inconsistent quality, if de-bunkering facilities are unavailable to permit our vessels to accept compliant fuels when required, or upon occurrence of any of the other foregoing events. Costs of compliance with these and other related regulatory changes may be significant and may have a material adverse effect on our future performance, results of operations, cash flows and financial position. As a result, an increase in the price of fuel beyond our expectations may adversely affect our profitability at the time of charter negotiation. Further, fuel may become much more expensive in the future, which may reduce the profitability and competitiveness of our business versus other forms of transportation, such as truck or rail.
Developments in safety and environmental requirements relating to the recycling of vessels may result in escalated and unexpected costs.
The 2009 Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (the “Hong Kong Convention”), aims to ensure ships, being recycled once they reach the end of their operational lives do not pose any unnecessary risks to the environment, human health and safety. In June 2023, the Hong Kong Convention was ratified by the required number of countries, and this will enter into force in June 2025. Upon the Hong Kong Convention's entry into force, each ship sent for recycling will have to carry an inventory of its hazardous materials. The hazardous materials, whose use or installation are prohibited in certain circumstances, are listed in an appendix to the Hong Kong Convention. Ships will be required to have surveys to verify their inventory of hazardous materials initially, throughout their lives and prior to the ship being recycled.
On November 20, 2013, the European Parliament and the Council of the EU adopted the EU Ship Recycling Regulation, or ESSR, which, among other things, retains the requirements of the Hong Kong Convention and requires that certain commercial seagoing vessels flying the flag of an EU member state may be recycled only in facilities included on the European list of permitted ship recycling facilities.
Apart from that, any vessel, including ours, is required to set up and maintain an Inventory of Hazardous Materials from December 31, 2018 for EU flagged new ships and from December 31, 2020 for EU flagged existing ships and non-EU flagged ships calling at a port or anchorage of an EU member state. Such a system includes information on the hazardous materials with a quantity above the threshold values specified in the relevant EU Resolution and are identified in ship’s structure and equipment. This inventory should be properly maintained and updated, especially after repairs, conversions or unscheduled maintenance on board the ship.
Under the ESSR, commercial EU-flagged vessels of 500 gross tonnage and above may be recycled only at shipyards included on the European List of Authorised Ship Recycling Facilities (the “European List”). The European List presently includes eight facilities in Turkey but no facilities in the major ship recycling countries in Asia. The combined capacity of the European List facilities may prove insufficient to absorb the total recycling volume of EU-flagged vessels. This circumstance, taken in tandem with the possible decrease in cash sales, may result in longer wait times for divestment of recyclable vessels as well as downward pressure on the purchase prices offered by European List shipyards. Furthermore, facilities located in the major ship recycling countries generally offer significantly higher vessel purchase prices, and as such, the requirement that we utilize only European List shipyards may negatively impact revenue from the residual values of our vessels.
In addition, on December 31, 2018, the European Waste Shipment Regulation, or EWSR, requires that non-EU flagged ships departing from EU ports be recycled only in Organisation for Economic Cooperation and Development, or OECD, member countries. In March 2018, the Rotterdam District Court ruled that the sale of four recyclable vessels by third-party Dutch ship owner Seatrade to cash buyers, who then reflagged and resold the vessels to non-OECD country recycling yards, were effectively indirect sales to non-OECD country yards, in violation of the EWSR. If European Union Member State courts widely adopt this analysis, it may negatively impact revenue from the residual values of our vessels and we may be subject to a heightened risk of non-compliance, due diligence obligations and costs in instances where we sell older ships to cash buyers.
These regulatory requirements, may lead to cost escalation by shipyards, repair yards and recycling yards. This may then result in a decrease in the residual recycling value of a vessel, which could potentially not cover the cost to comply with the latest requirements, which may have an adverse effect on our future performance, results of operation, cash flows and financial position.
Climate change and greenhouse gas restrictions may adversely impact our operations and markets.
Due to concern over the risk of climate change, a number of countries and the IMO have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emissions. These regulatory measures may include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. More specifically, on October 27, 2016, the IMO’s MEPC announced its decision concerning the implementation of regulations mandating a reduction in sulfur emissions from 3.5% to 0.5% as of the beginning of January 1, 2020. Additionally, in April 2018, nations at the MEPC 72 adopted an initial strategy to reduce greenhouse gas emissions from ships. The initial strategy identifies levels of ambition to reducing greenhouse gas emissions, including (i) decreasing the carbon intensity from ships through implementation of further phases of the EEDI for new ships; (ii) reducing carbon dioxide emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008 emission levels; and (iii) reducing the total annual greenhouse emissions by at least 50% by 2050 compared to 2008 while pursuing efforts towards phasing them out entirely. In July 2023, MEPC 80 adopted a revised strategy, which includes an enhanced common ambition to reach net-zero greenhouse gas emissions from international shipping around or close to 2050, a commitment to ensure an uptake of alternative zero and near-zero greenhouse gas fuels by 2030, as well as i). reducing the total annual greenhouse gas emissions from international shipping by at least 20%, striving for 30%, by 2030, compared to 2008; and ii). reducing the total annual greenhouse gas emissions from international shipping by at least 70%, striving for 80%, by 2040, compared to 2008.
The European Commission has proposed adding shipping to the Emission Trading Scheme (ETS) as of 2023 with a phase-in period. It is expected that shipowners will need to purchase and surrender a number of emission allowances that represent their recorded carbon emission exposure for a specific reporting period. The person or organization responsible for the compliance with the EU Emissions Trading System (“EU ETS”) should be the shipping company, defined as the shipowner or any other organization or person, such as the manager or the bareboat charterer, that has assumed the responsibility for the operation of the ship from the shipowner. On December 18, 2022, the Environmental Council and European Parliament agreed to include maritime shipping emissions within the scope of the EU ETS on a gradual introduction of obligations for shipping companies to surrender allowances: 40% for verified emissions from 2024, 70% for 2025 and 100% for 2026. Most large vessels will be included in the scope of the EU ETS from the start. Big offshore vessels of 5,000 gross tonnage and above will be included in the 'MRV' on the monitoring, reporting and verification of CO2 emissions from maritime transport regulation from 2025 and in the EU ETS from 2027. General cargo vessels and offshore vessels between 400-5,000 gross tonnage will be included in the MRV regulation from 2025 and their inclusion in EU ETS will be reviewed in 2026. Furthermore, starting from January 1, 2026, the ETS regulations will expand to include emissions of two additional greenhouse gases: nitrous oxide and methane. Compliance with the Maritime EU ETS could result in additional compliance and administration costs to properly incorporate the provisions of the Directive into our business routines. Additional EU regulations which are part of the EU’s Fit-for-55, could also affect our financial position in terms of compliance and administration costs when they take effect.
Since January 1, 2020, ships must either remove sulfur from emissions or buy fuel with low sulfur content, which may lead to increased costs and supplementary investments for ship owners. The interpretation of “fuel oil used on board” includes use in main engine, auxiliary engines and boilers. Shipowners must comply with this regulation by (i) using 0.5% sulfur fuels on board, which are available around the world but at a higher cost; (ii) installing scrubbers for cleaning of the exhaust gas; or (iii) by retrofitting vessels to be powered by alternative fuels, which may not be a viable option due to the lack of supply network and high costs involved in this process. Costs of compliance with these regulatory changes may be significant and may have a material adverse effect on our future performance, results of operation, cash flows and financial position.
On November 13, 2021, the Glasgow Climate Pact was announced following discussions at the 2021 United Nations Climate Change Conference (“COP26”). The Glasgow Climate Pact calls for signatory states to voluntarily phase out fossil fuels subsidies. A shift away from these products could potentially affect the demand for our vessels and negatively impact our future business, operating results, cash flows and financial position. COP26 also produced the Clydebank Declaration, in which 22 signatory states (including the United States and United Kingdom) announced their intention to voluntarily support the establishment of zero-emission shipping routes. Governmental and investor pressure to voluntarily participate in these green shipping routes could cause us to incur significant additional expenses to “green” our vessels.
Territorial taxonomy regulations in geographies where we are operating and are regulatorily liable might jeopardize the level of access to capital. For example, EU has already introduced a set of criteria for economic activities which should be framed as ‘green’, called EU Taxonomy. As long as we are an EU-based company meeting the NFRD prerequisites, we will be eligible for reporting our Taxonomy eligibility and alignment. Based on the current version of the Regulation, companies that own assets shipping fossil fuels are considered as not aligned with EU Taxonomy. The outcome of such provision might be either an increase in the cost of capital and/or gradually reduced access to financing as a result of financial institutions’ compliance with EU Taxonomy.
In addition, although the emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which required adopting countries to implement national programs to reduce emissions of certain gases, or the Paris Agreement (discussed further below), a new treaty may be adopted in the future that includes restrictions on shipping emissions. Compliance with changes in laws, regulations and obligations relating to climate change may affect the propulsion options in subsequent vessel designs and could increase our costs related to acquiring new vessels, operating and maintaining our existing vessels and require us to install new emission controls, acquire allowances or pay taxes related to our greenhouse gas emissions or administer and manage a greenhouse gas emissions program. Revenue generation and strategic growth opportunities may also be adversely affected.
Adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also adversely affect demand for our services. For example, increased regulation of greenhouse gases or other concerns relating to climate change may reduce the demand for oil and gas in the future or create greater incentives for use of alternative energy sources and alternate modes of transporting goods. In addition, the physical effects of climate change, including changes in weather patterns, extreme weather events, rising sea levels, scarcity of water resources, may negatively impact our operations. Any long-term material adverse effect on the oil and gas industry could have a significant financial and operational adverse impact on our business that we cannot predict with certainty at this time.
Regulations relating to ballast water discharge coming into effect during September 2019 may adversely affect our revenues and profitability.
The IMO has imposed updated guidelines offor ballast water management systems specifying the maximum amount of viable organisms allowed to be discharged from a vessel’s ballast water. Depending on the date of the International Oil Pollution Prevention ("IOPP"(“IOPP”) renewal survey, existing vessels constructed before September 8, 2017 must comply with the updated D-2 standardDischarge Performance Standard (“D-2 standard”) on or after September 8, 2019. Ships constructed on or after September 8, 2017 are to comply with the D-2 standards on or after September 8, 2017. For most vessels, compliance with the D-2 standard will involve installing on-board systems to treat ballast water and to eliminate unwanted organisms. organisms, which may incur substantial costs.
Furthermore, United States regulations are currently changing. Although the 2013 Vessel General Permit (“VGP”) program and U.S. National Invasive Species Act (“NISA”) are currently in effect to regulate ballast discharge, exchange and installation, the Vessel Incidental Discharge Act (“VIDA”), which was signed into law on December 4, 2018, requires that the U.S. Environmental Protection Agency, or EPA, develop national standards of performance for approximately 30 discharges, similar to those found in the VGP within two years. On October 26, 2020, the EPA published a Notice of Proposed Rulemaking for Vessel Incidental Discharge National Standards of Performance under VIDA. On October 18, 2023, the EPA published a supplemental notice of the proposed rule sharing new ballast water data received from the U.S. Coast Guard (“USCG”) and providing clarification on the proposed rule. The public comment period for the proposed rule ended on December 18, 2023. Once EPA finalizes the rule (possibly by Fall 2024), USCG must develop corresponding implementation, compliance and enforcement regulations regarding ballast water within two years. The new regulations could require the installation of new equipment, which may cause us to incur substantial costs.
MEPC 75 introduced draft amendments to Annex VI which impose new regulations to reduce greenhouse gas emissions from ships. These amendments introduce requirements to assess and measure the energy efficiency of all ships and set the required attainment values, with the goal of reducing the carbon intensity of international shipping. To achieve a 40% reduction in carbon emissions by 2030 compared to 2008, shipping companies are required to include: (i) a technical requirement to reduce carbon intensity based on a new Energy Efficiency Existing Ship Index (“EEXI”), and (ii) operational carbon intensity reduction requirements, based on a new operational carbon intensity indicator (“CII”). The EEXI is required to be calculated for ships of 400 gross tonnage and above. The IMO and MEPC will calculate “required” EEXI levels based on the vessel’s technical design, such as vessel type, date of creation, size and baseline. Additionally, an “attained” EEXI will be calculated to determine the actual energy efficiency of the vessel. A vessel’s attained EEXI must be less than the vessel’s required EEXI. Non-compliant vessels will have to upgrade their engine to continue to travel. With respect to the CII, the draft amendments would require ships of 5,000 gross tonnage to document and verify their actual annual operational CII achieved against a determined required annual operational CII. The vessel’s attained CII must be lower than its required CII. Vessels that continually receive subpar CII ratings will be required to submit corrective action plans to ensure compliance. MEPC 79 also adopted amendments to MARPOL Annex VI, Appendix IX to include the attained and required CII values, the CII rating and attained EEXI for existing ships in the required information to be submitted to the IMO Ship Fuel Oil Consumption Database. MEPC 79 revised the EEDI calculation guidelines to include a CO2 conversion factor for ethane, a reference to the updated ITCC guidelines, and a clarification that in case of a ship with multiple load line certificates, the maximum certified summer draft should be used when determining the deadweight. The amendments will enter into force on May 1, 2024. In July 2023,
MEPC 80 approved the plan for reviewing CII regulations and guidelines, which must be completed at the latest by January 1, 2026. There will be no immediate changes to the CII framework, including correction factors and voyage adjustments, before the review is completed.
Additionally, MEPC 75 proposed draft amendments requiring that, on or before January 1, 2023, all ships above 400 gross tonnage must have an approved Ship Energy Efficiency Management Plan, or SEEMP, on board. For ships above 5,000 gross tonnage, the SEEMP would need to include certain mandatory content. MEPC 75 also approved draft amendments to MARPOL Annex I to prohibit the use and carriage for use as fuel of heavy fuel oil by ships in Arctic waters on and after July 1, 2024. The draft amendments introduced at MEPC 75 were adopted at the MEPC 76 session held on June 2021, entered into force on November 1, 2022 and became effective on January 1, 2023.
We currently have 16eight vessels that are on fixed price management agreements with Frontline Management (Bermuda) Ltd., or Frontline Management, and Golden Ocean Group Management (Bermuda) Ltd, or Golden Ocean Management, which include the cost of complying with regulations. We have 25an additional nine vessels employed under bareboat charters where the cost of fitting ballast water treatment systems would lie with the charterer, if such vessel is still employed under the relevant bareboat charter at the time the regulations become applicable. We also have 2849 vessels employed in the spot market or under time charter agreements. Seven of theseThese have either already been fitted with ballast water treatment systems and the remainder are scheduled to beor will have them fitted within the required deadlines. The costs of compliance may be substantial and adversely affect our revenues and profitability.
Acts of piracy on ocean-going vessels could adversely affect our profitability.
A shift in consumer demand from oil towards other energy sources or changes to trade patterns for crude oil or refined oil products may have a material adverse effect on our business.
Acts
A significant portion of piracy have historically affected ocean-going vessels. At present, most piracyour earnings are related to the oil industry. A shift in or disruption of the consumer demand from oil towards other energy resources such as electricity, natural gas, liquefied natural gas, renewable energy or hydrogen will potentially affect the demand for certain of our vessels and armed robbery incidents are recurrent inrigs. A shift from the Gulfuse of Aden region off the coast of Somalia, Gulf of Guinea region off Nigeria, South China Sea, Sulu Sea and Celebes Sea. Sporadic incidents of robbery are also reported in many parts of Asia. The political turmoil in the Middle East regioninternal combustion engine vehicles to electric vehicles may also leadreduce the demand for oil. These factors could have a material adverse effect on our future performance, results of operation, cash flows and financial position.
“Peak oil” is the year when the maximum rate of extraction of oil is reached. While the International Energy Agency (“IEA”) recently announced a forecast of “peak oil” during the late 2020s, OPEC maintains that “peak oil” will not be reached until at least 2040, despite transition toward other energy sources. Irrespective of “peak oil”, the continuing shift in consumer demand from oil towards other energy resources such as wind energy, solar energy, hydrogen energy, nuclear energy or renewable energy, which appears to collateral damagesbe accelerating as a result of shifts in waters off Yemen. The current diplomatic crisis between Gulf Co-operation Council (GCC) countriesgovernment commitments and support for energy transition programs, may lead to an uncertain security situation in the Middle East region.
The security arrangements made for ship staff and vessels to counteract the ever-evolving security threat and to comply with Best Management Practices (BMP) add to the cost of operations of our ships.
The "war risks" areas are established by the Joint War Risks Committee. Our vessels have to trade in such areas due to the nature of our business. Due to the above issues when vessels trade in such areas, the insurance premiums are increased significantly to cover for the additional risks.
The above factors could have a material adverse effect on our future performance, results of operations, cash flows and financial position.
The IEA noted in its Global Electric Vehicles (“EV”) Outlook 2023 that a total of 14% of all new cars sold were electric in 2022, up from around 9% in 2021 and less than 5% in 2020. Electric car sales in 2023 were 14.1 million, up 34% from 2022. Under the IEA Stated Policies Scenario (STEPS), the global outlook for the share of electric car sales based on existing policies and firm objectives has increased to 35% in 2030, up from less than 25% in the previous outlook. The IEA has stated that, based on existing policies, oil demand from road transport is projected to peak around 2025 in the STEPS, with the amount of oil displaced by electric vehicles exceeding five million barrels per day in 2030. A growth in EVs or a slowdown in imports or exports of crude oil products worldwide may result in decreased demand for our vessels and lower charter rates, which could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.
Our
Seaborne trading and distribution patterns are primarily influenced by the relative advantage of the various sources of production, locations of consumption, pricing differentials and seasonality. Changes to the trade patterns of crude oil or refined oil products may have a significant negative or positive impact on the revenue per ton of freight per mile and therefore the demand for our tankers. This could have a material adverse effect on our future performance, results of operation, cash flows and financial position.
If our vessels may call onat ports located in or our rigs operate in countries or territories that are the subject to restrictionsof sanctions or embargoes imposed by the U.S. government, the European Union, the United Nations or other governments, whichgovernmental authorities, it could lead to monetary fines or penalties and adversely affect our reputation and the market for our common shares.shares and its trading price.
From time to time on charterers' instructions, our vessels may call andWe have called on ports locatednot engaged in shipping or drilling activities in countries subject toor territories or with government-controlled entities in 2023 in violation of any applicable sanctions andor embargoes imposed by the U.S. government, the EU, the United Nations or other applicable governmental authorities. Our contracts with our charterers may prohibit them from causing our vessels to call on ports located in sanctioned countries or territories or carrying cargo for entities that are the subject of sanctions. Although our charterers may, in certain causes, control the operation of our vessels, we have monitoring processes in place reasonably designed to ensure our compliance with applicable economic sanctions and countries identified byembargo laws. Nevertheless it remains possible that our charterers may cause our vessels to trade in violation of sanctions provisions without our consent. If such activities result in a violation of applicable sanctions or embargo laws, we could be subject to monetary fines, penalties, or other sanctions, and our reputation and the market for our common shares could be adversely affected.
U.S. government as state sponsorssanctions exist under a strict liability regime. A party need not know it is violating sanctions and need not intend to violate sanctions to be liable. We could be subject to monetary fines, penalties, or other sanctions for violating applicable sanctions or embargo laws even in circumstances where our conduct, or the conduct of terrorism, such as Iran, North Korea, Sudan and Syria. a charterer, is consistent with our sanctions-related policies, unintentional or inadvertent.
The U.S.applicable sanctions and embargo laws and regulations of these different jurisdictions vary in their application as theyand do not all apply to the same covered persons or proscribe the same activities, and suchactivities. In addition, the sanctions and embargo laws and regulations of each jurisdiction may be amended to increase or strengthenedreduce the restrictions they impose over time. With effect from July 1, 2010,time, and the U.S. enactedlists of persons and entities designated under these laws and regulations are amended frequently. Moreover, most sanctions regimes provide that entities owned or controlled by the Comprehensive Iran Sanctions Accountability and Divestment Act,persons or CISADA, which expanded the scope of the Iran Sanctions Act. Among other things, CISADA expands the application of the prohibitions to companiesentities designated in such as ours, and introduces limits on the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products. In addition, on May 1, 2012, President Obama signed Executive Order 13608 which prohibits foreign persons from violating or attempting to violate, or causing a violation of any sanctions in effect against Iran or facilitating any deceptive transactions for or on behalf of any personlists are also subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will be deemed a foreign sanctions evader and will be banned from all contacts with the United States, including conducting business in U.S. dollars. Also in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act, which created new sanctions and strengthened existing sanctions. Among other things, the Iran Threat Reduction Act intensifies existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran's petroleum or petrochemical sector. The Iran Threat Reduction Act also includes a provision requiring the President of the United States to impose five or more sanctions from Section 6(a) of the Iran Sanctions Act, as amended, on a person the President determines is a controlling beneficial owner of, or otherwise owns, operates, or controls or insures a vessel that was used to transport crude oil from Iran to another country and (1) if the person is a controlling beneficial owner of the vessel, the person had actual knowledge the vessel was so used or (2) if the person otherwise owns, operates, or controls, or insures the vessel, the person knew or should have known the vessel was so used. Such a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from financial transactions subject to U.S. jurisdiction, and exclusion of that person's vessels from U.S. ports for up to two years.
On November 24, 2013, the P5+1 (the United States, United Kingdom, Germany, France, Russia and China) entered into an interim agreement with Iran entitled the "Joint Plan of Action", or JPOA. Under the JPOA it was agreed that, in exchange for Iran taking certain voluntary measures to ensure that its nuclear program is only used for peaceful purposes, the U.S. and EU would voluntarily suspend certainhave enacted new sanctions for a period of six months. On January 20, 2014, the U.S. and EU indicated that they would begin implementing the temporary relief measures provided for under the JPOA. The JPOA was subsequently extended twice.
On July 14, 2015, the P5+1 and the EU announced that they had reached a landmark agreement with Iran titled the Joint Comprehensive Plan of Action Regarding the Islamic Republic of Iran's Nuclear Program, or the JCPOA, to significantly restrict Iran's ability to develop and produce nuclear weapons for 10 years while simultaneously easing sanctions directed towards non-U.S. persons for conduct involving Iran, but taking place outside of U.S. jurisdiction and not involving U.S. persons. On January 16, 2016, or Implementation Day, the United States joined the EU and the UNprograms in lifting a significant number of their nuclear-related sanctions on Iran following an announcement by the International Atomic Energy Agency, or IAEA, that Iran had satisfied its respective obligations under the JCPOA.
U.S. sanctions prohibiting certain conduct that is now permitted under the JCPOA have not actually been repealed or permanently terminated at this time. Rather, the U.S. government has implemented changes to the sanctions regime by: (1) issuing waivers of certain statutory sanctions provisions; (2) committing to refrain from exercising certain discretionary sanctions authorities; (3) removing certain individuals and entities from the sanctions lists of the Office of Foreign Assets Control; and (4) revoking certain Executive Orders and specified sections of Executive Orders. These sanctions will not be permanently “lifted” until the earlier of “Transition Day,” set to occur on October 20, 2023, or upon a report from the IAEA stating that all nuclear material in Iran is being used for peaceful activities. On October 13, 2017, President Trump announced he would not certify Iran’s compliance with the JCPOA. This did not withdraw the U.S. from the JCPOA or reinstate any sanctions. However, President Trump must periodically renew sanctions waivers and his refusal to do so could result in the reinstatement of certain sanctions suspended under the JCPOA.
In addition to the sanctions against Iran, subject to certain exceptions, U.S. law continues to restrict U.S. owned or controlled entities from doing business with Cuba and various U.S. sanctions have certain other extraterritorial effects that need to be considered by non-U.S. companies. Moreover, any U.S. person who serves as an officer, director or employee of our subsidiaries would be fully subject to U.S. sanctions. It should also be noted that other governments are more frequently implementing sanctions regimes.
We do not currently have any shipping or drilling contracts or plans to initiate any shipping or drilling contracts involving operations inrecent years. Additional countries or territories, as well as additional persons or entities within or affiliated with government-controlled entities that are subject to sanctionsthose countries or territories, have, and embargoes imposed by the U.S. government and/or identified by the U.S. government as state sponsors of terrorism. However, we may in the future enter into shipping and drilling contractswill, become the target of sanctions. These require us to be diligent in ensuring our compliance with countries or government-controlled entities that are subject to sanctions and embargoes imposed bylaws. Further, the U.S. government and/has increased its focus on sanctions enforcement with respect to the shipping sector. Current or identified by the U.S. government as state sponsorsfuture counterparties of terrorism, or we may enter into shipping and drilling contracts involving operations in countries or with government-controlled entities that are subject to sanctions and embargoes imposed by the U.S government and/or identified by the U.S. government as state sponsors of terrorism. While entering into such contracts would not violate U.S. law, it could potentially negatively affect our ability to obtain investors. In some cases, U.S. investors would be prohibited from investing in an arrangement in which the proceeds could directly or indirectly be transferred to or may benefit a sanctioned entity. Moreover, even though the investment would not violate U.S. law, potential investors could view such shipping and drilling contracts negatively, which could adversely affect our reputation and the market for our shares.
Certain of our charterers or other parties that we have entered into contracts withours may be affiliated with persons or entities that are or may be in the future the subject toof sanctions or embargoes imposed by the U.S. administration, the European UnionUnited States, EU, and/or other international bodies as a result of the annexation of Crimea by Russia in March 2014.bodies. If we determine that such sanctions require us to terminate existing chartersor future contracts to which we, or our subsidiaries, are party or if we are found to be in violation of such applicable sanctions, our results of operations may be adversely affected, or we may suffer reputational harm. We may also experience damage to our reputation if the vessels we have sold are being used in sanctioned activity in violation of the contract of sale, either by the buyer or by a third party.
As a result of Russia’s actions in Ukraine and the war between Israel and Hamas, the U.S., EU and United Kingdom, together with numerous other countries and self-sanctioning, have imposed significant economic sanctions which may adversely affect our ability to operate in the region and also restrict parties whose cargo we carry. Sanctions against Russia have also placed significant prohibitions on the maritime transportation of seaborne Russian oil, the importation of certain Russian energy products and other goods, and new investments in the Russian Federation. These sanctions further limit the scope of permissible operations including the maintenance of our vessels and the services provided to our vessels and crew while operating in these regions, and cargo we may carry. We may also encounter potential contractual disputes with charterers and insurers due to the various sanctions targeting Russian interests and Russian cargo.
Although we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations in 2023, and intend to maintain such compliance, there can be no assurance that we or our charterers will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and conduct our business, and could result in our reputation and the markets for our securities to be adversely affected and/or in some investors deciding, or being required, to divest their interest, or not to invest, in us. Many of our loan agreements include obligations to comply with applicable sanctions, and any violation could result in accelerated repayment of borrowings and severely impact our ability to access loan finance. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries or territories identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our common stockshares may adversely affect the price at which our common stock trades.shares trade. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be adversely affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries or territories that are the subject of certain U.S. sanctions or embargo laws, or engaging in operations associated with those countries or territories pursuant to contracts with third parties that are unrelated to those countries or territories or entities controlled by their governments. Investor perception of the value of our common stock may be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.countries or territories that we operate in.
In the highly competitive international seaborne transportation industry, we may not be able to compete for charters with new entrants or established companies with greater resources, and as a result we may be unable to employ our vessels profitably.
We employ our vessels in a highly competitive market that is capital intensive and highly fragmented, and competition arises primarily from other vessel owners. Competition for seaborne transportation of goods and products is intense and depends on charter rates and the location, size, age, condition and acceptability of the vessel and its operators to charterers. Due in part to the highly fragmented market, competitors with greater resources could operate larger fleets than we may operate and thus be able to offer lower charter rates and higher quality vessels than we are able to offer. If this were to occur, we may be unable to retain or attract new charterers on attractive terms or at all, which may have a material adverse effect on our business, financial condition and results of operations. Although we believe that no single competitor has a dominant position in the markets in which we compete, we are aware that certain competitors may be able to devote greater financial and other resources to certain activities than we can, resulting in a significant competitive threat to us. We cannot give assurances that we will continue to compete successfully with our competitors or that these factors will not erode our competitive position in the future.
The offshore contract drilling industry is highly competitive and cyclical.
Increased inspection procedures, tighter import
Our industry is highly competitive, and export controlsour contracts are traditionally awarded on a competitive bid basis. Pricing, safety records and new security regulations could increase costscompetency are key factors in determining which qualified contractor is awarded a contract. Rig availability, location and disrupt our business.
International shipping is subject to various security and customs inspection and related procedures in countries of origin, destination and trans-shipment points. Inspection procedurestechnical capabilities also can resultbe significant factors in the seizure ofdetermination. If we are not able to compete successfully, our revenues and profitability may decline.
Given the contents ofhigh capital requirements that are inherent in the offshore drilling industry, we may also be unable to invest in new technologies or expand in the future as may be necessary for us to succeed in this industry, while our vessels, delayslarger competitors with superior financial resources, and in loading, offloading or delivery,many cases less leverage than we have, may be able to respond more rapidly to changing market demands and compete more efficiently on price for drillship and drilling rig employment. We may not be able to maintain our competitive position, and we believe that competition for contracts will continue to be intense in the future. Our inability to compete successfully in the offshore drilling industry may reduce our revenues and profitability.
Demand for offshore contract drilling services is highly cyclical, which is primarily driven by the demand for drilling rigs and the levyingavailable supply of customs duties, finesdrilling rigs. Demand for drilling rigs is driven by the levels of offshore exploration and development conducted by oil and natural gas companies, which is beyond our control and may fluctuate substantially from year-to-year and from region-to-region.
Prolonged periods of reduced demand or other penalties against us.
It is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Changes to inspection procedures could also impose additional costs and obligations on our customersexcess rig supply have required us, and may in certain cases, render the shipmentfuture require us, to idle, sell or scrap rigs and enter into low day rate contracts or contracts with unfavorable terms. There can be no assurance that the current demand for drilling rigs will increase in the future or that any short-term improvement to market conditions will be sustained. Any further decline in demand for drilling rigs or oversupply of certain typesdrilling rigs could materially adversely affect our financial position, operating results or cash flows.
Future exploration and drilling results are uncertain and involve substantial risks and costs.
Drilling for oil involves numerous risks, including the risk that our customers to whom we have drilling contracts with, may not encounter commercially productive reservoirs. The costs of cargo uneconomicaldrilling, completing and operating wells are often uncertain, and drilling operations may be curtailed, delayed or impractical.canceled as a result of a variety of factors, including:
•unexpected drilling conditions;
•title problems;
•pressure or irregularities in formations;
•equipment failures or accidents;
•inflation in exploration and drilling costs;
•fires, explosions, blowouts or surface cratering;
•lack of, or disruption in, access to pipelines or other transportation methods; and
•shortages or delays in the availability of services or delivery of equipment.
We could experience periods of higher costs as activity levels fluctuate or if oil and natural gas prices rise. These increases could reduce our profitability, cash flow, and ability to complete development activities as planned.
An increase in oil and natural gas prices or other factors could result in increased development activity and investment in our areas of operations, which may increase competition for and cost of equipment, labor and supplies. Shortages of, or increasing costs for, experienced drilling crews and equipment, labor or supplies could restrict our operators’ ability to conduct desired or expected operations. In addition, capital and operating costs in the oil and natural gas industry have generally risen during periods of increasing oil and natural gas prices as producers seek to increase production in order to capitalize on higher oil and natural gas prices. In situations where cost inflation exceeds oil and natural gas price inflation, our profitability and cash flow, and our operators’ ability to complete development activities as scheduled and on budget, may be negatively impacted. Any such changesdelay in the drilling of new wells or developments may have a material adverse effect onsignificant increase in drilling costs could reduce our business, financial conditionrevenues and results of operations.profitability.
The offshore drilling sector and also demand for offshore support vessels dependdepends primarily on the level of activity in the offshore oil and gas industry, which is significantly affected by, among other things, volatile oil and gas prices, and may be materially and adversely affected by a decline in the offshore oil and gas industry.
The offshore contract drilling industry and also demand for offshore support vessels is cyclical and volatile and depends on the level of activity in oil and gas exploration and development and production in offshore areas worldwide. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments affect our customers' drilling campaigns. Oil and gas prices, and market expectations of potential changes in these prices, also significantly affect the level of activity and demand for drilling units.rigs.
Oil and gas prices are extremely volatile and are affected by numerous factors beyond our control, including the following:
•worldwide production and demand for oil and gas;
•the cost of exploring for, developing, producing and delivering oil and gas;
•expectations regarding future energy prices;
•advances in exploration, development and production technology;
•the ability of the Organization of Petroleum Exporting Countries, or OPEC to set and maintain production levels and pricing;
•the level of production in non-OPEC countries;
•international sanctions on oil-producing countries or the lifting of such sanctions;
•government regulations, including restrictions on offshore transportation of oil and gas;
•local and international political, economic and weather conditions;
•domestic and foreign tax policies;
•the development and implementation of policies to increase the use of renewable energy;
•increased supply of oil and gas from onshore hydraulic fracturing and shale development, and the relative costs of offshore and onshore production of oil and gas;
•worldwide economic and financial problems and any resulting decline in demand for oil and gas and, consequently, our services;
•the policies of various governments regarding exploration and development of their oil and gas reserves;
•accidents, severe weather, natural disasters and other similar incidents relating to the oil and gas industry; and
•the worldwide military and political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities, insurrection, or other crises in the Middle East, eastern Europe or other geographic areas, or further acts of terrorism in the United States, Europe or elsewhere.elsewhere, including the conflicts between Russia and Ukraine and between Israel and Hamas.
Recent declines inLower oil and gas prices have negatively affected, and could continue to negatively affect, the offshore drilling sector and have resulted, and could continue to result, in reduced exploration and drilling. These reductions in commodity prices have reduced the demand for drilling units.rigs. Continued weakness in oil and gas prices may result in an excess supply of drilling unitsrigs and intensify competition in the industry, which may result in drilling units,rigs, particularly older and lower specification drilling units,rigs, being idle for long periods of time. We cannot predict the future level of demand for drilling unitsrigs or future conditions of the oil and gas industry.
As an example of the volatility in oil prices, Brent fell to $9 per barrel in April 2020 before a recovery in oil and gas prices toward the end of 2020-early 2021 and continuing through part of 2022, during which time Brent rose above $120 per barrel, and fell to $82 per barrel in December 2022. In 2023, oil prices averaged $83 per barrel, down from an average of $101 per barrel in 2022 as global markets adjusted to new trade dynamics as global crude oil demand fell short of expectations, offsetting the impacts from OPEC+ crude oil supply curbs. However, there is no guarantee that the oil and gas price recovery will be sustained. Prices can continue to fluctuate and there may be longer periods of lower prices.
The supply of rigs in the market has, as a result of longer periods of significant fluctuations in oil and gas prices, continued to outweigh the demand. This trend may continue, and therefore have a damping effect on utilization levels and dayrates across all segments in 2024.
Continued periods of low demand can cause excess rig supply and intensify competition in our industry, which often results in drilling rigs, particularly older and less technologically-advanced drilling rigs, being idle for long periods of time. We cannot predict the future level of demand for drilling rigs or future condition of the oil and gas industry with any degree of certainty. Any future decrease in exploration, development or production expenditures by oil and gas companies could further reduce our revenues and materially harm our business.
In addition to oil and gas prices, the offshore drilling industry is influenced by additional factors, including:
•the availability of competing offshore drilling units;rigs;
•rising interest rates and the availability of debt financing on reasonableacceptable terms;
•the level of costs for associated offshore oilfield and construction services;
•the availability of personnel for offshore drilling rigs;
•oil and gas transportation costs;
•the level of rig operating costs, including crew and maintenance;
•the taxation imposed on the exploration and production activity in the relevant jurisdiction;
•the discovery of new oil and gas reserves;
•the cost of non-conventional hydrocarbons, such as the exploitation of oil sands;
•the political and military environment of oil and gas reserve jurisdictions;
•regulatory restrictions on offshore drilling.drilling; and
•inflationary pressures and supply chain disruptions.
Any of these factors could reduce demand for our offshore drilling assets and adversely affect our business and results of operations.
An over-supply of drilling units has led to a reduction in day-rates and therefore has adversely affected the ability of certain of our rig charterers to make lease payments to us.
We have leased two of our drilling units to two subsidiaries of Seadrill, namely Seadrill Deepwater Charterer Ltd., or Seadrill Deepwater, and Seadrill Offshore AS, or Seadrill Offshore. In addition, we have chartered one drilling unit to North Atlantic Linus Charterer Ltd., or North Atlantic Linus, which is a subsidiary of North Atlantic Drilling Limited, or NADL. The performance under the above leases is guaranteed by Seadrill, and Seadrill Deepwater, Seadrill Offshore and North Atlantic Linus are collectively referred to as the Seadrill Charterers. Following the 2008 peak in the oil price of around $140 per barrel, there was a period of high utilization and high dayrates, which prompted industry participants to increase the supply of drilling units by ordering the construction of new drilling units. The reduction in oil prices since 2014 has resulted in reduced demand for drilling units, which has adversely affected the Seadrill Charterers' ability to secure drilling contracts and, therefore, their ability to make lease payments to us.
In addition, the new construction of high-specification units, as well as changes in the Seadrill Charterers' competitors' drilling rig fleets, could cause our drilling units to become less competitive.
In September 2017, Seadrill announced that it has entered into a restructuring agreement (the “Restructuring Plan”) with more than 97% of its secured bank lenders, approximately 40% of its bondholders and a consortium of investors led by its largest shareholder, Hemen Holding Limited, or Hemen, who is also the largest shareholder in the Company. The Company and our three subsidiaries owning the relevant drilling units have also entered into the Restructuring Plan, which will be implemented by way of prearranged chapter 11 cases. In February 2018, Seadrill announced that it had succeeded in reaching a global settlement with an ad hoc group of bondholders, the official committee of unsecured creditors, and other major creditors in its chapter 11 cases. As a result of the settlement, approximately 70% of Seadrill's bondholders by principal amount have now signed up to the Restructuring Plan. Please see risk factor entitled, “Recently Seadrill announced that they reached a global settlement in its Chapter 11 proceedings. Although Seadrill has confirmed that its business operations remain unaffected by its restructuring efforts at this time, we may be adversely impacted if the Restructuring Plan is not approved by the court.”
One of the rigs leased to the Seadrill Charterers, the West Taurus, is currently idle, as the Seadrill Charterers have not been able to secure new drilling contracts in the current market. In the event that the Seadrill Charterers default on their obligations under the leases and the drilling units are redelivered to us, there is a significant risk that we would not be able to secure new employment for the rigs in the current market, which may have a material adverse effect on our business and our ability to pay dividends.
We also have one jack-up drilling rig, the Soehanah, which has been employed, since June 2017, on a one year bareboat charter with a one year option to extend on behalf of the charterer. If the charter is not extended, there is a significant risk that we would not be able to secure new employment for the rig in the current market.
Governmental laws and regulations, including environmental laws and regulations, may add to the costs of the Seadrill Charterers or other charterers of our drilling units, or limit their drilling activity, and may adversely affect their ability to make lease payments to us.
The Seadrill Charterers' business in the offshore drilling industry is affected by public policy and laws and regulations relating to the energy industry and the environment in the geographic areas where they operate.
The offshore drilling industry is dependent on demand for services from the oil and gas exploration and production industry, and, accordingly, the Seadrill Charterers are directly affected by the adoption of laws and regulations that, for economic, environmental or other policy reasons, curtail exploration and development drilling for oil and gas. The Seadrill Charterers may be required to make significant capital expenditures to comply with governmental laws and regulations. It is also possible that these laws and regulations may in the future add significantly to the Seadrill Charterers' operating costs or significantly limit drilling activity. Governments in some countries are increasingly active in regulating and controlling the ownership of concessions, the exploration for oil and gas, and other aspects of the oil and gas industries. In recent years, increased concern has been raised over protection of the environment. Offshore drilling in certain areas has been opposed by environmental groups, and has in certain cases been restricted. For example, on December 20, 2016, the former United States President and Canadian Prime Minister announced a ban on offshore oil and gas drilling in large areas of the Arctic and the Atlantic Seaboard. It is presently unclear how long these bans will remain in effect. Further operations in less developed countries can be subject to legal systems that are not as mature or predictable as those in more developed countries, which can lead to greater uncertainty in legal matters and proceedings.
In certain jurisdictions there are or may be imposed restrictions or limitations on the operation of foreign flag vessels and rigs, and these restrictions may prevent us or our charterers from operating our assets as intended. We cannot guarantee that we or our charterers will be able to accommodate such restrictions or limitations, nor that we or our charterers can relocate the assets to other jurisdictions where such restrictions or limitations do not apply. A violation of such restrictions, or expropriation in particular, could result in the total loss of our investments and/or financial loss for our charterers, and we cannot guarantee that we have sufficient insurance coverage to compensate for such loss. This may have a material adverse effect on our business and financial results.
To the extent that new laws are enacted or other governmental actions are taken that prohibit or restrict offshore drilling or impose additional environmental protection requirements that result in increased costs to the oil and gas industry in general or the offshore drilling industry in particular, the Seadrill Charterers' business or prospects could be materially adversely affected. The operation of our drilling units will require certain governmental approvals, the number and prerequisites of which cannot be determined until the Seadrill Charterers identify the jurisdictions in which they will operate upon securing contracts for the drilling units. Depending on the jurisdiction, these governmental approvals may involve public hearings and costly undertakings on the part of the Seadrill Charterers. The Seadrill Charterers may not obtain such approvals, or such approvals may not be obtained in a timely manner. If the Seadrill Charterers fail to secure the necessary approvals or permits in a timely manner, their customers may have the right to terminate or seek to renegotiate their drilling services contracts to the Seadrill Charterers' detriment. The amendment or modification of existing laws and regulations, or the adoption of new laws and regulations curtailing or further regulating exploratory or development drilling and production of oil and gas, could have a material adverse effect on the Seadrill Charterers' business, operating results or financial condition. Future earnings of the Seadrill Charterers may be negatively affected by compliance with any such new legislation or regulations. In addition, the Seadrill Charterers may become subject to additional laws and regulations as a result of future rig operations or repositioning. These factors may adversely affect the ability of the Seadrill Charterers to make lease payments to us.
We rely on our information systems to conduct our business, and failure to protect these systems against security breaches could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.
The efficient operation of our business, including processing, transmitting and storing electronic and financial information, is dependent on computer hardware and software systems. Information systems are vulnerable to security breaches by computer hackers and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information systems. However, these measures and technology may not adequately prevent security breaches. In addition, the unavailability of the information systems or the failure of these systems to perform as anticipated for any reason could disrupt our business and could result in decreased performance and increased operating costs, causing our business and results of operations to suffer. Any significant interruption or failure of our information systems or any significant breach of security could adversely affect our business and results of operations.
New technologies may cause our current drilling methods to become obsolete, resulting in an adverse effect on our business.
The offshore contract drilling industry is subject to the introduction of new drilling techniques and services using new technologies, some of which may be subject to patent protection. As competitors and others use or develop new technologies, we may be placed at a competitive disadvantage and competitive pressures may force us to implement new technologies at substantial cost. In addition, competitors may have greater financial, technical and personnel resources that allow them to benefit from technological advantages and implement new technologies before we can. We may not be able to implement technologies on a timely basis or at a cost that is acceptable to us.
Increased inspection procedures, tighter import and export controls and new security regulations could increase costs and cause disruption of our business.
International shipping is subject to security and customs inspection and related procedures in countries of origin, destination and trans-shipment points. Under the U.S. Maritime Transportation Security Act of 2002 (the "MTSA"), the USCG issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States and at certain ports and facilities. These security procedures can result in the seizure of the contents of our vessels, delays in the loading, offloading or trans-shipment, and the levying of customs duties, fines or other penalties against exporters or importers and, in some cases, carriers.
Future changes to the existing security procedures could impose additional financial and legal obligations on us. Changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical. Any such changes or developments may have a material adverse effect on our business, financial condition and results of operations.
We rely on our information security management system to conduct our business, and failure to protect this system against security breaches could adversely affect our business and results of operations, including on our vessels and rigs. Additionally, if this system fails or becomes unavailable for any significant period of time, our business could be harmed.
The safety and security of our vessels and efficient operation of our business, including processing, transmitting and storing electronic and financial information, depend on computer hardware and software systems, which are increasingly vulnerable to security breaches and other disruptions. Any significant interruption or failure of our information security management system or any significant breach of security could adversely affect our business and results of operations.
Our vessels rely on our information security management system for a significant part of their operations, including navigation, provision of services, propulsion, machinery management, power control, communications and cargo management. We have in place safety and security measures on our vessels, rigs and onshore operations to secure against cyber-security attacks and any disruption. However, these measures and technology may not adequately prevent security breaches despite our continuous efforts to upgrade and address the latest known threats, which are constantly evolving and have become increasing sophisticated. If these threats are not recognized or detected until they have been launched, we may be unable to anticipate these threats and may not become aware in a timely manner of such a security breach, which could exacerbate any damage we experience. A disruption to the information security management system relating to any of our vessels could lead to, among other things, incorrect routing, collision, grounding and propulsion failure.
Beyond our vessels and rigs, we rely on industry accepted security measures and technology to securely maintain confidential and proprietary information maintained on our information security management system. However, these measures and technology may not adequately prevent security breaches. The technology and other controls and processes designed to secure our confidential and proprietary information, detect and remedy any unauthorized access to that information were designed to obtain reasonable, but not absolute, assurance that such information is secure and that any unauthorized access is identified and addressed appropriately. Such controls may in the future fail to prevent or detect, unauthorized access to our confidential and proprietary information. In addition, the foregoing events could result in violations of applicable privacy and other laws. If confidential information is inappropriately accessed and used by a third party or an employee for illegal purposes, we may be responsible to the affected individuals for any losses they may have incurred as a result of misappropriation. In such an instance, we may also be subject to regulatory action, investigation or liable to a governmental authority for fines or penalties associated with a lapse in the integrity and security of our information security management system.
We may be required to expend significant capital and other resources to protect against and remedy any potential or existing security breaches and their consequences. A cyber-attack could also lead to litigation, fines, other remedial action, heightened regulatory scrutiny and diminished customer confidence. In addition, our remediation efforts may not be successful, and we may not have adequate insurance to cover these losses.
The unavailability of the information security management system or the failure of this system to perform as anticipated for any reason could disrupt our business and could have a material adverse effect on our business, results of operations, cash flows and financial condition.
Additionally, cybersecurity researchers have observed increased cyberattack activity, and warned of heightened risks of cyberattacks, in connection with the conflicts between Russia and Ukraine and between Israel and Hamas. To the extent such attacks have collateral effects on global critical infrastructure or financial institutions, such developments could adversely affect our business, operating results and financial condition. At this time, it is difficult to assess the likelihood of such threat and any potential impact at this time.
Furthermore, cybersecurity continues to be a key priority for regulators around the world, and some jurisdictions have enacted laws requiring companies to notify individuals or the general investing public of data security breaches involving certain types of personal data, including the SEC, which, on July 26, 2023, adopted amendments requiring the prompt public disclosure of certain cybersecurity breaches. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our businesses, liability to investors, regulatory intervention or reputational damage.
For more information on our cybersecurity risk management and strategy, please see “Item 16K. Cybersecurity.”
Increasing scrutiny and changing expectations from investors, lenders and other market participants with respect to our Environmental, Social and Governance policies may impose additional costs on us or expose us to additional risks.
Companies across all industries are facing increasing scrutiny relating to their ESG policies. Investor advocacy groups, certain institutional investors, investment funds, lenders and other market participants are increasingly focused on ESG practices and in recent years have placed increasing importance on the implications and social cost of their investments. Companies which do not adapt to or comply with investor, lender or other industry shareholder expectations and standards, which are evolving, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage, costs related to litigation, and the business, financial condition, and/or stock price of such a company could be materially and adversely affected.
In February 2021, the Acting Chair of the SEC issued a statement directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings and in March 2021 the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement (the “Task Force”). The Task Force’s goal is to develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment. To implement the Task Force’s purpose, the SEC has taken several enforcement actions, with the first enforcement action taking place in May 2022, and promulgated new rules. On March 21, 2022, the SEC proposed that all public companies are to include extensive climate-related information in their SEC filings. On May 25, 2022, SEC proposed a second set of rules aiming to curb the practice of "greenwashing" (i.e., making unfounded claims about one's ESG efforts) and would add proposed amendments to rules and reporting forms that apply to registered investment companies and advisers, advisers exempt from registration, and business development companies. On March 6, 2024, the SEC adopted final rules to require registrants to disclose certain climate-related information in SEC filings of all public companies. The final rules require companies to disclose, among other things: material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant's board of directors' oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant's business, results of operations, or financial condition. Further, to facilitate investors' assessment of certain climate-related risks, the final rules require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions on a phased-in basis when those emissions are material; the filing of an attestation report covering the required disclosure of such registrants’ Scope 1 and/or Scope 2 emissions, also on a phased-in basis; and disclosure of the financial statement effects of severe weather events and other natural conditions including, for example, costs and losses. The final rules include a phased-in compliance period for all registrants, with the compliance date dependent on the registrant’s filer status and the content of the disclosure.
We may face increasing pressures from investors, lenders and other market participants, who are increasingly focused on climate change, to prioritize sustainable energy practices, reduce our carbon footprint and promote sustainability. As a result, we may be required to implement more stringent ESG procedures or standards so that our existing and future investors and lenders remain invested in us and make further investments in us, especially given the highly focused and specific trade of crude oil transportation in which we are engaged. Such ESG corporate transformation calls for an increased resource allocation to serve the necessary changes in that sector, increasing costs and capital expenditure. If we do not meet these standards, our business and/or our ability to access capital could be harmed.
Additionally, certain investors and lenders may exclude fossil fuel-related companies, such as us, from their investing portfolios altogether due to environmental, social and governance factors. These limitations in both the debt and equity capital markets may affect our ability to grow as our plans for growth may include accessing the equity and debt capital markets. If those markets are unavailable, or if we are unable to access alternative means of financing on acceptable terms, or at all, we may be unable to implement our business strategy, which would have a material adverse effect on our financial condition and results of operations and impair our ability to service our indebtedness. Further, it is likely that we will incur additional costs and require additional resources to monitor, report and comply with wide ranging ESG requirements. The occurrence of any of the foregoing could have a material adverse effect on our business and financial condition.
See further details of our ESG efforts at “Item 4.B.—Business Overview” and our latest Environmental Social Governance Report, which may be found on our website at https://www.sflcorp.com/esg/. The information on our website is not incorporated by reference into this annual report.
Technological innovation and quality and efficiency requirements from our customers could reduce our charter hire income and the value of our vessels and may cause our current drilling methods to become obsolete.
Our customers, in particular those in the oil industry, have a high and increasing focus on quality and compliance standards with their suppliers across the entire supply chain, including the shipping and transportation segment. Our continued compliance with these standards and quality requirements is vital for our operations. The charter hire rates and the value and operational life of a vessel are determined by a number of factors including the vessel’s efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge cargo quickly. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and straits. The length of a vessel’s physical life is related to its original design and construction, its maintenance and the impact of the stress of operations. More technologically advanced vessels have been built since the owned or leased vessels in our fleet, which have an average age of approximately 11 years as of December 31, 2023, were constructed and vessels with further advancements may be built that are even more efficient or more flexible or have longer physical lives, including new vessels powered by alternative fuels or which are otherwise perceived as more environmentally friendly by charterers. We face competition from companies with more modern vessels having more fuel efficient designs than our vessels, or eco vessels, and if new vessels are built that are more efficient or more flexible or have longer physical lives than the current eco vessels, competition from the current eco vessels and any more technologically advanced vessels could adversely affect the amount of charter hire payments we receive for our vessels and the resale value of our vessels could significantly decrease. In these circumstances, we may also be forced to charter our vessels to less creditworthy charterers, either because the oil majors and other top tier charters will not charter older and less technologically advanced vessels or will only charter such vessels at lower contracted charter rates than we are able to obtain from these less creditworthy, second tier charterers. Similarly, technologically advanced vessels are needed to comply with environmental laws, the investment, in which along with the foregoing, could have a material adverse effect on our results of operations, charter hire payments, resale value of vessels, cash flows, financial condition and ability to pay dividends.
Additionally, the offshore contract drilling industry is subject to the introduction of new drilling techniques and services using new technologies, some of which may be subject to patent protection. As competitors and others use or develop new technologies, we may be placed at a competitive disadvantage and competitive pressures may force us to implement new technologies at substantial cost. In addition, competitors may have greater financial, technical and personnel resources that allow them to benefit from technological advantages and implement new technologies before we can. We may not be able to implement technologies on a timely basis or at a cost that is acceptable to us.
Prolonged or significant downturns in the tanker, dry bulk carrier, container offshore drilling and offshore support vesseldrilling charter markets may have an adverse effect on our earnings.earnings; and governmental and environmental laws and regulations may add to the costs of the charterers of our drilling rigs or limit their drilling activity which may adversely affect their ability to make payments to us.
Although most of our vessels are employed on medium or long termlong-term charters, prolonged or significant downturns in the markets in which we operate could have a significant and adverse effect in finding new customers in the short and long term market and on our existing customers'customers’ ability to continue to fulfilfulfill their obligations to us. It also affects the resale value of vessels.
The tanker market has experienced a downturn overhistorically been volatile. Global oil demand is expected to increase in 2024 with oil prices remaining near their 2023 average at $83 per barrel as the last year,global oil supply is expected to increase as well. The tanker market was relatively strong due in part to an oversupply of vesselsdemand growth, tight supply and the cut in OPEC production agreed in early 2017. According to industry sources, spot earnings for Very Large Crude Carriers, or VLCCs, declined from an average of $54,000 per day in December 2016 to an average of $10,377 per day in December 2017, being the lowest level in many years. We currently have eight vessels on charter to Frontline Shipping Limited (“Frontline Shipping”), an unguaranteed subsidiary of Frontline Ltd. (“Frontline”). With the downturn inongoing trade inefficiencies caused by geopolitical and climate related events. However, with continued uncertainty, there can be no assurance that the tanker market there iswill sustain its recent rally.
While also experiencing volatility, the dry bulk shipping market has enjoyed significantly improved market conditions during 2021. Industry sources indicate that seaborne dry bulk trade (in tonnes) increased slightly in 2023 but face increasing complexity and impacts from geopolitical disruption. The global fleet of dry bulk vessels has increased as a significant risk that Frontline Shipping may not have sufficient funds to fulfil their obligations underresult of the charters.
delivery of numerous newbuilding orders over the past few years. During 2022, the period from 2008 to 2016,global dry bulk fleet has grown by 2.9%, and as of January 2024, newbuilding orders had been placed for an aggregate of about 8.7% of the abruptexisting global dry bulk fleet, with Panamax and dramatic downturn inSupramax vessels accounting for 71% of deliveries during the next two years. The dry bulk charter market, from which we derive some ofand plan to continue to derive our revenues, has severely affectedbeen relatively weak in 2023, with freight rates rising at the end of the year due to congestion in the Panama Canal. In 2023, charter rates for dry bulk shipping industry.vessels experienced new highs that come close to the seasonal levels of 2021. The Baltic Dry Index, or BDI, an index published by The Baltic Exchange of shipping rates for 20 key dry bulk routes has fallen 97%reflected significant volatility in 2023 as levels ranged from a peakapproximately 564 points to 3166 points due to geopolitical tensions and readjustments of 11,793sea transport routes in May 2008 to a low of 290the Red Sea as well as uncertainty in February 2016. While the BDI has since increased, climbing to 1,192 in February 2018,broader economic sentiment. However, with continued uncertainty, there can be no assurance that the dry bulk charter market will continue to recover, and the market could decline.realize recovery.
The containership charter market experienced significant volatility in 2023, with disruption in global trade and supply chains. Due to escalated conflict in the Red Sea, approximately 90% of container vessels changed course in the first week of January 2024. As a result, global container capacity depletion could possibly increase by 20-25%. With the ongoing conflict in the Red Sea and expected port congesting, container spot rates have risen rapidly and may go up even further.
The offshore drilling charter market saw improvements in 2017, following a challenging environment in 2016. Charter rates generally improved through most of the year, with some variation across the vessel sizes due in partis correlated to a reduction in excess capacity. Significant overcapacity continues to affect the balance of supply and demand, and there can be no assurance that the container market will continue to recover and the market will not decline.
From 2011 to 2013, the oil price (Brent crude spot) averaged around $110 per barrel, however, overwhich has experienced significant volatility during the course of 2014last decade. In April 2020 the oil price fell to below $50$20 per barrel following fears that oil storage in December 2014 and the fall continued to under $30 per barrel in January 2016, although this recovered to an average of $43 per barrel in 2016 and increased to an average of $54 per barrel in 2017.U.S. was running tight. As a consequence of this fallthese reductions in oil prices, after 2013, oil and gas companies significantly reduced their exploration and development activities, resulting in many drilling companies laying up rigs and experiencing financial difficulties, including our customer Seadrill, who entered intodifficulties. However, oil prices averaged over $83 per barrel in 2023, down from $101 per barrel in 2022. Oil prices are projected to remain relatively flat in 2024 as industry experts expect global supply and demand to be relatively balanced over the Restructuring Plannext year. However, in September 2017.January 2024, there was a rise in oil prices as the crisis in the Red Sea raised concerns about trade disruption. The medium and long-term oil price development remains uncertain, with the escalation of conflict in the Red Sea and a structural transition in global energy systems with renewable energy expected to increase going forward.
The downturn inAdditionally, the offshore drilling market has also had a related effectindustry is dependent on demand for services from the offshore support vessel market which remains oneoil and gas exploration and production industry, and, accordingly, the charterers of the most severelyour drilling rigs are directly affected by the downturnadoption of laws and regulations that, for economic, environmental or other policy reasons, curtail exploration and development drilling for oil and gas. For example, current U.S. President Biden signed an executive order in January 2021 blocking new leases for oil and gas drilling in U.S. federal waters. The charterers of our drilling rigs may be required to make significant capital expenditures to comply with governmental laws and regulations. It is also possible that these laws and regulations may in the offshorefuture add significantly to the charterers of our drilling market. Despite small indications of demand-side improvement, which has helped to offer marginal improvements in some day rate levels in early 2018,rigs’ operating costs or significantly limit drilling activity. In certain jurisdictions, there are severe supply side challengesor may be imposed restrictions or limitations on the operation of foreign flag vessels and rigs, and these restrictions may prevent us or our charterers from operating our assets as intended. We cannot guarantee that we or our charterers will be able to accommodate such restrictions or limitations, nor that we or our charterers can relocate the assets to other jurisdictions where such restrictions or limitations do not apply.
Currently, we own two harsh environment drilling rigs, the 2014-built jack-up rig Linus and 2008-built semi-submersible drilling rig Hercules. In September 2022, Linus was redelivered from Seadrill to us. Concurrently, the drilling contract of Linus with ConocoPhillips was assigned from Seadrill to us and we started earning drilling contract revenue directly from ConocoPhillips. Following the redelivery of the Hercules from Seadrill in December 2022, the rig went through its 15-year special periodic survey (“SPS”) and upgrades at a shipyard in Norway, which was finalized in June 2023. Following the completion of the third SPS and upgrades, the Hercules mobilized to Canada for a drilling contract with ExxonMobil which began in mid-July and was completed in September 2023. The Hercules then mobilized to Namibia for the marketcommencement of a contract with more than 1,100 OSVs in lay-up, and many more idle or under-utilized, accordingGalp Energia S.A. (“Galp Energia”), where it is currently working. Once completed, the rig will be mobilized to industry sources. We have five offshore supply vessels on long term chartersCanada for a contract with Equinor Canada Ltd (“Equinor”) expected to Deep Sea Supply Shipowning II AS (the “Solstad Charterer”), which was a wholly owned subsidiary of Deep Sea Supply Plc. (“Deep Sea”). Due to the downturn commence in the offshore support vessel market, the termsfirst half of the charters2024. While we have been renegotiated two times over the last years, most recently in June 2017 in connection with the merger of Deep Sea, Solstad Offshore ASAable to charter our jack-up rig and Farstad Shipping ASA, creating Solstad Farstad ASA (“Solstad Farstad”), which is listed on the Oslo Stock Exchange. Following the merger, the Solstad Charterer is owned by Solship Invest 3 AS (“Solship”, formerly Deep Sea), who also acts as charter guarantor under the charters. Solship is a wholly owned subsidiary of Solstad Farstad, but there are no parent company guarantees for the obligations of Solship. Many of the vessels in Solship are in lay-up, including the five vessels on charter from us. With the severe downturn in the market for offshore support vessels, the financial situation in Solship has deteriorated, and Solship has recently engaged in discussions with its financial creditors, including the Company, regarding restructuring of its capital structure. These discussions may require the Company and Solship to enter into customary standstill agreements, which may result in a loss of revenue for the Company. The outcome of these discussions is pending at the current time, but there is a significant risk that the Solstad Charterer will not have sufficient funds to fulfil its current obligations under the charters, and the charters may be renegotiated at lower levels, or terminated. If the vessels are redelivered to us,semi-submersible drilling rig, we may not be able to secure new employmentrecharter them in the current market. A terminationfuture on similar or renegotiation of the charters may also result in a breach of covenants under the credit facility for the financing of the vessels, which, unless waived or modified by our lenders, may give our lenders the right to, among other things, call on the guarantees provided, increase our interest payments and/or accelerate our indebtedness and foreclose their liens on the assets securing the credit facility.better terms.
For more information please see “Item 5.D.—Trend Information”.
Downturns in these markets and resulting volatility has had a number of adverse consequences, including, among other things:
•an absence of financing for vessels or rigs;
no active•limited second-hand market for the sale of vessels or rigs;
•extremely low charter rates, particularly for vessels employed in the spot market;
•widespread loan covenant defaults in the shipping and offshore industries; and
•declaration of bankruptcy by some operators, rig and ship owners as well as charterers.
The occurrence of one or more of these events could adversely affect our business, results of operations, cash flows, financial condition and ability to pay cash distributions.
In addition, because the market value of the Company’sour vessels and rigs may fluctuate significantly, we may incur losses when we sell vessels, which may adversely affect earnings. If we sell vessels at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our financial statements, the sale may be at less than the vessel’s carrying amount in those financial statements, resulting in a loss and a reduction in earnings.
World events could adversely affect our resultsThe Company is exposed to fluctuating demand and supply for maritime transportation services, as well as fluctuating prices of operationscommodities (such as iron ore, coal, grain, soybeans and financial condition.
Continuing conflictsaggregates) and recent developmentsconsumer and industrial products, and may be affected by a decrease in the Middle East and North Africa,demand for such commodities and/or products and the presencevolatility in their prices.
Our growth significantly depends on continued growth in worldwide and regional demand for the products we transport, such as dry bulk commodities (such as iron ore, coal, soybeans, etc.) and consumer and industrial products, which could be negatively affected by several factors, including declines in prices for such commodities and/or products, or general political, regulatory and economic conditions.
In past years, China and India have had two of the world’s fastest growing economies in terms of gross domestic product and have been the main driving forces behind increases in shipping trade and the demand for marine transportation. While China in particular has enjoyed rates of economic growth significantly above the world average, slowing economic growth rates may reduce the country’s contribution to world trade growth, especially in view of deteriorating real estate property values. If economic growth declines in China, India and other countries in the Asia Pacific region, we may face decreases in shipping trade and demand. The level of imports to and exports from China may also be adversely affected by changes in political, economic and social conditions (including a slowing of economic growth) or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions, internal political instability, changes in currency policies, changes in trade policies and territorial or trade disputes. Furthermore, a slowdown in the economies of the United States andor the European Union, or certain other armed forces in Afghanistan,Asian countries may lead to additional acts of terrorism and armed conflict around the world, which may contribute to furtheralso have adverse impacts on economic instabilitygrowth in the global financial markets. These uncertainties could also adversely affect our ability to obtain financing on terms acceptable to us or at all. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularlyAsia Pacific region. Therefore, a negative change in the Arabian Gulf region. Actseconomic conditions (including any negative changes resulting from any pandemic) of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia. Anyany of these occurrences,countries or the perception that ourelsewhere may reduce demand for dry bulk and/or containership vessels are potential terrorist targets,and their associated charter rates, which could have a material adverse impacteffect on our business, financial condition and operating results, as well as our prospects.
More generally, various economies around the globe were impacted by inflationary pressures and/or supply chain disruptions in 2023, in part stemming from the conflict in Ukraine and related sanctions against Russia and Belarus and the conflict between Israel and Hamas. For example, demand for and the price of coal, a product which we transport from time to time, reached an all-time high in 2023. This was due to, among other factors, disruptions in natural gas supplies to the European Union as a result of tensions with Russia, which was accompanied by a surge in energy demand and, in some jurisdictions, a temporary shortage in available electrical capacity. Demand for coal is projected to decline in 2024, driven by a reduction in China as the country expects to see a recovery in hydropower output and increases in solar and wind generation. The global economy currently remains and is expected to continue to remain subject to substantial uncertainty, which may impact demand for the products which we transport. Periods of low demand can cause excess vessel supply and intensify the competition in the industry, which often results in vessels being idle for long periods of time, which could reduce our revenues and materially harm the profitability of our segments, our business, results of operations and ability to pay dividends.available cash.
Our business has inherent operational risks, which may not be adequately covered by insurance.
Our vessels and their cargoes are at risk of being damaged or lost due to events such as marine disasters, bad weather, mechanical failures, human error, environmental accidents, war, terrorism, piracy, political circumstances and hostilities in foreign countries, labor strikes and boycotts, changes in tax rates or policies, and governmental expropriation of our vessels. Any of these events may result in loss of revenues, increased costs and decreased cash flows to our customers, which could impair their ability to make payments to us under our charters. There is a material risk of increased premiums or loss of coverage as a result of the geopolitical conflict between Russia and Ukraine.
In the event of a vessel casualty or other catastrophic event, we will rely on ourthe marine insurance policies to pay the insured value of the vessel or the damages incurred. Through the agreements with our vessel managers, we procure insurance for most of the vessels in our fleet employed under time and voyage charters against those risks that we believe the shipping industry commonly insures against. These insurances include marine hull and machinery insurance, protection and indemnity insurance, which include pollution risks and crew insurances, and war risk insurance. Currently, the amount of coverage for liability for pollution, spillage and leakage available to us on commercially reasonable terms through protection and indemnity associations and providers of excess coverage is $1$1.0 billion per vessel per occurrence.occurrence, except for certain excluded areas at high risk including Russia, Ukraine and Belarus (the “High Risk Areas”).
We cannot assure you that we will be adequately insured against all risks. Our vessel managers may not be able to obtain adequate insurance coverage at reasonable rates for our vessels in the future. For example, in the past more stringent environmental regulations have led to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. Additionally, our insurers may refuse to pay particular claims. For example, the circumstances of a spill, including non-compliance with environmental laws, could result in denial of coverage, protracted litigation, and delayed or diminished insurance recoveries or settlements. Any significant loss or liability for which we are not insured could have a material adverse effect on our financial condition. Under the terms of our bareboat charters, the charterer is responsible for procuring all insurances for the vessel.
We procure insurance for our fleet against risks commonly insured against by vessel owners and operators. Even if our insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement vessel in the event of a loss. Furthermore, in the future, we may not be able to obtain adequate insurance coverage at reasonable rates for our fleet. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability. Our insurance policies also contain deductibles, limitations and exclusions which, although we believe are standard in the shipping industry, may nevertheless increase our costs. If our insurance is not enough to cover claims that may arise, the deficiency may have a material adverse effect on our financial condition and results of operations. We may also be subject to calls, or premiums, in amounts based not only on our own claim records but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity insurance coverage for tort liability, including pollution-related liability. Our payment of these calls could result in significant expenses to us.
Acts of piracy and attacks on ocean-going vessels could adversely affect our business.
Acts of piracy and attacks have historically affected ocean-going vessels trading in certain regions of the world, such as the South China Sea, the Gulf of Aden and the Red Sea. Piracy continues to occur in the Gulf of Aden, off the coast of Somalia, and increasingly in the Gulf of Guinea. We consider potential acts of piracy to be a material risk to the international shipping industry, and protection against this risk requires vigilance. Our vessels regularly travel through regions where pirates are active. Furthermore, the recent Houthi seizures and attacks on commercial vessels in the Red Sea and the Gulf of Aden have impacted the global economy as we, our charterers and other companies have decided to reroute vessels to avoid the Suez Canal and Red Sea. We may not be adequately insured to cover losses from acts of terrorism, piracy, regional conflicts and other armed actions, which could have a material adverse effect on our results of operations, financial condition and ability to pay dividends. Crew costs could also increase in such circumstances.
Maritime claimants could arrest or attach one or more of our vessels, which could interrupt our customers' or our cash flows.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against one or more of our vesselsa vessel for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting“arresting” or “attaching” a vessel through judicial or foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt the cash flow of the charterer and/or the Companyour cash flow and require us to pay a significant amount of money to have the arrest lifted, which would have an adverse effect on our financial condition and results of operations.
In addition, in some jurisdictions where the “sister ship” theory of liability applies, such as South Africa, under the "sister ship" theory of liability, a claimant may arrest both the vessel whichthat is subject to the claimant's maritime lien and any "associated"“associated” vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert "sister ship"In countries with “sister ship” liability laws, claims may be asserted against us or any of our vessels in our fleet managed by our vessel managers for claims relating to another vessel managed byliabilities of other vessels that manager.we own.
Governments could requisition our vessels during a period of war or emergency, without adequate compensation, resulting in a loss of earnings.
A government of a vessel’s registry could requisition for title or seize one or more of our vessels for title or for hire.vessels. Requisition for title occurs when a government takes control of a vessel and becomes her owner, whilethe owner. Such government could also requisition one or more of our vessels for hire. Requisition for hire occurs when a government takes control of a vessel and effectively becomes herthe charterer at dictated charter rates. Generally, requisitions occur during periodsa period of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment could be materially less than the charterhire that would have been payable otherwise. In addition, we would bear all risk of loss or damage to a vessel under requisition for hire.emergency. Government requisition of one or more of our vessels may negatively impactcould have a material adverse effect on our revenuesbusiness, results of operations, cash flows, financial condition and reduce the amount of dividends paid, if any,ability to our shareholders.pay dividends.
The aging of our fleet may result in increased operating costs or loss of hire in the future, which could adversely affect our earnings.
In general, the costs to maintain a vessel in good operating condition increase aswith the vessel ages.age of the vessel. As of December 31, 2023, the average age of our fleet, owned or leased by us, was approximately 11 years. As our fleet ages, we will incur increased costs. Due to improvements in engine technology, older vessels are typically less fuel-efficient and more costly to maintain than more recently constructed vessels. Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.
Governmental regulations, safety, environmental regulations or other equipment standards related to the age of tankers and other types of vessels may require expenditures for alterations or the addition of new equipment to our vessels to comply with safety or environmental laws or regulations that may be enacted in the future. These laws or regulations may also restrict the type of activities in which our vessels may engage or prohibit their operation in certain geographic regions. We cannot predict what alterations or modifications our vessels may be required to undergo as a result of requirements that may be promulgated in the future, or that as our vessels age market conditions will justify any required expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.
There are risks associated with the purchase and operation of second-hand vessels.
Our current business strategy includes additional growth through the acquisition of both newbuildings and second-hand vessels. AlthoughWhile we generallyrigorously inspect second-handpreviously owned or secondhand vessels prior to purchase, this does not normally provide us with the same knowledge about the vessels'their condition and cost of any required (or anticipated) repairs that we would have had if suchthese vessels had been built for and operated exclusively by us. A secondhand vessel may also have conditions or defects that we were not aware of when we bought the vessel and which may require us to incur costly repairs to the vessel. These repairs may require us to put a vessel into drydock, which would reduce our fleet utilization and increase our operating costs. The market prices of secondhand vessels also tend to fluctuate with changes in charter rates and the cost of new build vessels, and if we sell the vessels, the sales prices may not equal and could be less than their carrying values at that time. Therefore, our future operating results could be negatively affected if the vessels do not perform as we expect. Also,
Delays in the delivery of any newbuilding or secondhand tankers we do not receiveagree to acquire could harm our operating results.
Delays in the benefitdelivery of warranties fromany new-building or second-hand vessels we may agree to acquire in the builders iffuture, would delay our receipt of revenues generated by these vessels and, to the extent we have arranged charter employment for these vessels, could possibly result in the cancellation of those charters, and therefore adversely affect our anticipated results of operations. Although this would delay our funding requirements for the installment payments to purchase these vessels, it would also delay our receipt of revenues under any charters we arrange for such vessels. The delivery of newbuilding vessels could be delayed, other than at our request, because of, among other things, work stoppages or other labor disturbances; bankruptcy or other financial crisis of the shipyard building the vessel; hostilities, health pandemics or political or economic disturbances in the countries where the vessels are being built, including any escalation of tensions involving Russia and North Korea; weather interference or catastrophic event, such as a major earthquake, tsunami or fire; our requests for changes to the original vessel specifications; requests from our customers, with whom we buyhave arranged any charters for such vessels, to delay construction and delivery of such vessels due to weak economic conditions and shipping demand and a dispute with the shipyard building the vessel.
In addition, the refund guarantors under the newbuilding contracts, which are older than one year.banks, financial institutions and other credit agencies, may also be affected by financial market conditions in the same manner as our lenders and, as a result, may be unable or unwilling to meet their obligations under their refund guarantees. If the shipbuilders or refund guarantors are unable or unwilling to meet their obligations to the sellers of the vessels, this may impact our acquisition of vessels and may materially and adversely affect our operations and our obligations under our credit facilities. The delivery of any secondhand vessels could be delayed because of, among other things, hostilities or political disturbances, non-performance of the purchase agreement with respect to the vessels by the seller, our inability to obtain requisite permits, approvals or financing or damage to or destruction of the vessels while being operated by the seller prior to the delivery date.
Risks Relating to Our Company
Changes in our dividend policy could adversely affect holders of our common shares.
Any dividend that we declare is at the discretion of our Boardboard of Directors.directors of the Company (the “Board of Directors”). We cannot assure you that our dividend will not be reduced or eliminated in the future.future, and changes in our dividend policy could adversely affect the market price of our common shares. Our profitability and corresponding ability to pay dividends is substantially affected by amounts we receive through charter hire and profit sharingprofit-sharing payments from our charterers. In particular, Seadrill’s Restructuring Plan (see below), may have a significant impact on the amount of charter hire we receive from the Seadrill Charterers, if any, which constitutes a significant portion of our contracted future charter hire payments. Our entitlement to profit sharing payments, if any, is based on the financial performance of our vessels which is outside of our control. If our charter hire and profit sharingprofit-sharing payments decrease substantially, we may not be able to continue to pay dividends at present levels, or at all. We are also subject to contractual limitations on our ability to pay dividends pursuant to certain debt agreements, and we may agree to additional limitations in the future. Additional factors that could affect our ability to pay dividends include statutory and contractual limitations on the ability of our subsidiaries to pay dividends to us, including under current or future debt arrangements.arrangements, economic conditions, and macroeconomic impacts on our business and financial condition, such as inflationary pressure, and other factors the Board of Directors may deem relevant.
We depend on our charterers, including Frontline Shipping, the Seadrill Charterers and the Golden Ocean Charterer,companies which are companies affiliated with us, and the Solstad Charterer, for our operating cash flows and for our ability to pay dividends to our shareholders and repay our outstanding borrowings.
Most of the tanker vessels in our fleet are chartered to a subsidiary of Frontline, namely Frontline Shipping. In addition,During 2023, we have chartered three of our drilling units to the Seadrill Charterers andhad eight dry bulk carriers chartered to Golden Ocean Trading Limited, or the Golden Ocean Charterer. WeCharterer, a subsidiary of Golden Ocean. Hemen, our largest shareholder, is also have five offshore supportthe largest shareholder of Golden Ocean. In addition, we own fully or partially 13 container vessels on charterlong-term bareboat charters to the Solstad Charterer.MSC Mediterranean Shipping Company S.A. and its affiliate Conglomerate Shipping Ltd. (“MSC”) and 16 container vessels on long-term time charters to Maersk A/S (“Maersk”), and multiple other assets chartered to a number of counterparties. Our other vessels that have charters attached to them are chartered to other customers under short, mediumshort-, medium- or long termlong-term time and bareboat charters.
The charter-hirecharter hire payments that we receive from our customers constitute substantially all of our operating cash flows.
The performance under the leases with the Seadrill Charterers is currently guaranteed by Seadrill. The performance under the lease with North Atlantic Linus was originally guaranteed by NADL, but following an amendment to the charter in February 2015, Seadrill has replaced NADL as guarantor under the lease. The performance under the charters with the Golden Ocean Charterer is guaranteed by Golden Ocean Group Limited, or Golden Ocean. If Frontline Shipping, the Seadrill Charterers, the Golden Ocean Charterer or any of our other charterers are unable to make charter hire payments to us, our results of operations and financial condition willcould be materially adversely affected and we may not have cash available to pay dividends to our shareholders and to repay our outstanding borrowings. In particular, with the severe downturn in the demand for drilling units and Seadrill’s ongoing Restructuring Plan (see below), there is still a risk that the leases with the Seadrill Charterers may be terminated. A significant portion of our net income and operating cash flows are generated from our leases with the Seadrill Charterers,charterers of our drilling rigs, and a termination of these leases may have a material adverse effect on our earnings and profitability, and our ability to pay dividends to our shareholders.
We have eight remaining VLCCs on long term charters to Frontline Shipping and in which performance under the charters is not guaranteed by Frontline. With the current depressed tanker market, there is a significant risk that Frontline Shipping may not have sufficient funds to fulfil their obligations under the charters, which may have a material adverse effect on our earnings and profitability, and our ability to pay dividends to our shareholders.
We have five offshore supply vessels on long term charters to the Solstad Charterer, which is a wholly owned subsidiary of Solship who also acts as charter guarantor under the charters. Solship is a wholly owned subsidiary of Solstad Farstad, but there are no parent company guarantees for the obligations of Solship. Many of the vessels in Solship are in lay-up, including the five vessels on charter from us. With the severe downturn in the market for offshore support vessels, the financial situation in Solship has deteriorated, and Solship has recently engaged in discussions with its financial creditors, including the Company, regarding restructuring of its capital structure. These discussions may require the Company and Solship to enter into customary standstill agreements, which may result in a loss of revenue for the Company. The outcome of these discussions is pending at the current time, but there is a significant risk that the Solstad Charterer will not have sufficient funds to fulfil its current obligations under the charters, and the charters may be renegotiated at lower levels, or terminated. If the vessels are redelivered to us, we may not be able to secure new employment in the current market. A termination or renegotiation of the charters may also result in a breach of covenants under the credit facility for the financing of the vessels, which, unless waived or modified by our lenders, may give our lenders the right to, among other things, call on the guarantees provided, increase our interest payments and/or accelerate our indebtedness and foreclose their liens on the assets securing the credit facility.
Recently Seadrill announced that they have reached a global settlement in its Chapter 11 proceedings. Although Seadrill has confirmed that its business operations remain unaffected by its restructuring efforts at this time, we may be adversely impacted if the Restructuring Plan is not approved by the court.
As of March 26, 2018, we have three bareboat leases with the Seadrill Charterers for the West Taurus, West Hercules and West Linus. The performance of the Seadrill Charterers under the leases is currently fully guaranteed by Seadrill. In September 2017, Seadrill announced that it entered into the Restructuring Plan, which will be implemented by way of prearranged chapter 11 cases in the Southern District of Texas, U.S.
In February 2018, Seadrill announced that it had succeeded in reaching a global settlement with an ad hoc group of bondholders, the official committee of unsecured creditors, and other major creditors in its chapter 11 cases. As a result of the settlement, approximately 70% of Seadrill's bondholders by principal amount have now signed up to the Restructuring Plan to support the restructuring. Ship Finance and approximately 99% of Seadrill's bank lenders by principal amount had previously signed and remain party to the Restructuring Plan.
Assuming the Restructuring Plan is approved by the court, Ship Finance has agreed to reduce the contractual charter hire for the three rigs by approximately 29% for a period of five years starting in 2018, with the reduced amounts added back in the period thereafter. The term of the leases for West Hercules and West Taurus will also be extended by 13 months until December 2024, and the call options on behalf of the Seadrill Charterers under the relevant leases have also been amended as part of the Restructuring Plan. Seadrill will continue to pay full charter hire while the Restructuring Plan is being processed by the court. If the Restructuring Plan is not approved by the court, this may have a material adverse effect on our earnings and profitability, and our ability to pay dividends to our shareholders. For more information about the Restructuring Plan, please see “Item 5. Operating and Financial Review and Prospects-Liquidity and Capital Resources”.
The amount of profit sharingprofit-sharing payment we receive under our charters with Frontline Shipping, the Golden Ocean Charterer, the Solstad Charterer, and other charterers, if any, may depend on prevailing spot market rates, which are volatile.
Most of our tanker vessels operate under time charters to Frontline Shipping. These charter contracts provide for base charterhire and additional profit sharing payments when Frontline Shipping's earnings from deploying our vessels exceed certain levels. The majority of our vessels chartered to Frontline Shipping are sub-chartered by them in the spot market, which is subject to greater volatility than the long-term time charter market, and the amount of future profit sharing payments that we receive, if any, will be primarily dependent on the strength of the spot market.
We have eight Capesize dry bulk carriers employed under time charters to the Golden Ocean Charterer.Charterer, whereby we receive 33% profit share above the base charter rates, calculated on a quarterly basis. These charter contracts provide for base charterhirecharter hire and additional profit sharingprofit-sharing payments when the Golden Ocean Charterer's earnings from deploying our vessels exceed certain levels. The majority of our vessels chartered to the Golden Ocean Charterer are sub-chartered by them in the spot market, which is subject to greater volatility than the long-term time charter market, and the amount of future profit sharing payments we receive, if any, will be primarily dependent on the strength of the spot market.
We have five offshore support vessels chartered to the Solstad Charter. These charter contracts provide for base charterhire and additional profit sharing payments when the Solstad Charterer's earnings from deploying our vessels exceed certain levels. Our vessels chartered to the Solstad Charterer are currently in lay-up and there are thus not currently any prospects for profit sharing payments under these agreements. The amount of future profit sharing payments we receive, if any, will be primarily dependent on the strength of the spot market.
We may also enter into agreements which include profit sharing provisions with other charterers.
We cannot assure you that we will receive any profit sharingprofit-sharing payments for any periods in the future, which may have an adverse effect on our results and financial condition and our ability to pay dividends in the future.
The amount of fuel saving payment we receive under certain charters, if any, depends on prevailing fuel costs, which are volatile.
We installed scrubbers on seven of the containerships on charter to Maersk in return for receiving a share of the fuel savings expected to be achieved by the charterer, Maersk. Thus, as part of the charter agreements, we receive a share of the fuel savings, dependent on the price difference between IMO compliant fuel and IMO non-compliant fuel that is subsequently made compliant by the scrubbers. Additionally, we earn scrubber related fuel savings revenue in connection with a 4,900 CEU car carrier, Arabian Sea, on time charter with EUKOR Car Carriers Inc. (“Eukor”) which includes a similar share of the fuel savings in the charter agreement. For the year ended December 31, 2023, we recorded $13.2 million from fuel saving arrangements due to the installation of scrubbers, relating to the seven container vessels on charter to Maersk and one scrubber-fitted car carrier on charter to Eukor.
We cannot assure you that we will receive any fuel saving payments for any periods in the future, which may have an adverse effect on our results and financial condition and our ability to pay dividends in the future.
The charter-free market values of our vessels and drilling unitsrigs may decrease, which could limit the amount of funds that we can borrow or trigger breaches in certain financial covenants underin our current or future credit facilities and we may incur a loss if we sell vessels or drilling unitsrigs following a decline in their charter-free market value. This could affect future dividend payments.
We are generally prohibited from selling our vessels or drilling unitsrigs during periods which they are subject to charters without the charterer's consent, and may therefore be unable to take advantage of increases in vessel or drilling unitrig values during such times. Conversely, if the charterers were to default under the charters due to adverse market conditions, causing a termination of the charters, it is likely that the charter-free market value of our vessels and drilling unitsrigs would also be depressed. The charter-free market values of our vessels and drilling unitsrigs have experienced high volatility in recent years.
The charter-free market value of our vessels and drilling unitsrigs may increase and decrease depending on a number of factors including, but not limited to, the prevailing level of charter rates and dayrates,day rates, general economic and market conditions affecting the international shipping and offshore drilling industries, types, sizes, sophistication and ages of vessels and drilling units,rigs, supply and demand for vessels and drilling units,rigs, availability of or developments in other modes of transportation, competition from other shipping companies, cost of newbuildings, governmental or other regulations and technological advances.advances in vessel design, capacity, propulsion technology and fuel consumption efficiency.
In addition, as vessels and drilling unitsrigs grow older, they generally decline in value. If the charter-free market values of our vessels and drilling unitsrigs decline, we may not be in compliance with certain provisions of our credit facilities and we may not be able to refinance our debt, obtain additional financing or make distributions to our shareholders. Additionally, if we sell one or more of our vessels or drilling unitsrigs at a time when vessel and drilling unitrig prices have fallen and before we have recorded an impairment adjustment to our consolidated financial statements, the sale price may be less than the vessel's or drilling unit'srig's carrying value on our consolidated financial statements, resulting in a loss and a reduction in earnings.
Furthermore, if vessel and drilling unitrig values fall significantly, we may have to record an impairment adjustment in our financial statements, which could adversely affect our financial results and condition. In 2023, we recorded an impairment loss of $7.4 million as a result of the sale and delivery of two chemical tankers, SFL Weser and SFL Elbe. In 2022, no impairment charge was recorded, however, impairment charges of $1.9 million and $252.6 million were recorded on one of our rigs, West Taurus in 2021 and 2020 respectively, prior to the sale of the rig for recycling in September 2021.
Conversely, if vessel values are elevated at a time when we wish to acquire additional vessels, the cost of the acquisition may increase and this could adversely affect our business, results of operations, cash flow and financial position.
Volatility in the international shipping and offshore markets may cause our counterparties on contracts to fail to meet their obligations which could cause us to suffer losses or otherwise adversely affect our business.
From time to time, we enter into, among other things, charter parties with our customers, newbuilding contracts with shipyards, credit facilities with banks, guarantees, interest rate swap agreements, and currency swap agreements, total return bond swaps, and total return equity swaps. Such agreements subject us to counterparty risks. The ability and willingness of each of our counterparties to perform itstheir obligations under a contract with us will depend on a number of factors that are beyond our control. As a result, our revenues and results of operations may be adversely affected. These factors include:
•global and regional economic and political conditions;
•supply and demand for oil and refined petroleum products, which is affected by, among other things, competition from alternative sources of energy;
•supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial products;
•developments in international trade;
•changes in seaborne and other transportation patterns, including changes in the distances that cargoes are transported;
•environmental concerns and regulations;
•weather;
•the number of newbuilding deliveries;
•the improved fuel efficiency of newer vessels;
•the scrappingrecycling rate of older vessels; and
•changes in production of crude oil, particularly by OPEC members and other key producers.
Tanker charter rates also tend to be subject to seasonal variations, with demand (and therefore charter rates) normally higher in winter months in the northern hemisphere.
In addition, in depressed market conditions, our charterers and customers may no longer need a vessel or drilling unitrig that is currently under charter or contract, or may be able to obtain a comparable vessel or drilling unitrig at a lower rate. As a result, charterers and customers may seek to renegotiate the terms of their existing charter parties and drilling contracts, or avoid their obligations under those contracts. Should a counterparty fail to honor its obligations under agreements with us, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Certain of our directors, executive officers and major shareholders may have interests that are different from the interests of our other shareholders.
CertainC.K. Limited is the trustee of two trusts (the “Trusts”) that indirectly hold all of the common shares of Hemen, our largest shareholder. Accordingly, C.K. Limited, as trustee, may be deemed to beneficially own the 25,728,687 of our directors, executive officers and major shareholders may have interestscommon shares, representing 18.7% of our outstanding shares that are different from, or are in addition to,owned by Hemen. Mr. Fredriksen established the interests of our other shareholders. In particular, Hemen, a company indirectly controlled by trusts established by Mr. John Fredriksen,Trusts for the benefit of his immediate family,family. Beneficiaries of the Trusts, which may include Ms. Fredriksen, do not have any absolute entitlement to the Trust assets and certainthus disclaim beneficial ownership of its affiliates, may be deemed to beneficially own approximately 26%all of our issuedcommon shares owned by Hemen. Mr. Fredriksen is neither a beneficiary nor a trustee of either Trust and has no economic interest in such common shares. He disclaims any control over and all beneficial ownership of such common shares, save for any indirect influence he may have with C.K. Limited, as the trustee of the Trusts, in his capacity as the settlor of the Trusts. Please see “Item 7. Major Shareholders and Related Party Transactions – A. Major Shareholders.”
For so long as Hemen beneficially owns a significant percentage of our outstanding common shares, as at March 26, 2018.it is able to exercise significant influence over us and will be able to strongly influence the outcome of shareholder votes on other matters, including the adoption or amendment of provisions in our articles of incorporation or bye-laws and approval of possible mergers, amalgamations, control transactions and other significant corporate transactions. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, merger, amalgamations, consolidation, takeover or other business combination. This concentration of ownership could also discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which could in turn have an adverse effect on the market price of our common shares. Hemen may not necessarily act in accordance with the best interests of other shareholders. The interests of Hemen may not coincide with the interests of other holders of our common shares. To the extent that conflicts of interests may arise, Hemen may vote in a manner adverse to us or to you or other holders of our securities.
Hemen is also a principal shareholder of a number of other large publicly traded companies involved in various sectors of the shipping and oil services industries or the Hemen(the “Hemen Related Companies.Companies”). In addition, certain of our directors, including Mr. Bekker,Cordia, Mr. Thorstein,O'Shaughnessy, Mr. LeandHjertaker, Mr. Homan-Russell and Mrs. Blankenship,Ms. Kathrine Fredriksen, also serve on the boards of one or more of the Hemen Related Companies, including but not limited to Frontline plc (formerly Frontline Ltd.) (NYSE: FRO) (“Frontline”), Golden Ocean Seadrill, Seadrill Partners LLCGroup Limited (NYSE: GOGL) (“Golden Ocean”), Archer Limited (OSE: ARCHER), Avance Gas Holding Ltd (OSE: AGAS) (“Avance Gas”), Northern Drilling Ltd (OSE: NODL) and NADL.NorAm Drilling Company AS (“NorAm Drilling”). There may be real or apparent conflicts of interest with respect to matters affecting Hemen and other Hemen Related Companies whose interests in some circumstances may be adverse to our interests.
To the extent that we do business with or compete with other Hemen Related Companies for business opportunities, prospects or financial resources, or participate in ventures in which other Hemen Related Companies may participate, these directors and officers may face actual or apparent conflicts of interest in connection with decisions that could have different implications for us. These decisions may relate to corporate opportunities, corporate strategies, potential acquisitions of businesses, newbuilding acquisitions, inter-company agreements, the issuance or disposition of securities, the election of new or additional directors and other matters. Such potential conflicts may delay or limit the opportunities available to us, and it is possible that conflicts may be resolved in a manner adverse to us or result in agreements that are less favorable to us than terms that would be obtained in arm's-length negotiations with unaffiliated third-parties.
The agreements between us and affiliates of Hemen may be less favorable to us than agreements that we could obtain from unaffiliated third parties.
The charters, management agreements, charter ancillary agreements and the other contractual agreements we have with companies affiliated with Hemen were made in the context of an affiliated relationship. Although every effort was made to ensure that such agreements were made on an arm's-length basis, the negotiation of these agreements may have resulted in prices and other terms that are less favorable to us than terms we might have obtained in arm's-length negotiations with unaffiliated third parties for similar services.
Hemen and its associated companies' business activities may conflict with our business activities.
While Frontline and Golden Ocean, whose major shareholder is Hemen, have agreed to cause Frontline Shippingfor Key Chartering Corporation (“Key Chartering”), Golden Ocean Group Management and the Golden Ocean Charterer, respectively, to use their commercial best efforts to employ our vessels on market terms and not to give preferential treatment in the marketing of any other vessels owned or managed by Frontline and Golden Ocean or its other affiliates, it is possible that conflicts of interests in this regard will adversely affect us. Under our charter ancillarythe agreements with Frontline Shipping, Frontline, the Golden Ocean Charterer, and Golden Ocean, we are entitled to receive quarterly profit sharingprofit-sharing payments to the extent that the average daily time-chartertime charter equivalent or TCE,("TCE"), rates realized by Frontline Shipping and the Golden Ocean Charterer exceed specified levels. Because Frontline, and Golden Ocean also ownowns or managemanages other vessels in addition to our fleet, which are not included in the profit sharingprofit-sharing calculations, conflicts of interest may arise between us Frontline and Golden Ocean in the allocation of chartering opportunities that could limit our fleet's earnings and reduce profit sharing payments or charterhirecharter hire due under our charters.
Our shareholders must rely on us to enforce our rights against our contract counterparties.
Holders of our common shares and other securities have no direct right to enforce the obligations of Frontline Shipping, Frontline Management, Frontline, the Golden Ocean Charterer, Golden Ocean Management, Golden Ocean, the Seadrill Charterersrelated and Seadrill, or any of our othernon-related customers under the charters, or any of the other agreements to which we are a party. Accordingly, if any of those counterparties were to breach their obligations to us under any of these agreements, our shareholders would have to rely on us to pursue our remedies against those counterparties.
There is a risk that U.S.United States tax authorities could treat us as a "passive foreign investment company", which wouldcould have adverse U.S.United States federal income tax consequences to U.S.United States shareholders.
A foreign corporation will be treated as a "passive foreign investment company," or PFIC,("PFIC"), for U.S.United States federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of "passive income" or (2) at least 50% of the average value of the corporation's assets produce or are held for the production of those types of "passive income."income". For purposes of these tests, "passive income" includes dividends, interest and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties, which are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests, income derived from the performance of services does not constitute "passive income", but income from bareboat charters does constitute "passive income."income".
U.S.United States shareholders of a PFIC are subject to a disadvantageous U.S.United States federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.
Under these rules, if our income from our time charters is considered to be passive rental income, rather than income from the performance of services, we will be considered to be a PFIC. We believe that it is more likely than not that our income from time charters will not be treated as passive rental income for purposes of determining whether we are a PFIC. Correspondingly, we believe that the assets that we own and operate in the connection with the production of such income do not constitute passive assets for purposes of determining whether we are a PFIC. This position is principally based upon the positions that (1) our time charter income will constitute services income, rather than rental income, and (2) Frontline Management and Golden Ocean Management, which provide services to certain of our time-chartered vessels, will be respected as separate entities from Frontline Shipping and the Golden Ocean Charterer, with which they are respectively affiliated. WeBased on our current and anticipated chartering activities, we do not believe that we will be treated as a PFIC for our 2017 taxable year. Nevertheless, for the 2018 taxable year andcurrent or future taxable years, depending upon the relative amounts of income we derive from our various assets as well as their relative fair market values, we mayalthough no assurance can be treated as a PFIC.given in this regard.
We note thatAlthough there is no direct legal authority under the PFIC rules addressing our current and expected method of operation.operation, there is substantial legal authority supporting our position consisting of case law and the United States Internal Revenue Service (the "IRS"), pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes. However, it should be noted that there is also authority that characterizes time charter income as rental income rather than services income for other tax purposes. Accordingly, no assurance can be given that the Internal Revenue Service, or the IRS or a court of law will accept our position, and there is a significant risk that the IRS or a court of law could determine that we are a PFIC. Furthermore, even if we would not be a PFIC under the foregoing tests,Moreover, no assurance can be given that we would not constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations were to change.operations.
If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S.United States shareholders will face adverse U.S.United States federal income tax consequences. For example, U.S. non-corporateUnder the PFIC rules, unless those shareholders make an election available under United States Internal Revenue Code of 1986, as amended (the "Code") (which election could itself have adverse consequences for such shareholders, as discussed below under "Taxation-United States Federal Income Tax Considerations"), such shareholders would not be eligible forliable to pay United States federal income tax at the preferential ratethen prevailing income tax rates on dividends that we pay.ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the shareholder's holding period of our common shares.
We may have to pay tax on U.S.United States source income, which would reduce our earnings.
Under the U.S. Internal Revenue Code of 1986 as amended, or the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States, may be subject to a 4% U.S.United States federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the applicable Treasury Regulations promulgated thereunder.
We believe that we and each of our subsidiaries qualifyqualified for this statutory tax exemption for our taxable year ending on December 31, 2023 and we will take this position for U.S.United States federal income tax return reporting purposes for the 2017 taxable year.purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption for future taxable years and thereby become subject to U.S.United States federal income tax on our U.S.United States source shipping income. For example, we would no longer qualify for exemption under Section 883 of the Code for a particular taxable year if Hemen, who we believe to be a non-qualified shareholder, were to, in combination with othercertain non-qualified shareholders come to ownwith a 5% or greater interest in our common shares owned, in the aggregate, 50% or more of our outstanding common shares for more than half the days during the taxable year, thereyear. It is a riskpossible that we could no longer qualifybe subject to this rule for exemption under Section 883 of the Code for a particularour taxable year.year ending on or after December 31, 2024. Due to the factual nature of the issues involved, wethere can givebe no assurances on our tax-exempt status or that of any of our subsidiaries.
If we or our subsidiaries, are not entitled to exemption under Section 883 of the Code for any taxable year, we, or our subsidiaries, could be subject forduring those years to an effective 2% U.S.United States federal income tax on the gross shipping income these companies derivederived during thesuch a year that is attributable to the transport of cargoes to or from the United States. The imposition of this tax would have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders.
Changes in tax laws and unanticipated tax liabilities could materially and adversely affect the taxes we pay, results of operations and financial results.
From time to time, we are subject to income and other taxes in various jurisdictions, and our results of operations and financial results may be affected by tax and other initiatives around the world. For instance, there is a high level of uncertainty in today’s tax environment stemming from global initiatives put forth by the Organisation for Economic Co-operation and Development’s (“OECD”) two-pillar base erosion and profit shifting project. In October 2021, members of the OECD put forth two proposals: (i) Pillar One reallocates profit to the market jurisdictions where sales arise versus physical presence; and (ii) Pillar Two compels multinational corporations with €750 million or more in annual revenue to pay a global minimum tax of 15% on income received in each country in which they operate. The reforms aim to level the playing field between countries by discouraging them from reducing their corporate income taxes to attract foreign business investment. Over 140 countries agreed to enact the two-pillar solution to address the challenges arising from the digitalization of the economy and, in 2024, these guidelines were declared effective and must now be enacted by those OECD member countries. Qualifying international shipping income is currently exempt from many aspects of this framework if the exemption requirements are met. If we are in the scope of OECD’s Pillar Two rules, including due to our inability to satisfy the requirements of the international shipping exemption, these changes, when and if enacted and implemented by various countries in which we do business, could increase the burden and costs of our tax compliance, the amount of taxes we incur in those jurisdictions and our global effective tax rate, which could have a material adverse impact on our results of operations and financial results.
As an exempted company incorporated under Bermuda law, our operations may be subject to economic substance requirements.
The Economic Substance Act 2018 and the Economic Substance Regulations 2018 of Bermuda (the “Economic Substance Act” and the “Economic Substance Regulations”, respectively) became operative on December 31, 2018. The Economic Substance Act applies to every registered entity in Bermuda that engages in a relevant activity and requires that every such entity shall maintain a substantial economic presence in Bermuda. Relevant activities for the purposes of the Economic Substance Act are banking business, insurance business, fund management business, financing and leasing business, headquarters business, shipping business, distribution and service center business, intellectual property holding business and conducting business as a holding entity.
The Bermuda Economic Substance Act provides that a registered entity that carries on a relevant activity complies with economic substance requirements if (a) it is directed and managed in Bermuda, (b) its core income-generating activities (as may be prescribed) are undertaken in Bermuda with respect to the relevant activity, (c) it maintains adequate physical presence in Bermuda, (d) it has adequate full time employees in Bermuda with suitable qualifications and (e) it incurs adequate operating expenditure in Bermuda in relation to the relevant activity.
A registered entity that carries on a relevant activity is obliged under the Bermuda Economic Substance Act to file a declaration in the prescribed form (the “Declaration”) with the Registrar of Companies (the “Registrar”) on an annual basis.
If we fail to comply with our obligations under the Bermuda Economic Substance Act or any similar law applicable to us in any other jurisdictions, we could be subject to financial penalties and spontaneous disclosure of information to foreign tax officials in related jurisdictions and may be struck from the register of companies in Bermuda or such other jurisdiction. Any of these actions could have a material adverse effect on our business, financial condition and results of operations.
If our long-term time or bareboat charters or management agreements with respect to our vessels and rigs employed on long-term time charters terminate, we could be exposed to increased volatility in our business and financial results, our revenues could significantly decrease and our operating expenses could significantly increase.
If any of our charters terminate, we may not be able to re-charter those vessels on a long-term basis with terms similar to the terms of our existing charters, or at all.
The vessels in our fleet that have charters attached to them are generally contracted to expire between one and 14 years from now.a firm period in addition to certain optional periods. However, we have granted some of our charterers purchase or early termination options that, if exercised, may effectively terminate our charters with these customers at an earlier date. One or more of the charters with respect to our vessels may also terminate in the event of a requisition for title or a loss of a vessel.
Under our vessel management agreements with Frontline Management and Golden Ocean Management, for fixed management fees, Frontline Management and Golden Ocean Management are responsible for all of the technical and operational management of the vessels chartered by Frontline Shipping and the Golden Ocean Charterer, respectively, and will indemnify us against certain loss of hire and various other liabilities relating to the operation of these vessels. If the relevant charter is terminated, the corresponding management agreement will also be terminated.
In addition to the eight vessels on charter to Frontline Shipping and the Golden Ocean Charterer, we also have seven23 container vessels, seven dry bulk carriers, and twoSuezmax tankers, six product tankers and six car carriers employed on time charters and two Suezmax tankers, seven dry bulk carriers two car carriers and one container vessel employedtrading in the spot or short termshort-term time charter market. The agreements for the technical and operational management of these vessels are not fixed price agreements, and we cannot assure you that any further vessels which we may acquire in the future will be operated under fixed price management agreements.
We also own two harsh environmental drilling rigs, the 2014-built jack-up rig Linus and 2008-built semi-submersible drilling rig Hercules. In September 2022, Linus was redelivered from Seadrill to us. Concurrently, the drilling contract of Linus with ConocoPhillips was assigned from Seadrill to us and we started earning drilling contract revenue directly from ConocoPhillips. Following the redelivery of the Hercules from Seadrill in December 2022, the rig went through its third SPS and upgrades at a shipyard in Norway, which was finalized in June 2023. Following the completion of the third SPS and upgrades, the Hercules mobilized to Canada for a drilling contract with ExxonMobil which began in mid-July and was completed in September 2023. The Hercules then mobilized to Namibia for the commencement of a contract with Galp Energia, where it is currently working. Once completed, the rig will be mobilized to Canada for a contract with Equinor expected to commence in the first half of 2024. Therefore, to the extent that we acquire additional vessels, our cash flow could be more volatile in the future and we could be exposed to increases in our vessel and rig operating expenses, each of which could materially and adversely affect our results of operations and business.
Certain of our vessels and drilling unitsrigs are subject to purchase options held by the charterer of the vessel or drilling unit,rig, which, if exercised, could reduce the size of our fleet and reduce our future revenues.
The charter-free market values of our vessels and drilling unitsrigs are expected to change from time to time depending on a number of factors including general economic and market conditions affecting the shipping and offshore industries, competition, cost of vessel or drilling unitrig construction, governmental or other regulations, prevailing levels of charter rates and technological changes. We have granted fixed price purchase options to certain of our customers with respect to the vessels and drilling unitsrigs they have chartered from us, and these prices may be less than the respective vessel's or drilling unit’srig’s charter-free market value at the time the option may be exercised. In addition, we may not be able to obtain a replacement vessel or drilling unitrig for the price at which we sell the vessel or drilling unit.rig. In such a case, we could incur a loss and a reduction in earnings.
Volatility of interest rate benchmarks under our financing agreements could affect our profitability, earnings and cash flow.
As certain of our current financing agreements have, and our future financing arrangements may have, floating interest rates, typically based on the Secured Overnight Financing Rate (SOFR), movements in interest rates could negatively affect our financial performance. In order to manage our exposure to interest rate fluctuations under SOFR or any other variable interest rate, we have and may from time-to-time use interest rate derivatives to effectively fix some of our floating rate debt obligations. No assurance can however be given that the use of these derivative instruments, if any, may effectively protect us from adverse interest rate movements. The use of interest rate derivatives may affect our results through mark to market valuation of these derivatives. Also, adverse movements in interest rate derivatives may require us to post cash as collateral, which may impact our free cash position. Volatility in applicable interest rates among our financing agreements presents a number of risks to our business, including potential increased borrowing costs for future financing agreements or unavailability of or difficulty in attaining financing, which could in turn have an adverse effect on our profitability, earnings and cash flow.
A change in interest rates could subject us to interest rate risk and materially and adversely affect our financial performance.performance and financial position.
Some of our credit facilities use variable interest rates and expose us to interest rate risk. If interest rates increase and we are unable to effectively hedge our interest rate risk, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our profitability and cash available for servicing our indebtedness would decrease.
As of December 31, 2017, the Company2023, we and itsour consolidated subsidiaries had approximately $1.2$1.1 billion in floating rate debt outstanding under our credit facilities, and a further $0.8 billion in floating rate debt held by our unconsolidated wholly-owned subsidiaries accounted for under the equity method.facilities. Although we use interest rate and cross currency swaps to manage our interest rate exposure and have interest rate adjustment clauses in some of our chartering agreements, we are exposed to fluctuations in interest rates. For a portion of our floating rate debt, if interest rates rise, interest payments on our floating rate debt that we have not swapped into effectively fixed rates would increase.
In order to manage our exposure to interest rate fluctuations under NIBOR, SOFR or any other alternative rate, we have and may from time to time use interest rate and cross currency derivatives to effectively fix some of our floating rate debt obligations. No assurance can however be given that the use of these derivative instruments, if any, may effectively protect us from adverse interest rate movements. The use of interest rate derivatives may affect our results through mark to market valuation of these derivatives. Also, adverse movements in interest rate derivatives may require us to post cash as collateral, which may impact our free cash position.
As of December 31, 2017, the Company, its2023, we and our consolidated subsidiaries and its wholly-owned subsidiaries accounted for under the equity method have entered into interest rate and cross currency swaps which fix the interest on $1.2approximately $0.4 billion of our outstanding indebtedness.
An increase in interest rates could cause us to incur additional costs associated with our debt service, which may materially and adversely affect our results of operations. Our maximum exposure to interest rate fluctuations on our outstanding debt atas of December 31, 2017,2023 was approximately $0.8 billion, including our equity-accounted subsidiaries. A one percentage change in interest rates would, based on the Company'sour estimates, increase or decrease interest expenserate exposure by approximately $8.5$7.9 million per year as of December 31, 2017.2023. The figure does not take into account that certain of our charter contracts include interest adjustment clauses, whereby the charter rate is adjusted to reflect the actual interest paid on a deemed outstanding debt related to the assets on charter. AtAs of December 31, 2017, $0.92023, $0.1 billion of our floating rate debt was subject to such interest adjustment clauses, including our equity-accounted subsidiaries. OfNone of this amount, a total of $0.2 billion was subject to interest rate swaps and the balance of $0.7$0.1 billion remained on a floating rate basis, effectively reducing ourbasis. Our net exposure to floating rate debt to $132.4 million.is therefore $0.7 billion.
The interest rate and cross currency swaps that have been entered into by the Companyus and itsour subsidiaries are derivative financial instruments that effectively translate floating rate debt into fixed rate debt. USU.S. GAAP requires that these derivatives be valued at current market prices in our financial statements, with increases or decreases in valuations reflected in results of operations or, if the instrument is designated as a hedge, in other comprehensive income. Changes in interest rates give rise to changes in the valuations of interest rate and cross currency swaps and could adversely affect results of operations and other comprehensive income.
Our liquidity may be affected during the period of the swap contracts arising from the requirement to pay collateral if current interest rates move significantly adversely compared to the swap interest rates. This could have a material adverse effect on our liquidity, depending on the magnitude of the fluctuation.
A change in foreign exchange rates could materially and adversely affect our financial position.
As of December 31, 2023, we had approximately $126.5 million equivalent in senior unsecured bonds denominated in Norwegian kroner (“NOK”). Although the effect on profitability is managed through the use of currency swaps, liquidity may be affected during the period of the swap contracts arising from the requirement to pay collateral if the NOK currency rates move adversely compared to the United States dollar (“USD”). This could have a material adverse effect on our liquidity, depending on the magnitude of the currency fluctuation.
We may have difficulty managing our planned growth properly.
Since our original acquisitions from Frontline, we have expanded and diversified our fleet, and we are performing certain administrative services through our wholly-owned subsidiaries Ship FinanceSFL Management AS, and Ship FinanceSFL Management (Bermuda) Limited, SFL Management (Singapore) Pte. Ltd., LH Rig Management (Cyprus) Ltd and SFL UK Management Ltd.
We intend to continue to expand our fleet. We continuously evaluate potential transactions, which may include pursuit of other business combinations, the acquisition of vessels or related businesses, the expansion of our operations, repayment of existing debt, share repurchases, short term investments or other transactions that we believe will be accretive to earnings, enhance shareholder value or are in our best interests. Our future growth will primarily depend on our ability to locate and acquire suitable vessels and drilling units,assets or businesses, identify and consummate acquisitions or joint ventures, obtain required financing, integrate any acquired vessels and drilling unitsrigs with our existing operations, enhance our customer base, and manage our expansion.
The growth in the size and diversity of our fleet will continue to impose additional responsibilities on our management, and may present numerous risks, such as undisclosed liabilities and obligations, difficulty in recruiting additional qualified personnel and managing relationships with customers and suppliers, and integrating newly acquired operations into existing infrastructures. We cannot assure you that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with our future growth.
We are highly leveraged and subject to restrictions in our financing agreements that impose constraints on our operating and financing flexibility.
We have significant indebtedness outstanding under our senior unsecured convertible notes and our Norwegian kroner, or NOK senior unsecured bonds. We have also entered into loan facilities that we have used to refinance existing indebtedness and to acquire additional vessels. We may need to refinance some or all of our indebtedness on maturity of our convertible notes, bonds or loan facilities and to acquire additional vessels in the future. We cannot assure you that we will be able to do so on terms acceptable to us or at all. If we cannot refinance our indebtedness, we will have to dedicate some or all of our cash flows, and we may be required to sell some of our assets, to pay the principal and interest on our indebtedness. In such a case, we may not be able to pay dividends to our shareholders and may not be able to grow our fleet as planned. We may also incur additional debt in the future.
Our loan facilities and the indentures for our convertible notes and bonds subject us to limitations on our business and future financing activities, including:
•limitations on the incurrence of additional indebtedness, including issuance of additional guarantees;
•limitations on incurrence of liens;
•limitations on our ability to pay dividends and make other distributions; and
•limitations on our ability to renegotiate or amend our charters, management agreements and other material agreements.
Further, our loan facilities contain financial covenants that require us to, among other things:
•provide additional security under the loan facility or prepay an amount of the loan facility as necessary to maintain the fair market value of our vessels securing the loan facility at not less than specified percentages (ranging from 100% to 150%) of the principal amount outstanding under the loan facility;
•maintain available cash on a consolidated basis of not less than $25 million;
•maintain positive working capital on a consolidated basis; and
•maintain a ratio of total liabilities to adjusted total assets of less than 0.80.
Under the terms of our loan facilities, we may not make distributions to our shareholders if we do not satisfy these covenants or receive waivers from the lenders. We cannot assure you that we will be able to satisfy these covenants in the future.
Due to these restrictions, we may need to seek permission from our lenders in order to engage in some corporate actions. Our lenders' interests may be different from ours and we cannot guarantee that we will be able to obtain our lenders' permission when needed. This may prevent us from taking actions that are in our best interests.
Our debt service obligations require us to dedicate a substantial portion of our cash flows from operations to required payments on indebtedness and could limit our ability to obtain additional financing, make capital expenditures and acquisitions, and carry out other general corporate activities in the future. These obligations may also limit our flexibility in planning for, or reacting to, changes in our business and the shipping industry or detract from our ability to successfully withstand a downturn in our business or the economy generally. This may place us at a competitive disadvantage to other less leveraged competitors.
Furthermore, our debt agreements, including our bond agreements, contain cross-default provisions that may be triggered by a default under one of our other debt agreements. The cross default provisions imply that a failure by Ship Finance International Limited,us as guarantor or issuer, to pay any financial indebtedness above certain thresholds when due, or within any applicable grace period, could result in a default under our other debt agreements.
The occurrence of any event of default, or our inability to obtain a waiver from our lenders in the event of a default, could result in certain or all of our indebtedness being accelerated or the foreclosure of the liens on our vessels by our lenders. If our secured indebtedness is accelerated in full or in part, it would be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels and other assets securing our credit facilities if our lenders foreclose their liens, which would adversely affect our ability to conduct our business.
Moreover, in connection with any waivers of or amendments to our credit facilities that we have obtained, or may obtain in the future, our lenders may impose additional operating and financial restrictions on us or modify the terms of our existing credit facilities. These restrictions may further restrict our ability to, among other things, pay dividends, make capital expenditures or incur additional indebtedness, including through the issuance of guarantees. Our lenders may also require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness. See "Item 5. Operating and Financial Review and Prospects-Prospects - B. Liquidity and Capital Resources.Resources".
In addition, under the terms of our credit facilities, our payment of dividends or other payments to shareholders as well as our subsidiaries' payment of dividends to us is subject to no event of default having occurred. See "Item 8. Financial Information-Dividend Policy."Information -Dividend Policy".
We may be subject to litigation that, if not resolved in our favor and not sufficiently insured against, could have a material adverse effect on us.
We may be, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes, personal injury claims, environmental claims or proceedings, asbestos and other toxic tort claims, employment matters, governmental claims for taxes or duties, and other litigation that arises in the ordinary course of our business. Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and the ultimate outcome of any litigation or the potential costs to resolve them may have a material adverse effect on us. Insurance may not be applicable or sufficient in all cases and/or insurers may not remain solvent, which may have a material adverse effect on our financial condition.
Risks Relating to Our Common Shares
We are a holding company and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial and other obligations and to make dividend payments.obligations.
We are a holding company, and our subsidiaries conduct all of our operations and own all of our operating assets. We have no significant assets other than the equity interests in our subsidiaries. Our subsidiaries own all of our vessels and drilling units,rigs, and payments under our charter agreements are made to our subsidiaries. As a result, our ability to make distributions to our shareholders depends on the performance of our subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by a claim or other action by a third party or by the law of its respective jurisdiction of incorporation which regulates the payment of dividends by companies. Under the terms of our credit facilities, we may be restricted from making distributions from our subsidiaries if they are not in compliance with the terms of the relevant agreements. If we are unable to obtain funds from our subsidiaries, we willmay not be able to pay dividends to our shareholders.
The market price of our common shares may be unpredictable and volatile.
The market price of our common shares has been volatile. For the year ended December 31, 2017,2023, the closing market price of our common shares ranged from a high of $15.95$11.71 on January 26 and 27, 2017,December 22, 2023, to a low of $12.45$8.48 on June 21, 2017.May 16, 2023. The market price of our common shares may continue to fluctuate due to factors such as actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry, changes in key management personnel, any reductions in the payment of our dividends or changes in our dividend policy, mergers and strategic alliances in the shipping and offshore industries, market conditions in the shipping and offshore industries, changes in government regulation, shortfalls in our operating results from levels forecast by securities analysts, perceived or actual inability by our chartering counterparts to fully perform under the charter parties, including the Seadrill Charterers, Frontline Shippingcharterers of our drilling rigs and the Solstad Charterer,third party announcements concerning us or our competitors and the general state of the securities market. The shipping and offshore industries have been highly unpredictable and volatile. The market for common shares in these industries may be equally volatile. The market volatility in equities remains high. Therefore, we cannot assure you that you will be able to sell any of our common shares you may have purchased at a price greater than or equal to its original purchase price.price, also when adjusted for any dividends. Additionally, to the extent that the price of our common shares declines, our ability to raise funds through the issuance of equity, or otherwise using our common shares as consideration, will be reduced.
Worldwide inflationary pressures could negatively impact our results of operations and cash flows.
It has been recently observed that worldwide economies have experienced inflationary pressures, with price increases seen across many sectors globally. For example, the U.S. consumer price index, an inflation gauge that measures costs across dozens of items, rose 3.4% in 2023 compared to the prior year, driven in large part by rising shelter costs. It remains to be seen whether inflationary pressures will continue, and to what degree, as central banks begin to respond to price increases. In the event that inflation becomes a significant factor in the global economy generally and in the shipping industry more specifically, inflationary pressures would result in increased operating, voyage and administrative costs. Furthermore, the effects of inflation on the supply and demand of the products we transport could alter demand for our services. Interventions in the economy by central banks in response to inflationary pressures may slow down economic activity, including by altering consumer purchasing habits and reducing demand for the commodities and products we carry, and cause a reduction in trade. As a result, the volumes of goods we deliver and/or charter rates for our vessels may be affected. Any of these factors could have an adverse effect on our business, financial condition, cash flows and operating results.
Future sales of our common shares or conversion of our convertible notescould cause the market price of our common shares to decline.
The market price of our common shares could decline due to sales of a large number of our shares in the market or the perception that such sales could occur or conversion of our convertible notes. This could depress the market price of our common shares and make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate, or at all.
Because we are a foreign corporation, you may not have the same rights as a shareholder in a U.S. corporation may have.
We are a Bermuda exempted company. Our Memorandum of Association and Bye-Laws and the Bermuda Companies Act 1981, as amended, govern our affairs. Investors may have more difficulty in protecting their interests and enforcing judgments in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a United States jurisdiction. Under Bermuda law a director generally owes a fiduciary duty only to the company and not to the company's shareholders. Our shareholders may not have a direct course of action against our directors. In addition, Bermuda law does not provide a mechanism for our shareholders to bring a class action lawsuit under Bermuda law. Further, our bye-lawsBye-laws provide for the indemnification of our directors or officers against any liability arising out of any act or omission except for an act or omission constituting fraud, dishonesty or illegality.
Because our offices and the majoritymost of our assets are located outside the United States, you may not be able to bring suit against us, or enforce a judgment obtained against us in the United StatesStates.
Our executive offices, administrative activities and the majority of our assets are located outside the United States. In addition, most of our directors and officers are not resident in the United States.States residents. As a result, it may be more difficult for investors to effect service of process within the United States upon us, or to enforce both in the United States and outside the United States judgments against us in any action, including actions predicated upon the civil liability provisions of the United States federal securities laws of the United States.laws.
ITEM 4. INFORMATION ON THE COMPANY
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ITEM 4. | INFORMATION ON THE COMPANY |
A. HISTORY AND DEVELOPMENT OF THE COMPANY
The Company
We are Ship Finance International Limited,SFL Corporation Ltd. a Bermuda-based company incorporated in Bermuda on October 10, 2003, as a Bermuda exempted company under the Bermuda Companies Law of 1981 (Company No. EC-34296). We are engaged primarily in the ownership and operation of vessels and offshore related assets, and also involved in the charter, purchase and sale of assets. Our registered and principal executive offices are located at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda, and our telephone number is +1 (441) 295-9500. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC’s internet site is www.sec.gov. None of the information contained on these websites is incorporated into or forms a part of this annual report.
We operate through subsidiaries and branches located in Bermuda, Canada, Cyprus, Malta, Liberia, Namibia, Norway, Singapore, the United Kingdom and the Marshall Islands.
We are an international ship owning and chartering company with a large and diverse asset base across the maritime, shipping and offshore industries.asset classes and business sectors. As at March 26, 2018,of December 31, 2023, our assets consist of 10seven crude oil tankers, 22six oil product tankers, 15 dry bulk carriers, 2232 container vessels (including two chartered-in 19,200 TEU vessel)seven leased-in container vessels), twofive car carriers, twoone jack-up drilling rigs, tworig and one ultra-deepwater drilling units, five offshore supportrig, as well as two dual-fuel 7,000 Car Equivalent Unit (“CEU”) newbuilding car carriers under construction. One of these vessels two chemical tankers and two oil product tankers. Our crude oil tankers, chemical tankers and oil product tankers are all double-hull vessels.was delivered from the shipyard in January 2024 with the second vessel expected to be delivered during the first half of 2024. We also partly own four leased-in container vessels in our associated companies.
As at March 26, 2018, our customers included Frontline Shipping, Seadrill, Golden Ocean, Sinochem Shipping Co. Ltd (“Sinochem”), Heung-A Shipping Co. Ltd (“Heung-A”), Hyundai Glovis Co. Ltd. (“Hyundai Glovis”), Maersk Line A/S (“Maersk”), China National Chartering Co. Ltd. (“Sinochart”), Phillips 66 Company (“Phillips 66”), MSC Mediterranean Shipping Company S.A. (“MSC”) and the Solstad Charterer.
Our primary objective is to continue to grow our business through accretive acquisitions across a diverse range of marine and offshore asset classes. In doing so, our strategy is to generate stable and increasing cash flows by chartering our assets primarily under medium to long-term bareboat or time charters.
History of the Company
We were formed in 2003 as a wholly ownedwholly-owned subsidiary of Frontline, a major operator of large crude oil tankers. In 2004, Frontline distributed 25% of our common shares to its ordinary shareholders in a partial spin off, and our common shares commenced trading on the New York Stock Exchange, or the NYSE, under the ticker symbol "SFL" on June 17,14, 2004. Frontline subsequently made six further dividends of our shares to its shareholders and its ownership in our Company is now less than one percent. Our assets at the time consisted of a fleet of Suezmax tankers, VLCCs,very large crude carriers (“VLCCs”), and oil/bulk/ore carriers, or OBOs.carriers.
Since 2004, we have diversified our asset base and now have nineseven asset types, which comprise crude oil tankers, chemical tankers, oil product tankers, container vessels, car carriers, dry bulk carriers, a jack-up drilling rigs,rig and an ultra-deepwater drilling units and offshore support vessels.rig. In addition, we have certain financial investments.
Acquisitions, Deliveries, Capital Investments and Disposals
Acquisitions, Deliveries and Capital Investments
During the year ended December 31, 2023, we invested $117.8 million for a SPS, Ballast Water Treatment System (“BWTS”) and other capital upgrades performed on the harsh environment semi-submersible drilling rig Hercules.
During the year ended December 31, 2023, we had paid total installments and related costs of $158.4 million in relation to two dual-fuel 7,000 CEU newbuilding car carriers designed to use LNG under construction. The first of the vessels, Emden was delivered in September 2023, while the second vessel, Wolfsburg, was delivered in November 2023. On delivery, the vessels performed a voyage charter for an Asia based operator from Asia to Europe, and thereafter, the vessels started a 10-year time charter to Volkswagen Group.
Also during the year ended December 31, 2023, we had paid total installments and related costs of $83.9 million in relation to another two dual-fuel 7,000 CEU newbuilding car carriers under construction. One of these vessels, Odin Highway, was delivered from the shipyard in January 2024 and immediately commenced a 10-year time charter to K Line. The second vessel, Thor Highway, is also expected to be delivered during the first half of 2024 and will immediately commence a 10-year time charter to K Line.
Disposals
In the year ended December 31, 2017,2023, we took deliverydisposed of the following vessels:
•In March 2017,2023 and April 2023, we delivered the 19,200two Suezmax tankers, Glorycrown and Everbright, which were trading in the spot market, to an unrelated third party. Net sale proceeds of $84.9 million were received in connection with the transaction and recorded a gain of $16.4 million on the disposal.
•In April 2023 and June 2023, we sold and delivered the two chemical tankers, SFL Weser and SFL Elbe, which were also trading in the spot market, to an unrelated third party for net sale proceeds of $19.4 million. We recorded a gain of $30 thousand on the disposal and recorded an impairment loss of $7.4 million prior to the disposal.
•In August 2023, we sold and delivered the VLCC, Landbridge Wisdom, which was previously accounted for as an investment in ‘leaseback asset’, to Landbridge Universal Limited (“Landbridge”) following exercise of the applicable purchase option in the charter contract. Net sales proceeds totaling $52.0 million were received from Landbridge and we recorded a gain of $2.2 million in connection with the transaction.
In the period between January 1, 2024 and March 14, 2024, we have not had any disposal of vessels or rigs.
Corporate Debt and Lease Debt Financing
In January 2023, we drew down $144.6 million for the financing of four Suezmax tankers. The facility bears interest at the compounded daily SOFR plus a margin and has a term of approximately three years.
In February 2023, we issued $150.0 million in senior unsecured sustainability-linked bonds due 2027 in the Nordic credit market. The bond was issued at a price of 99.58%. The difference between the face value and market value of the bond of $0.6 million will be amortized as an interest expense over the life of the bond. The bonds pay a coupon of 8.875% of the nominal value per annum and are redeemable in full on February 1, 2027, and net proceeds were used to refinance existing bonds and for general corporate purposes.
Between January and March 2023, we bought back approximately $53.0 million of the 4.875% senior unsecured convertible bonds due 2023. The repurchases were made from surplus cash from the issuance of the new $150.0 million sustainability-linked bonds and as a result of favorable market conditions. The net outstanding balance of $84.9 million remaining after the repurchases were redeemed in full at the maturity of the bonds in May 2023.
In February 2023, we bought back approximately $29.4 million (NOK293 million) of the NOK700 million senior unsecured floating rate bonds due 2023. The repurchase was made from surplus cash from the issuance of the new $150.0 million sustainability-linked bonds and as a result of favorable market conditions. The net outstanding balance of $38.1 million (NOK407 million) remaining after the repurchases were redeemed in full at the maturity of the bonds in September 2023.
In April 2023, we entered into a sale and leaseback transaction via a Japanese operating lease with call option financing structure for $45.0 million for the financing of the car carrier, Arabian Sea. The vessel was sold and leased back for a term of approximately five years, with the option to purchase the vessel at the end of the period.
Also, in April 2023, we drew down $150.0 million for the refinancing of the harsh environment jack-up drilling rig, Linus. The facility bears a fixed interest rate and has a term of approximately three years.
In May 2023, we entered into a sale and leaseback transaction via a Japanese operating lease with call option financing structure for $38.5 million for the financing of the 2,500 TEU newbuilding container vessel, MSC Viviana Maersk Pelepas. The vessel was delivered by the shipyardsold and in terms of agreements entered into in October 2015, commenced a bareboat charter to usleased back for a periodterm of 15 years. The vessel simultaneously commenced a 15 year bareboat charter to MSC.
In August 2017, the Company took delivery of two 114,000 dwt LR2 newbuilding oil product tankers, SFLTrinity and SFL Sabine. Upon delivery, the vessels commenced their respective seven year time charters to Phillips 66,nearly nine years, with options to purchase the vessel after approximately six or seven years.
In May 2023, we drew down $150.0 million and a further $8.4 million for the chartererrefinancing of the harsh environment semi-submersible rig, Hercules, and general corporate purposes, respectively. The facilities bear interest at the compounded daily SOFR plus a margin and have a term of approximately three years.
Also, in May 2023, we drew down $32.5 million on pre-delivery facilities in relation to extendtwo 7,000 CEU newbuild car carriers, Odin Highway and Thor Highway. The pre-delivery facilities bear interest at the period up to 12 years.
The Company has not takencompounded daily SOFR plus a margin and are repayable upon delivery of any new vessels between December 31, 2017 and March 26, 2018. However in March 2018, the Company announced that it has agreed to acquire a fleet of 15 second-hand feeder size container vessels, ranging from 1,100 TEU to 4,400 TEU, in combination with long term bareboat charters to a leading container line. Delivery of the vessels in 2024.
In September 2023 and November 2023, respectively, we completed sale and leaseback transactions via a Japanese operating lease with call option financing structure for $72.2 million for the financing of the two 7,000 CEU newbuild car carriers, Emden and Wolfsburg, totaling $144.4 million. The vessels were sold and leased back for a term of nearly 12 years, with options to purchase the vessels in approximately 10 years.
In December 2023, we were offered a reverse stock loan facility of $60.0 million as security for the shares of the Company lent under a general share lending agreement entered into with a bank in 2021. As of December 31, 2023, 11.8 million shares of the Company were in the custody of the bank. The facility bears interest at Effective Federal Funds Rate (“EFFR”) plus a margin and is repayable on demand.
Share Options
In February 2023, we awarded a total of 440,000 options to employees, officers and directors, pursuant to our share option scheme (the “Share Option Scheme”). The options have a five-year term and a three-year vesting period and the first options will be exercisable from February 2024 onwards. The initial strike price was $10.34 per share.
In February 2024, we awarded a total of 440,000 options to employees, officers and directors, pursuant to our Share Option Scheme. The options have a five-year term and a three-year vesting period and the first options will be exercisable from February 2025 onwards. The initial strike price was $12.02 per share.
Shares Issue
In January 2024, we issued 43,708 new shares to an officer in settlement of options issued in 2019 pursuant to the Company’s incentive program. The weighted average exercise price of the options exercised was $6.62 per share and the total intrinsic value of the options exercised was $0.5 million.
Shares Repurchase
In May 2023, the Board of Directors authorized the repurchase of up to an aggregate of $100.0 million of the Company’s common shares, which is valid until June 30, 2024 (the “Share Repurchase Program”). The Company is expected in April 2018.not obligated under the terms of the program to repurchase any of its common shares and the program may be suspended or reinstated at any time at the Company’s discretion and without notice.
Disposals
InDuring the year ended December 31, 2017,2023, we repurchased a total of 1,095,095 shares under the Share Repurchase Program, at an average price of approximately $9.27 per share, with principal amounts totaling $10.2 million. We have $89,847,972 remaining under the authorized Share Repurchase Program.
The specific timing and amounts of the repurchases will be in the sole discretion of the Company and may vary based on market conditions and other factors. We are not obligated under the terms of the program to repurchase any of our common shares.
New Contracts, Extensions and Changes
In May 2023, we signed a contract with a subsidiary of Galp Energia for the harsh environment semi-submersible rig Hercules. The contract, which commenced in November 2023, is for two wells plus optional well testing. Without any options, the duration is approximately 115 days including the mobilization period.
In August 2023, we signed a new contract with a subsidiary of Equinor for the harsh environment semi-submersible rig Hercules. The contract is for one well plus one optional well, and is expected to commence in the first half of 2024, when the contract with Galp Energia terminates. The duration for the firm contract period is approximately 200 days including transit time to and from Canada.
In October 2023, Maersk declared an extension option for the 9,500 TEU container vessel Maersk Sarat until the second quarter of 2025.
In November 2023, the 15,400 TEU container vessel Savannah Express commenced a time charter contract with Hapag Lloyd AG (“Hapag Lloyd”) for a duration of five years.
In March 2024, Maersk declared a further 12 months extension option each for the 8,700 TEU container vessel, San Felipe, and 9,500 TEU container vessel, Maersk Skarstind.
Dividend Reinvestment Plan ("DRIP") and At-the-Market Sales Agreement ("ATM")
On April 12, 2022, the Board of Directors authorized a renewal of our dividend reinvestment plan, or DRIP, to facilitate investments by individual and institutional shareholders who wish to invest dividend payments received on shares owned, or other cash amounts, in the Company’s common shares on a regular or one time basis, or otherwise. On April 15, 2022, the Company filed a registration statement on Form F-3ASR (Registration No. 333-264330) to register the sale of up to 10,000,000 common shares pursuant to the DRIP. If certain waiver provisions in the DRIP are requested and granted pursuant to the terms of the plan, we may grant additional share sales to investors, from time to time, up to the amount registered under the plan.
In May 2020, we entered into agreements foran equity distribution agreement with BTIG LLC ("BTIG") under which the disposalCompany may, from time to time, offer and sell new common shares having aggregate sales proceeds of vessels, as follows:
up to $100.0 million through an ATM program (the “2020 ATM Program”). We had sold 11.4 million of our common shares, and received net proceeds of $90.2 million, under the 2020 ATM Program. In March 2017, April 2022, we entered into an amended and restated equity distribution agreement with BTIG, under which the VLCC Front Century Company may, from time to time, offer and sell new common shares up to $100.0 million through an ATM program with BTIG (the “2022 ATM Program”). Under this agreement, the prior 2020 ATM Program established in May 2020 was deliveredterminated and replaced with the renewed 2022 ATM Program. On April 28, 2023, in connection with the 2022 ATM Program, we filed a new registration statement on Form F-3ASR (Registration No. 333-271504) and an accompanying prospectus supplement with the SEC to its new owner. Theregister the offer and sale of this vessel hadup to $100.0 million common shares pursuant to the 2022 ATM Program. No common shares have been agreed in November 2016,sold under the 2022 ATM Program.
No new common shares were issued and an impairment adjustment of $0.5 million was recorded against it insold under the DRIP and ATM arrangements during the year ended December 31, 2016. Net sales proceeds were approximately $23.8 million, including compensation received from Frontline Shipping2023.
Dividends
On February 15, 2023, the Board of Directors declared a dividend of $0.24 per share which was paid in cash on March 30, 2023 to shareholders of record as of March 15, 2023.
On May 15, 2023, the Board of Directors declared a dividend of $0.24 per share, which was paid in cash on June 30, 2023 to shareholders of record as of June 16, 2023.
On August 17, 2023, the Board of Directors declared a dividend of $0.24 per share, which was paid in cash on September 29, 2023 to shareholders of record as of September 14, 2023.
On November 8, 2023, the Board of Directors declared a dividend of $0.25 per share, which was paid in cash on December 28, 2023 to shareholders of record as of December 15, 2023.
On February 14, 2024, the Board of Directors declared a dividend of $0.26 per share which will be paid in cash on or around March 28, 2024 to shareholders of record as of March 15, 2024.
Change in the Company’s Certifying Accountant
In November 2022, MSPC Certified Public Accountants and Advisors, P.C. (“MSPC”) (PCAOB Firm ID number: 717), the independent registered public accounting firm of the Company for the early terminationfiscal year ended December 31, 2022, notified us of its decision not to stand for re-appointment as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2023. On November 24 2022, our Board of Directors appointed Ernst & Young AS (“EY”) (PCAOB Firm ID number: 1572) as the successor independent registered public accounting firm for the year ended December 31, 2023. The engagement of EY was ratified by shareholders at our annual meeting of shareholders held May 8, 2023. Please refer to “Item 16F. Change in Registrant's Certifying Accountant” for further information.
Russian-Ukrainian Conflict and Red Sea disruption
The conflict between Russia and Ukraine has disrupted supply chains and caused instability in the global economy, and the United States and the European Union, among other countries, announced sanctions against the Russian government and its supporters. OFAC administers and enforces multiple authorities under which sanctions have been imposed on Russia, including: the Russian Harmful Foreign Activities sanctions program, established by the Russia-related national emergency declared in Executive Order (E.O.) 14024 and subsequently expanded and addressed through certain additional authorities, and the Ukraine-/Russia-related sanctions program, established with the Ukraine-related national emergency declared in E.O. 13660 and subsequently expanded and addressed through certain additional authorities. The United States has also issued several Executive Orders that prohibit certain transactions related to Russia, including the importation of certain energy products of Russian Federation origin, investments in the Russian energy sector by U.S. persons, among other prohibitions and export controls. The ongoing conflict could result in the imposition of further economic sanctions or new categories of export restrictions against persons in or connected to Russia. As of March 14, 2024, the Company’s charter contracts have not been materially affected by the events in Russia and Ukraine. However, it is possible that in the future third parties, with whom the Company has or will have charter contracts, may be impacted by such events. While in general much uncertainty remains regarding the global impact of the charter.conflict in Ukraine, it is possible that such tensions could adversely affect the Company’s business, financial condition, results of operation and cash flows.
The armed conflict In May 2017,Israel and Gaza is difficult to predict and its impact on the Company agreedworld economy is uncertain. The conflict in the Gaza strip has increased the political risk for shipping significantly due to sell the 2000-built VLCC Front Scillaproximity both physically and politically to the largest oil exporting region in the world. The costs of vessel security measures have been affected by the geopolitical conflicts in the Middle East and maritime incidents in and around the Red Sea, including off the coast of Yemen in the Gulf of Aden where vessels have faced an increased number of armed attacks targeting US-linked ships and Marshall Islands’ flagged vessels. Substantial loss of revenue and other costs may be incurred as a result of detention of a vessels or additional security measures and the 1998-built Suezmax tanker Front Brabantrisk of uninsured losses could have a material adverse effect on our business, liquidity and operating results. The Red Sea shipping crisis has disrupted supply chains which is compounded by the ongoing shipping disruptions caused by blockages in the Panama Canal, which is experiencing one of the region’s worst droughts. Given the risk of attack in the Red Sea, many ships are now avoiding the canal, opting for routes around the Cape of Good Hope thereby increasing ship transit times and costs. As of March 14, 2024, the Company’s vessels and contracts have not been materially affected by the events in the Middle East and the Red Sea.
Inflation
In light of the current and foreseeable economic environment, significant global inflationary pressures could increase the Company's operating, voyage, general and administrative and financing costs. Further, as a result of disruptions in the Red Sea, shipping costs have increased substantially which are likely to unrelated third parties. The agreed net salesbe reflected in rising import prices and longer shipping times will reduce supplies of intermediate inputs and consumer goods. Historically shipping companies are accustomed to navigating in shipping downturns, coping with inflationary pressures and monitoring costs to preserve the liquidity, as they typically encourage suppliers and service providers to lower rates and prices.
We therefore assume inflation in all of our investment decisions and attempt to mitigate cost inflation. We constantly monitor our fleet’s cost levels and employ a pool of different suppliers for the vessels were approximately $26.8 millionsame services to get competitive pricing on services. However, there are no assurances that the effects of inflation would not have a material adverse impact on our business, financial condition, results of operation and $12.1 million, respectively, including compensation received from Frontline Shipping for the early termination of the charters. Front Brabant was delivered to its new owner in May 2017 and Front Scilla was delivered to its new owner in June 2017.
cash flows.In July 2017, the Company agreed to sell the 1997-built Suezmax tanker Front Ardenne to an unrelated third party. The agreed net sales price for the vessel was approximately $12.0 million, including compensation received from Frontline Shipping for the early termination of the charter. Front Ardenne was delivered to its new owner in August 2017.
The Company has disposed of the following vessel between December 31, 2017 and March 26, 2018:
In February 2018, the Company delivered the 1999-built VLCC Front Circassia to an unrelated third party. The net sale proceeds were approximately $17.5 million, and in addition, the Company will receive an interest bearing loan note of approximately $8.9 million from Frontline Shipping as compensation for the early termination of the charter.
In addition to the above, in March 2018, the Company announced that it has agreed to sell the 1,700 TEU container vessel SFL Avon to an unrelated third party. The net sales proceeds will be approximately $12.5 million. Delivery to the new owner is expected in April 2018.
B. BUSINESS OVERVIEW
Our Business Strategies
Our primary objectives are to profitably grow our business and increase long-term distributable cash flow per share by pursuing the following strategies:
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(1) | Expand our asset base. We have increased, and intend to further increase, the size of our asset base through timely and selective acquisitions of additional assets that we believe will be accretive to long-term distributable cash flow per share. We will seek to expand our asset base through placing newbuilding orders, acquiring second-hand vessels and entering into medium or long-term charter arrangements. From time to time we may also acquire vessels with no or limited initial charter coverage. We believe that by entering into newbuilding contracts or acquiring second-hand vessels or rigs we can provide for long-term growth of our assets.
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(1)Expand our asset base. We have increased, and intend to further increase, the size of our asset base through timely and selective acquisitions of additional assets and businesses that we believe will be accretive to long-term distributable cash flow per share. We will seek to expand our asset base through various transactions including, placing newbuilding orders, acquiring second-hand vessels and entering into short, medium or long-term charter arrangements. We also make financial investments or provide loans secured by vessels, rigs and or other assets in the wider maritime industry. From time to time we may also acquire vessels with no or limited initial charter coverage. We believe that by entering into newbuilding contracts or acquiring second-hand vessels or rigs we can provide for long-term growth of our assets. We may also seek new investment opportunities, including technologies and assets with a positive impact on the environment with an overall aim of reducing the Company’s carbon footprint in line with the UN sustainable development goals.
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(2) | Diversify our asset base.
(2)Diversify our asset base. Since 2004, we have diversified our asset base and now have the following asset types, which comprise crude oil tankers, oil product tankers, container vessels, car carriers, dry bulk carriers, a jack-up drilling rig and an ultra-deepwater drilling rig. We believe that there are other attractive markets that could provide us with the opportunity to further diversify our asset base. These markets include vessels and other assets that are of long-term strategic importance to certain operators in the shipping maritime and offshore industries. We believe that the expertise and relationships of our management, together with our relationship with Mr. John Fredriksen, could provide us with incremental opportunities to expand our asset base.
(3)Expand and diversify our customer relationships. Since 2004, we have diversified our asset base and now have nine asset types, which comprise crude oil tankers, chemical tankers, oil product tankers, container vessels, car carriers, dry bulk carriers, jack-up drilling rigs, ultra-deepwater drilling units and offshore support vessels. We believe that there are other attractive markets that could provide us with the opportunity to further diversify our asset base. These markets include vessels and other assets that are of long-term strategic importance to certain operators in the shipping and offshore industries. We believe that the expertise and relationships of our management, together with our relationship and affiliation with Mr. John Fredriksen, could provide us with incremental opportunities to expand our asset base. |
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(3) | Expand and diversify our customer relationships. Since 2004, we have increased our customer base from one to 11 customers. Of these 11 customers, Frontline Shipping, Seadrill and Golden Ocean are related parties. We intend to continue to expand our relationships with our existing customers and also to add new customers, as companies servicing the international shipping and offshore oil exploration markets continue to expand their use of chartered-in assets to add capacity.
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(4) | Pursue medium to long-term fixed-rate charters. We intend to continue to pursue medium to long-term fixed rate charters, which provide us with stable future cash flows. Our customers typically employ long-term charters for strategic expansion as most of their assets are typically of strategic importance to certain operating pools, established trade routes or dedicated oil-field installations. We believe that we will be well positioned to participate in their growth. In addition, we will also seek to enter into charter agreements that are shorter and provide for profit sharing, so that we can generate incremental revenue and share in the upside during strong markets.
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Customers
Frontline Shipping was our principal customer when we were spun-off from Frontline in 2004. As discussed above we have increased our customer base from one to 11more than 10 customers with Golden Ocean now the only related party remaining in our list of long-term customers. We intend to continue to expand our relationships with our existing customers and also to add new customers, as the companies servicing the international shipping, maritime and offshore oil exploration and production markets continue to expand their use of leased-in assets to add capacity.
(4)Pursue medium to long-term fixed-rate charters. We intend to continue to pursue medium to long-term fixed rate charters, which provide us with stable future cash flows. Our customers typically employ long-term charters for strategic expansion as most of their assets are typically of strategic importance to certain operating pools, established trade routes or dedicated oil-field installations. We believe that we will be well positioned to participate in their growth. In addition, we will also seek to enter into charter agreements that are shorter and provide for profit sharing, so that we can generate incremental revenue and share in the upside during strong markets.
Our Environmental, Social and Governance Efforts
SFL relies on the SASB framework for our sector to facilitate the monitoring of material ESG issues. We strive to incorporate the UN Global Compact Principles in our operations in general, as well as in our ESG management system, as more fully described below.
We have carried out a materiality analysis in order to aid us in prioritizing our sustainability efforts. Our review of potentially material topics followed the GRI Materiality Standard (GRI 3, 2021), considering the severity and likelihood of the impacts of our operations. Our ESG priorities also take into consideration those which are financially material, and we are guided by the SASB Marine Transportation Standard (2018) in this regard. The following topics have been considered by the Board of Directors and are deemed material for inclusion in the ESG report:
•Direct GHG emissions;
•Low carbon energy sources;
•Climate-related risks;
•Marine casualties involving crew;
•Corruption risk;
•Ship recycling;
•Spills and releases; and
•Compliance training and training on board our vessels.
We have established specific targets for the material areas pinpointed in the assessment described above. In particular, SFL will continue to develop its strategy to address direct emissions and associated climate-related risks.
Our Corporate Code of Business Ethics and Conduct is established by the Board of Directors. The Board works to ensure that we have sufficient internal control and risk management systems in place, which encompass our corporate values and ethical guidelines, including related paritiesthe guidelines for corporate social responsibility. The Board routinely considers critical ESG issues, and in line with our Code of Conduct, any significant incidents are reported directly to the Board. The Board also reviews our annual ESG report, which sets forth our ESG strategy and goals, and report on our ESG performance across all our business operations. All of our ESG Reports may be found on our website at https://www.sflcorp.com/esg/. The information on our website is not incorporated by reference into this annual report.
Together with other Hemen Related Companies, such as Avance Gas, Flex LNG Ltd., Frontline Shipping, Seadrill and Golden Ocean. InOcean, we have established an ESG forum, the year ended December 31, 2017, Frontlinegoal of which is to design industry leading approaches to ESG risk management and reporting parameters.
We also support the following initiatives: The Neptune Declaration on Seafarer Wellbeing and Crew Change, the Maritime Anti-Corruption Network (“MACN”), the Clean Shipping accountedAlliance, and the International Association of Independent Tanker Owners (“Intertanko”). We also comply with the requirements of Oil Companies International Marine Forum (“OCIMF”).
Environmental Priorities
Monitoring and Management
At SFL, we are examining ways to manage our environmental impact in order to better protect the environment, the sector, our customers and our own business. Our Environmental Policy describes our commitment to environmental due diligence and how spills and operational emissions of sulfur oxides, nitrogen oxides, waste and other discharges are to be managed.
We rolled out a digital platform to track vessel fuel efficiency since 2021 and, as of the date of this annual report, we continue to track our vessels’ fuel efficiency. We believe live tracking our vessels’ emissions and energy consumption is an important tool to monitor energy efficiency and emissions in accordance with regulations and our own targets.
Decarbonization
We see decarbonization as a strategic priority going forward; this addresses our direct emissions, climate-related risks of regulatory changes, evolving expectations from our customers, as well as access to cost efficient capital. The energy mix in our fleet is dependent on available technologies.
Social Priorities
We believe that providing safe and healthy labor conditions, a supportive environment and opportunities for 15%employees to develop within the Company are key to the well-being of our consolidated operating revenues (2016: 28%, 2015: 33%staff and fundamental to the long-term success of SFL.
Labor Rights and Working Conditions
In addition to securing our workers’ health and safety, we seek to ensure that our employees, onshore and offshore, are working under conditions that meet the requirements set out in the International Labor Conventions and the Maritime Labor Convention. As part of safeguarding seafarers labor rights, these conventions include the right to collective bargaining agreements, and that no employee is discriminated based on nationality, race or any other basis.
Diversity
Our policies prohibit discrimination against any employee or any other person on the basis of sex, race, color, age, religion, sexual preference, marital status, national origin, disability, ancestry, political opinion, or any other basis. We are an international company with shipboard employees from across the world. While our rig and shipboard employees are predominantly male, women make up over 40% of our onshore employees.
Human Rights
We are committed to respecting and protecting internationally recognized human rights as laid out in the UN Guiding Principles on Business and Human Rights (“UNGP”). InWe are an international company with suppliers from all over the world. We strive to have and update the necessary policies, due diligence processes and access to remedy in line with the UNGP.
Governance Priorities
SFL has a risk-based approach to compliance and has established policies and procedures which clearly set out how we manage ESG issues. These policies and procedures which are regularly reviewed and updated (as necessary), mitigates our risks and any negative ESG impacts. Our ESG management system is complemented by annual risk assessments, integrity due diligence, training of employees, third party audits, internal systems and controls – such as internal compliance testing, remediation and investigations. Each year, ended December 31, 2017,we conduct a full Compliance Risk Assessment in order to adequately address the Company had eight Capesize dry bulk carriers leasedcompliance risks SFL is exposed to.
Anti-Bribery and Anti-Corruption
Commitment to honest and ethical conduct and integrity are key values for SFL. These values are embedded in our way of working with customers, business partners, employees, shareholders and the communities in which we operate. We have a subsidiaryzero-tolerance policy towards bribery as stated in our Corporate Code of Business Ethics and Conduct and Financial Crime Policy, which applies to all entities controlled by SFL’s officers, directors, employees as well as workers and third-party consultants, wherever they are located. Our implemented enterprise-wide anti-corruption and money laundering policies are modelled on the UK Bribery Act and US Foreign Corrupt Practices Act (“FCPA”).
Assessing and monitoring business processes, training and controls are fundamental tools in implementing our anticorruption policy. As part of our compliance processes, appropriate risk-based communication and training are provided to employees as part of their onboarding and ongoing development program.
See further details contained in our latest Environmental Social Governance Report, which may be found on our website at https://www.sflcorp.com/esg/. The information on our website is not incorporated by reference into this annual report.
Customers
As of March 14, 2024, our customers includes, among others, Golden Ocean which accounted for approximately 14%Group Limited (“Golden Ocean”), Maersk A/S (“Maersk”), Maersk Sealand Pte Ltd (“Maersk Sealand”), MSC Mediterranean Shipping Company S.A. and its affiliate Conglomerate Shipping Ltd. (“MSC”), ConocoPhillips Skandinavia AS (“ConocoPhillips”), Phillips 66 Company (“Phillips 66”), Evergreen Marine Corporation (Taiwan) Ltd. and its affiliate Evergreen Marine (Singapore) Pte Ltd (“Evergreen”), Volkswagen Konzernlogistik Gmbh Co. OHG (“Volkswagen”), Kawasaki Kisen Kaisha Ltd. (“K Line”), Trafigura Maritime Logistics Pte Ltd (“Trafigura”), Hapag-Lloyd AG (“Hapag-Lloyd”), Koch Shipping Pte Ltd (“Koch”), EUKOR Car Carriers Inc. (“Eukor”), Galp Energia, S.A (“Galp Energia”) and Equinor Canada Ltd (“Equinor”).
Our customers that represent the largest proportion of our consolidated operating revenues (2016: 12%, 2015: 5%)revenue are discussed below in “Item 5 - Factors Affecting Our Current and Future Results”.
The Company also had 12 container vessels on long-term bareboat charters to MSC, which accounted for approximately 10% of our consolidated operating revenues in the year ended December 31, 2017 (2016: 4%, 2015: 4%).
Our income earned from Seadrill is through three wholly owned subsidiaries which are accounted for using the equity method, that lease drilling units to subsidiaries of Seadrill. In the year ended December 31, 2017, income from associated companies accounted for 38.6% of our net income (2016: 31.7%, 2015: 24.7%).
Competition
We currently operate in several sectors of the maritime, shipping and offshore industry,industries, including oil transportation, dry bulk shipments, chemical transportation, oil productproducts transportation, container transportation, car transportation and drilling rigs and offshore support vessels.rigs.
The markets for international seaborne oil transportation services, dry bulk transportation services, and container and car transportation services are highly fragmented and competitive. Seaborne oil transportation services are generally provided by two main types of operators: major oil companies or captive fleets (both private and state-owned) and independent shipowner fleets.
In addition, several owners and operators pool their vessels together on an ongoing basis, and such pools are available to customers to the same extent as independently owned and operated fleets. Many major oil companies and other commodity carriers also operate their own vessels and use such vessels not only to transport their own cargoes but also to transport cargoes for third parties, in direct competition with independent owners and operators.
Container vessels and car carriers are generally operated by logistics companies, where the vessels are used as an integral part of their services. Therefore, container vessels and car carriers are typically chartered more on a period basis and single voyage chartering is less common. As the market has grown significantly over recent decades, we expect in the future to see more vessels chartered by logistics companies on a shorter term basis, particularly smaller vessels, however this will vary depending on market conditions and the availability of vessels.
One of ourOur jack-up drilling rigs,rig and our ultra-deepwater drilling units and our offshore support vesselsrig are charteredsub-chartered out on long-term charters to contractors.oil majors. Jack-up drilling rigs and ultra-deepwater drilling units and offshore support vesselsrigs are normally chartered by oil companies on a shorter-term basis linked to area-specific well drilling or oil exploration activities, but there have also been longer period charters available when oil companies want to cover their longer term requirements for such vessels. Offshore support vessels and ultra-deepwaterrigs. Ultra-deepwater semi-submersible drilling rigs are self-propelled, and can therefore easily move between geographic areas. Jack-up drilling rigs are not self-propelled, but it is common to move these assets over long distances on heavy-lift vessels. Therefore, the markets and competition for these rigs are effectively world-wide.
Competition for charters in all the above sectors is intense and is based upon price, location, size, age, specifications, condition and acceptability of the vessel/rig and its manager.technical and commercial managers. Competition is also affected by the availability of other sizesized vessels/rigs to compete in the trades in which we engage. Most of our existing vessels are chartered at fixed rates on a long-term basis and are thus not directly affected by competition in the short-term. However, tankers chartered to Frontline Shipping, dry bulk carriers chartered to the Golden Ocean Charterer and our five offshore support vessels chartered to the Solstad Charterer are subject to profit sharing agreements, which will beare affected by competition experienced by the charterers.
Risk of LossEnvironmental and Insurance
Our business is affected by a number of risks, including mechanical failure, collisions, property loss to the vessels, cargo loss or damage, and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, the operation of any ocean-going vessel is subject to the inherent possibility of catastrophic marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.
The insurance of our vessels which are chartered on a bareboat basis or on a time charter basis to Frontline Shipping and the Golden Ocean Charterer is the responsibility of the bareboat charterers, Frontline Management or Golden Ocean Management, respectively, who arrange insurance in line with standard industry practice. We are responsible for the insurance of our other time chartered and voyage chartered vessels. In accordance with standard practice, we maintain marine hull and machinery and war risks insurance, which include the risk of actual or constructive total loss, and protection and indemnity insurance with mutual assurance associations. From time to time we carry insurance covering the loss of hire resulting from marine casualties in respect of some of our vessels. Currently, the amount of coverage for liability for pollution, spillage and leakage available to us on commercially reasonable terms through protection and indemnity associations and providers of excess coverage is up to $1 billion per vessel per occurrence. Protection and indemnity associations are mutual marine indemnity associations formed by shipowners to provide protection from large financial loss to one member by contribution towards that loss by all members.
We believe that our current insurance coverage is adequate to protect us against the accident-related risks involvedOther Regulations in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage, consistent with standard industry practice. However, there is no assurance that all risks are adequately insured against, that any particular claims will be paid, or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.Shipping Industry
Environmental Regulation and Other Regulations
Government regulation and laws significantly affect the ownership and operation of our fleet. We are subject to international conventions and treaties, national, state and local laws and regulations in force in the countries in which our vessels may operate or are registered relating to safety and health and environmental protection including the storage, handling, emission, transportation and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage to natural resources. Compliance with such laws, regulations and other requirements entails significant expense, including vessel modifications and implementation of certain operating procedures.
A variety of government and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include the local port authorities (applicable national authorities such as the United States Coast Guard (“USCG”),USCG, harbor master or equivalent), classification societies, flag state administrations (countries of registry) and charterers, particularly terminal operators. Certain of these entities require us to obtain permits, licenses, certificates and other authorizations for the safe operation of our vessels. Failure to maintain necessary permits or approvalscomply could require us to incur substantial costs or result in the temporary suspension of the operation of one or more of our vessels.
We believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry.
Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards. We are required to maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training of our officers and crews and compliance with United States and international regulations. We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations. However, because such laws and regulations are frequently changedchange and may impose increasingly stricter requirements, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels. In addition, a future serious marine incident that causes significant adverse environmental impact could result in additional legislation or regulation that could negatively affect our profitability.profitability and reputation.
It should be noted that the U.S. is currently experiencing changes in its environmental policy, the results of which have yet to be fully determined. For example, in April 2017, the U.S. President signed an executive order regarding environmental regulations, specifically targeting the U.S. offshore energy strategy, which may affect parts of the maritime industry and our operations. Furthermore, recent action by the IMO’s Maritime Safety Committee and United States agencies indicate that cybersecurity regulations for the maritime industry are likely to be further developed in the near future in an attempt to combat cybersecurity threats. For example, cyber-risk management systems must be incorporated by ship-owners and managers by 2021. This might cause companies to cultivate additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures. However, the impact of such regulations is hard to predict at this time.
The laws and regulations discussed below may not constitute a comprehensive list of all such laws and regulations that are applicable to the operation of our vessels and drilling units.
Flag State
The flag state, as defined by the United Nations Convention on the Law of the Sea, is responsible for implementing and enforcing a broad range of international maritime regulations with respect to all ships granted the right to fly its flag. The "Shipping“Shipping Industry Guidelines on Flag State Performance"Performance” evaluates flag states based on factors such as ratification, implementation and enforcement of principal international maritime treaties, supervision of surveys, compliance with International Labour Organization reporting, and participation at IMO meetings. Our vessels and rigs are flagged in Liberia, the Bahamas, Cyprus, Malta, the Marshall Islands, Panama,Cyprus, Hong Kong and Norway.
International Maritime Organization
The International Maritime Organization, the United Nations agency for maritime safety and the prevention of pollution by vessels (the “IMO”), has adopted the International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto, collectively referred to as MARPOL 73/78 and herein as “MARPOL,” adopted the International Convention for the Safety of Life at Sea of 1974 (“SOLAS Convention”), and the International Convention on Load Lines of 1966 (the “LL Convention”). MARPOL establishes environmental standards relating to oil leakage or spilling, garbage management, sewage, air emissions, handling and disposal of noxious liquids and the handling of harmful substances in packaged forms. MARPOL is applicable to drybulk,dry bulk, tanker and LPGLNG carriers, among other vessels, and is broken into six Annexes, each of which regulates a different source of pollution. Annex I relates to oil leakage or spilling; Annexes II and III relate to harmful substances
carried in bulk in liquid or in packaged form, respectively; Annexes IV and V relate to sewage and garbage management, respectively; and Annex VI, lastly, relates to air emissions. Annex VI was separately adopted by the IMO in September of 1997.1997; new emission standards titled IMO-2020 took effect on January 1, 2020.
In 2012, the IMO’sIMO's Marine Environmental Protection Committee, or the “MEPC,”“MEPC” adopted a resolution amending the International Code for the Construction and Equipment of Ships Carrying Dangerous Chemicals in Bulk, or the “IBC Code.”Code”. The provisions of the IBC Code are mandatory under MARPOL and the SOLAS Convention. These amendments, which entered into force in June 2014 and took effect on January 1, 2021, pertain to revised international certificates of fitness for the carriage of dangerous chemicals in bulk and identifying new products that fall under the IBC Code. We may need to make certain financial expenditures to comply with these amendments.
In 2013, the MEPC adopted a resolution amending MARPOL Annex I Condition Assessment Scheme, or “CAS.”“CAS”. These amendments became effective on October 1, 2014, and require compliance with the 2011 International Code on the Enhanced Programme of Inspections during Surveys of Bulk Carriers and Oil Tankers, or “ESP Code,”Code”, which provides for enhanced inspection programs. We may need to make certain financial expenditures to comply with these amendments.
Non-compliance with IMO regulations may subject a shipowner or bareboat charterer to increased liability, may lead to loss of or decreases in available insurance coverage for affected vessels and may result in denial of access to, or detention in, some ports including United States, or U.S., and European Union, or EU, ports.
Air Emissions
In September of 1997, the IMO adopted Annex VI to MARPOL to address air pollution from vessels. Effective May 2005, Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from all commercial vessel exhausts and prohibits “deliberate emissions” of ozone depleting substances (such as halons and chlorofluorocarbons), emissions of volatile compounds from cargo tanks, and the shipboard incineration of specific substances. Annex VI also includes a global cap on the sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions, as explained below. Emissions of “volatile organic compounds” from certain tankers,vessels, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances (such as polychlorinated biphenyls, or PCBs) are also prohibited. We believe that all our vessels are currently compliant in all material respects with these regulations.
The MEPC adopted amendments to Annex VI regarding emissions of sulfur oxide, nitrogen oxide, particulate matter and ozone depleting substances, which entered into force on July 1, 2010. The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulfur contained in any fuel oil used on board ships. On October 27, 2016, at its 70th70th session, the MEPC agreed to implement a global 0.5% m/m sulfur oxide emissions limit (reduced from the current 3.50%) starting from January 1, 2020. This limitation can be met by using low-sulfur complaintcompliant fuel oil, alternative fuels, or certain exhaust gas cleaning systems. Once the cap becomes effective, ships will beShips are now required to obtain bunker delivery notes and International Air Pollution Prevention (“IAPP”) Certificates from their flag states that specify sulfur content. This subjectsAdditionally, at MEPC 73, amendments to Annex VI to prohibit the carriage of bunkers above 0.5% sulfur on ships were adopted and took effect on March 1, 2020, with the exception of vessels fitted with exhaust gas cleaning equipment (“scrubbers”) which can carry fuel of higher sulfur content. These regulations subject ocean-going vessels in these areas to stringent emissionsemission controls, and may cause us to incur additionalsubstantial costs.
Sulfur content standards are even stricter within certain “Emission Control Areas,” or (“ECAs”). As of January 1, 2015, ships operating within an ECA were not permitted to use fuel with sulfur content in excess of 0.1%. m/m. Amended Annex VI establishes procedures for designating new ECAs. Currently, the IMO has designated four ECAs, including specified portions of the Baltic Sea area, North Sea area, North American area and United States Caribbean area. Ocean-going vessels in these areas will be subject to stringent emission controls and may cause us to incur additional costs. Other areas in China are subject to local regulations that impose stricter emission controls. In December 2021, the member states of the Convention for the Protection of the Mediterranean Sea Against Pollution (“Barcelona Convention”) agreed to support the designation of a new ECA in the Mediterranean. On December 15, 2022, MEPC 79 adopted the designation of a new ECA in the Mediterranean, with an effective date of May 1, 2025. In July 2023, MEPC 80 announced three new ECA proposals, including the Canadian Arctic waters and the North-East Atlantic Ocean. If other ECAs are approved by the IMO, or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the U.S Environmental Protection Agency (“EPA”) or the states where we operate, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of our operations.
Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for marine diesel engines, depending on their date of installation. At the MEPC meeting held from March to April 2014, amendments to Annex VI were adopted which address the date on which Tier III Nitrogen Oxide (NOx)(“NOx”) standards in ECAs will go into effect. Under the amendments, Tier III NOx standards apply to ships that operate in the North American and U.S. Caribbean Sea ECAs designed for the control of NOx produced by vessels with a marine diesel engine installed and constructed on or after January 1, 2016. Tier III requirements could apply to areas that will be designated for Tier III NOx in the future. At MEPC 70 and MEPC 71, the MEPC approved the North Sea and Baltic Sea as ECAs for nitrogen oxide for ships built on or after January 1, 2021. The U.S. Environmental Protection AgencyEPA promulgated equivalent (and in some senses stricter) emissions standards in late 2009.2010. As a result of these designations or similar future designations, we may be required to incur additional operating or other costs.
As determined at the MEPC 70, the new Regulation 22A of MARPOL Annex VI isbecame effective as of March 1, 2018 and requires ships above 5,000 gross tonnage to collect and report annual data on fuel oil consumption to an IMO database, with the first year of data collection commencinghaving commenced on January 1, 2019. The IMO intends to use such data as the first step in its roadmap (through 2023) for developing its strategy to reduce greenhouse gas emissions from ships, as discussed further below.
As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for ships. All ships are now required to develop and implement Ship Energy Efficiency Management Plans (“SEEMPS”SEEMP”), and new ships must be designed in compliance with minimum energy efficiency levels per capacity mile as defined by the Energy Efficiency Design Index.Index (“EEDI”). Under these measures, by 2025, all new ships built will be 30% more energy efficient than those built in 2014. MEPC 75 adopted amendments to MARPOL Annex VI which brings forward the effective date of the EEDI’s “phase 3” requirements from January 1, 2025 to April 1, 2022 for several ship types, including gas carriers, general cargo ships, and LNG carriers.
Additionally, MEPC 75 introduced draft amendments to Annex VI which impose new regulations to reduce greenhouse gas emissions from ships. These amendments introduce requirements to assess and measure the energy efficiency of all ships and set the required attainment values, with the goal of reducing the carbon intensity of international shipping. The requirements include (1) a technical requirement to reduce carbon intensity based on a new Energy Efficiency Existing Ship Index (“EEXI”), and (2) operational carbon intensity reduction requirements, based on a new operational carbon intensity indicator (“CII”). The attained EEXI is required to be calculated for ships of 400 gross tonnage and above, in accordance with different values set for ship types and categories. With respect to the CII, the draft amendments would require ships of 5,000 gross tonnage to document and verify their actual annual operational CII achieved against a determined required annual operational CII. Additionally, MEPC 75 proposed draft amendments requiring that, on or before January 1, 2023, all ships above 400 gross tonnage must have an approved SEEMP on board. For ships above 5,000 gross tonnage, the SEEMP would need to include certain mandatory content. MEPC 75 also approved draft amendments to MARPOL Annex I to prohibit the use and carriage for use as fuel of heavy fuel oil (“HFO”) by ships in Arctic waters on and after July 1, 2024. The draft amendments introduced at MEPC 75 were adopted at the MEPC 76 session in June 2021 and entered into force on November 1, 2022 with the requirements for EEXI and CII certification effective from January 1, 2023. MEPC 77 adopted a non-binding resolution which urges Member States and ship operators to voluntarily use distillate or other cleaner alternative fuels or methods of propulsion that are safe for ships and could contribute to the reduction of Black Carbon emissions from ships when operating in or near the Arctic. MEPC 79 adopted amendments to MARPOL Annex VI, Appendix IX to include the attained and required CII values, the CII rating and attained EEXI for existing ships in the required information to be submitted to the IMO Ship Fuel Oil Consumption Database. MEPC 79 revised the EEDI calculation guidelines to include a CO2 conversion factor for ethane, a reference to the updated ITCC guidelines, and a clarification that in case of a ship with multiple load line certificates, the maximum certified summer draft should be used when determining the deadweight. The amendments will enter into force on May 1, 2024. In July 2023, MEPC 80 approved the plan for reviewing CII regulations and guidelines, which must be completed at the latest by January 1, 2026. There will be no immediate changes to the CII framework, including correction factors and voyage adjustments, before the review is completed.
We may incur costs to comply with these revised standards. Additional or new conventions, laws and regulations may be adopted that could require the installation of expensive emission control systems and could adversely affect our business, results of operations, cash flows and financial condition.
Safety Management System Requirements
The SOLAS Convention was amended to address the safe manning of vessels and emergency training drills. The Convention of Limitation of Liability for Maritime Claims (the “LLMC”) sets limitations of liability for a loss of life or personal injury claim or a property claim against ship owners. We believe that all of our vessels are in substantial compliance with SOLAS and LL ConventionLLMC standards.
Under Chapter IX of the SOLAS Convention, or the International Safety Management Code for the Safe Operation of Ships and for Pollution Prevention (the “ISM Code”), our operations are also subject to environmental standards and requirements. The ISM Code requires the party with operational control of a vessel to develop an extensive safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. We rely upon the safety management system that we and our technical management team have developed for compliance with the ISM Code. The failure of a vessel owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.
The ISM Code requires that vessel operators obtain a safety management certificate for each vessel they operate. This certificate evidences compliance by a vessel’s management with the ISM Code requirements for a safety management system. No vessel can obtain a safety management certificate unless its manager has been awarded a document of compliance, issued by each flag state, under the ISM Code. We have obtained applicable documents of compliance for our offices and safety management certificates for all of our vessels for which the certificates are required by the IMO. The document of compliance and safety management certificate are renewed as required.
Regulation II-1/3-10 of the SOLAS Convention governs ship construction and stipulates that ships over 150 meters in length must have adequate strength, integrity and stability to minimize risk of loss or pollution. Goal-based standards amendments in SOLAS regulation II-1/3-10 entered into force in 2012, with July 1, 2016 set for application to new oil tankers and bulk carriers. The SOLAS Convention regulation II-1/3-10 on goal-based ship construction standards for bulk carriers and oil tankers, which entered into force on January 1, 2012, requires that all oil tankers and bulk carriers of 150 meters in length and above, for which the building contract is placed on or after July 1, 2016, satisfy applicable structural requirements conforming to the functional requirements of the International Goal-based Ship Construction Standards for Bulk Carriers and Oil Tankers (GBS Standards)(“GBS Standards”).
Amendments to the SOLAS Convention Chapter VII apply to vessels transporting dangerous goods and require those vessels be in compliance with the International Maritime Dangerous Goods Code (“IMDG Code”). Effective January 1, 2018, the IMDG Code includes (1) updates to the provisions for radioactive material, reflecting the latest provisions from the International Atomic Energy Agency, (2) new marking, packing and classification requirements for dangerous goods, and (3) new mandatory training requirements. Amendments which took effect on January 1, 2020 also reflect the latest material from the UN Recommendations on the Transport of Dangerous Goods, including (1) new provisions regarding IMO type 9 tank, (2) new abbreviations for segregation groups, and (3) special provisions for carriage of lithium batteries and of vehicles powered by flammable liquid or gas. Additional amendments, which came into force on June 1, 2022, include (1) addition of a definition of dosage rate, (2) additions to the list of high consequence dangerous goods, (3) new provisions for medical/clinical waste, (4) addition of various ISO standards for gas cylinders, (5) a new handling code, and (6) changes to stowage and segregation provisions.
The IMO has also adopted the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (“STCW”). As of February 2017, all seafarers are required to meet the STCW standards and be in possession of a valid STCW certificate. Flag states that have ratified SOLAS and STCW generally employ the classification societies, which have incorporated SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance.
Furthermore, recent action by the IMO’s Maritime Safety Committee and United States agencies indicates that cybersecurity regulations for the maritime industry are likely to be further developed in the near future in an attempt to combat cybersecurity threats. By IMO resolution, administrations are encouraged to ensure that cyber-risk management systems are incorporated by ship-owners and managers by their first annual Document of Compliance audit after January 1, 2021. In February 2021, the U.S. Coast Guard published guidance on addressing cyber risks in a vessel’s safety management system. This might cause companies to create additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures. The impact of such regulations is hard to predict at this time.
In June 2022, SOLAS also set out new amendments that took effect on January 1, 2024, which include new requirements for: (1) the design for safe mooring operations, (2) the Global Maritime Distress and Safety System (“GMDSS”), (3) watertight integrity, (4) watertight doors on cargo ships, (5) fault-isolation of fire detection systems, (6) life-saving appliances, and (7) safety of ships using LNG as fuel. These new requirements may impact the cost of our operations.
Pollution Control and Liability Requirements
The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions. For example, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments (the “BWM Convention”) in 2004. The BWM Convention entered into force on September 9,8, 2017. The BWM Convention requires ships to manage their ballast water to remove, render harmless, or avoid the uptake or discharge of new or invasive aquatic organisms and pathogens within ballast water and sediments. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits, and require all ships to carry a ballast water record book and an international ballast Waterwater management certificate.
On December 4, 2013, the IMO Assembly passed a resolution revising the application dates of the BWM Convention so that the dates are triggered by the entry into force date and not the dates originally in the BWM Convention. This, in effect, makes all vessels delivered before the entry into force date “existing vessels” and allows for the installation of ballast water management systems on such vessels at the first International Oil Pollution Prevention (IOPP)(“IOPP”) renewal survey following entry into force of the convention. The MEPC adopted updated guidelines for approval of ballast water management systems (G8) at MEPC 70. At MEPC 71,72, the schedule regarding the BWM Convention’s implementation dates was also discussed and amendments were introduced to extend the date existing vessels are subject to certain ballast water standards. Those changes were adopted at MEPC 72. Ships over 400 gross tons generally must comply with a “D-1 standard,” requiring the exchange of ballast water only in open seas and away from coastal waters. The “D-2 standard” specifies the maximum amount of viable organisms allowed to be discharged, and compliance dates vary depending on the IOPP renewal dates. Depending on the date of the IOPP renewal survey, existing vessels must comply with the D2D-2 standard on or after September 8, 2019. For most ships, compliance with the D2D-2 standard will involve installing on-board systems to treat ballast water and eliminate unwanted organisms. Ballast water management systems, which include systems that make use of chemical, biocides, organisms or biological mechanisms, or which alter the chemical or physical characteristics of the ballast water, must be approved in accordance with IMO Guidelines (Regulation D-3). As of October 13, 2019, MEPC 72’s amendments to the BWM Convention took effect, making the Code for Approval of Ballast Water Management Systems, which governs assessment of ballast water management systems, mandatory rather than permissive, and formalized an implementation schedule for the D-2 standard. Under these amendments, all ships must meet the D-2 standard by September 8, 2024. Costs of compliance with these regulations may be substantial. Additionally, in November 2020, MEPC 75 adopted amendments to the BWM Convention which would require a commissioning test of the ballast water management system for the initial survey or when performing an additional survey for retrofits. This analysis will not apply to ships that already have an installed BWM system certified under the BWM Convention. These amendments have entered into force on June 1, 2022. In December 2022, MEPC 79 agreed that it should be permitted to use ballast tanks for temporary storage of treated sewage and grey water. MEPC 79 also established that ships are expected to return to D-2 compliance after experiencing challenging uptake water and bypassing a BWM system should only be used as a last resort. In July 2023, MEPC 80 approved a plan for a comprehensive review of the BWM Convention over the next three years and the corresponding development of a package of amendments to the Convention. MEPC 80 also adopted further amendments relating to Appendix II of the BWM Convention concerning the form of the Ballast Water Record Book, which are expected to enter into force in February 2025. A protocol for ballast water compliance monitoring devices and unified interpretation of the form of the BWM Convention certificate were also adopted.
Once mid-ocean ballast exchange ballast water treatment requirements become mandatory under the BWM Convention, the cost of compliance could increase for ocean carriers and may be material.have a material effect on our operations. However, many countries already regulate the discharge of ballast water carried by vessels from country to country to prevent the introduction of invasive and harmful species via such discharges. The U.S., for example, requires vessels entering its waters from another country to conduct mid-ocean ballast exchange, or undertake some alternate measure, and to comply with certain reporting requirements. The costs of compliance with a mandatory mid-ocean ballast exchange could be material, and it is difficult to predict the overall impact of such a requirement on our operations.
The IMO adopted the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocols in 1976, 1984, and 1992, and amended in 2000 (“the CLC”(the “CLC”). Under the CLC and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel’s registered owner may be strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain exceptions. The 1992 Protocol changed certain limits on liability expressed using the International Monetary Fund currency unit, the Special Drawing Rights. The limits on liability have since been amended so that the compensation limits on liability were raised. The right to limit liability is forfeited under the CLC where the spill is caused by the shipowner’s actual fault and under the 1992 Protocol where the spill is caused by the shipowner’s intentional or reckless act or omission where the shipowner knew pollution damage would probably result. The CLC requires ships over 2,000 tons covered by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner’s liability for a single incident. We have protection and indemnity insurance for environmental incidents. P&I Clubs in the International Group issue the required Bunkers Convention “Blue Cards” to enable signatory states to issue certificates. All of our vessels are in possession of a CLC State issued certificate attesting that the required insurance coverage is in force.
The IMO also adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Bunker Convention”) to impose strict liability on ship owners (including the registered owner, bareboat charterer, manager or operator) for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the LLMC). With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is determined by the national or other domestic laws in the jurisdiction where the events or damages occur.
Ships are required to maintain a certificate attesting that they maintain adequate insurance to cover an incident. In jurisdictions, such as the United States where the CLC or the Bunker Convention has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or on a strict-liability basis.
Anti‑Fouling Requirements
In 2001, the IMO adopted the International Convention on the Control of Harmful Anti‑fouling Systems on Ships, or the “Anti‑fouling Convention.”Convention”. The Anti‑fouling Convention, which entered into force on September 17, 2008, prohibits the use of organotin compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels. Vessels of over 400 gross tons engaged in international voyages will also be required to undergo an initial survey before the vessel is put into service or before an International Anti‑fouling System Certificate (the “IAFS Certificate”) is issued for the first time; and subsequent surveys when the anti‑fouling systems are altered or replaced. Vessels of 24 meters in length or more but less than 400 gross tonnage engaged in international voyages will have to carry a Declaration on Anti-fouling Systems signed by the owner or authorized agent.
In November 2020, MEPC 75 approved draft amendments to the Anti-fouling Convention to prohibit anti-fouling systems containing cybutryne, which have applied to ships since January 1, 2023, or, for ships already bearing such an anti-fouling system, at the next scheduled renewal of the system after that date, but no later than 60 months following the last application to the ship of such a system. In addition, the IAFS Certificate has been updated to address compliance options for anti-fouling systems to address cybutryne. Ships which are affected by this ban on cybutryne must receive an updated IAFS Certificate no later than two years after the entry into force of these amendments. Ships which are not affected (i.e. with anti-fouling systems which do not contain cybutryne) must receive an updated IAFS Certificate at the next anti-fouling application to the vessel. These amendments were formally adopted at MEPC 76 in June 2021 and entered into force on January 1, 2023.
We have obtained Anti‑fouling System Certificates for all of our vessels that are subject to the Anti‑fouling Convention.
Compliance Enforcement
Noncompliance with the ISM Code or other IMO regulations may subject the ship owner or bareboat charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. The USCG and European Union authorities have indicated that vessels not in compliance with the ISM Code by applicable deadlines will be prohibited from trading in U.S. and European Union ports, respectively. As of the date of this report, March 26, 2018,14, 2024, each of our vessels is ISM Code certified.However, there can be no assurance that such certificates will be maintained in the future. The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulations might have on our operations.
United States Regulations
The U.S. Oil Pollution Act of 1990 and the Comprehensive Environmental Response, Compensation and Liability Act
The U.S. Oil Pollution Act of 1990 (“OPA”) established an extensive regulatory and liability regime for the protection and cleanup of the environment from oil spills. OPA affects all “owners and operators” whose vessels trade or operate withwithin the U.S., its territories and possessions or whose vessels operate in U.S. waters, which includes the U.S.’s territorial sea and its 200 nautical mile exclusive economic zone around the U.S. The U.S. has also enacted the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), which applies to the discharge of hazardous substances other than oil, except in limited circumstances, whether on land or at sea. OPA and CERCLA both define “owner and operator” in the case of a vessel as any person owning, operating or chartering by demise, the vessel. Both OPA and CERCLA impact our operations.
Under OPA, vessel owners and operators are “responsible parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels, including bunkers (fuel). OPA defines these other damages broadly to include:
(i) injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;
(ii) injury to, or economic losses resulting from, the destruction of real and personal property;
(iv)(iii) loss of subsistence use of natural resources that are injured, destroyed or lost;
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(iii) | net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources; |
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(v) | lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and |
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(vi) | net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources. |
(iv) net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources;
(v) lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and
(vi) net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.
OPA contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs. On December 23, 2022, the USCG issued a final rule to adjust the limitation of liability under the OPA. Effective December 21, 2015,March 23, 2022, the new adjusted limits of OPA liability for a tank vessel, other than a single-hull tank vessel, over 3,000 gross tons liability is limited to the greater of $2,200$2,500 per gross ton or $18,796,800.$21,521,300 (previous limit was $2,300 per gross ton or $19,943,400). Effective December 21, 2015,March 23, 2022, the USCGnew adjusted the limits of OPA liability for non-tank vessels, edible oil tank vessels, and any oil spill response vessels, to the greater of $1,100$1,300 per gross ton or $939,800 (subject to periodic adjustment for inflation)$1,076,000 (previous limit was $1,200 per gross ton or $997,100). These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person acting pursuant to a contractual relationship), or a responsible party'sparty’s gross negligence or willful misconduct. The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident as required by law where the responsibilityresponsible party knows or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities; or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section 311 (c), (e)) or the Intervention on the High Seas Act.
CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damages for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing the same, and health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater of $300 per gross ton or $5.0 million for vessels carrying a hazardous substance as cargo and the greater of $300 per gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations. The limitation on liability also does not apply if the responsible person fails or refused to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.
OPA and CERCLA each preserve the right to recover damages under existing law, including maritime tort law. OPA and CERCLA both require owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer or a guarantee. We plancomply and intend to comply going forward with the USCG’s financial responsibility regulations by providing applicable certificates of financial responsibility.
The
In 2010, the Deepwater Horizonoil spill in the Gulf of Mexico which is unrelated to Ship Finance, resulted in additional regulatory initiatives or statutes, including the raising ofhigher liability caps under OPA, new regulations regarding offshore oil and gas drilling, and a pilot inspection program for offshore facilities. However, the status of several of these initiatives and regulations is currently in flux.have been or may be revised. For example, the U.S. Bureau of Safety and Environmental EnforcementEnforcement’s (“BSEE”) announced a newrevised Production Safety Systems Rule (“PSSR”), effective December 27, 2018, modified and relaxed certain environmental and safety protections under the 2016 PSSR. Additionally, the BSEE amended the Well Control Rule, in April 2016, but pursuant to orders byeffective July 15, 2019, which rolled back certain reforms regarding the safety of drilling operations, and former U.S. President in early 2017, the BSEE announced in August 2017 that this rule would be revised. In January 2018, the U.S. PresidentTrump had proposed leasing new sections of U.S. waters to oil and gas companies for offshore drilling. In January 2021, U.S. President Biden signed an executive order temporarily blocking new leases for oil and gas drilling vastly expandingin federal waters. However, Attorneys general from 13 states filed suit in March 2021 to lift the U.S. watersexecutive order and in June 2021, a federal judge in Louisiana granted a preliminary injunction against the Biden administration stating that are available for such activity over the next five years. The effectspower to pause offshore oil and gas leases "lies solely with Congress". In August 2022, a federal judge in Louisiana sided with Texas Attorney General Ken Paxton, along with the other 12 plaintiff states, by issuing a permanent injunction against the Biden Administration’s moratorium on oil and gas leasing on federal public lands and offshore waters. After being blocked by the courts, in September 2023, the Biden administration announced a scaled back offshore oil drilling plan, including just three oil lease sales in the Gulf of the proposal are currently unknown. ComplianceMexico. With these rapid changes, compliance with any new requirements of OPA may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes. Additionaland future legislation or regulations applicable to the operation of our vessels that may be implemented incould impact the future couldcost of our operations and adversely affect our business.
OPA specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA and some states have enacted legislation providing for unlimited liability for oil spills. Many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law. Moreover, some states have enacted legislation providing for unlimited liability for discharge of pollutants within their waters, although in some cases, states which have enacted this type of legislation have not yet issued implementing regulations defining tankervessel owners’ responsibilities under these laws. The Company intendsWe intend to comply with all applicable state regulations in the ports where the Company’sour vessels call.
We currently maintain pollution liability coverage insurance in the amount of $1$1.0 billion per vessel per incident, except for each of our vessels.certain excluded areas at high risk including Russia, Ukraine and Belarus (the “High Risk Areas”). If the damages from a catastrophic spill were to exceed our insurance coverage, it could have an adverse effect on our business and results of operation.operations. Cybersecurity is also a top priority with the U.S. Coast Guard, and they announced a concentrated campaign to assist in identifying and addressing cybersecurity vulnerabilities during the first quarter of the year 2023. The cybersecurity of our vessels continues to improve through hands-on training, campaigns and external assistance/equipment provision.
Other United States Environmental Initiatives
The U.S. Clean Air Act of 1970 (including its amendments of 1977 and 1990) (“CAA”) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas.The CAA also requires states to draft State Implementation Plans, or SIPs,"SIPs", designed to attain national health-based air quality standards in each state. Although state-specific, SIPs may include regulations concerning emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. Our vessels operating in such regulated port areas with restricted cargoes are equipped with vapor recovery systems that satisfy these existing requirements.
The U.S. Clean Water Act (“CWA”) prohibits the discharge of oil, hazardous substances and ballast water in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA and CERCLA. In 2015, the EPA expanded the definition of “waters of the United States” (“WOTUS”), thereby expanding federal authority under the CWA. Following litigation on the revised WOTUS rule, in December 2018, the EPA and Department of the Army proposed a revised, limited definition of WOTUS. In 2019 and 2020, the agencies repealed the prior WOTUS Rule and promulgated the Navigable Waters Protection Rule (“NWPR”) which significantly reduced the scope and oversight of EPA and the Department of the Army in traditionally non-navigable waterways. On August 30, 2021 a federal district court in Arizona vacated the NWPR and directed the agencies to replace the rule. On December 7, 2021, the EPA and the Department of the Army proposed a rule that would reinstate the pre-2015 definition. On December 30, 2022, the EPA and the Department of Army announced the final WOTUS rule that largely reinstated the pre-2015 definition.
The EPA and the USCG have also enacted rules relating to ballast water discharge, compliance with which requires the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial costs, and/or otherwise restrict our vessels from entering U.S. Waters.
The EPA requires a permit regulatingwill regulate these ballast water discharges and other discharges incidental to the normal operation of certain vessels within United States waters underpursuant to the Vessel Incidental Discharge Act (“VIDA”), which was signed into law on December 4, 2018 and replaces the 2013 Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels (the “VGP”(“VGP”). On March 28, 2013, the EPA re-issued the VGP for another five years from the effective date of December 19, 2013. The 2013 VGP focuses on authorizing program (which authorizes discharges incidental to operations of commercial vessels and contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in U.S. waters, stringent requirements for exhaust gas scrubbers, and requirements for the use of environmentally acceptable lubricants. For a new vessel delivered to an owner or operator after December 19, 2013 to be covered by the VGP, the owner must submit a Notice of Intent (“NOI”) at least 30 days (or 7 days for eNOIs) before the vessel operates in United States waters. We have submitted NOIs for our vessels where required.
The USCGlubricants) and current Coast Guard ballast water management regulations adopted under the U.S. National Invasive Species Act (“NISA”) impose mandatory, such as mid-ocean ballast water management practicesexchange programs and installation of approved USCG technology for all vessels equipped with ballast water tanks bound for U.S. ports or entering U.S. waters. VIDA establishes a new framework for the regulation of vessel incidental discharges under CWA, requires the EPA to develop performance standards for those discharges within two years of enactment, and requires the U.S. Coast Guard to develop implementation, compliance, and enforcement regulations within two years of EPA’s promulgation of standards. Under VIDA, all provisions of the 2013 VGP and USCG regulations regarding ballast water treatment remain in force and effect until the EPA and U.S. Coast Guard regulations are finalized. Non-military, non-recreational vessels greater than 79 feet in length must continue to comply with the requirements of the VGP, including submission of a Notice of Intent (“NOI”) or operating inretention of a PARI form and submission of annual reports. We have submitted NOIs for our vessels where required. Compliance with the EPA, U.S. waters, whichCoast Guard and state regulations could require the installation of certain engineering equipment andballast water treatment systems to treat ballast water before it is dischargedequipment on our vessels or the implementation of other port facility disposal arrangements or procedures, and/or may otherwise restrict our vessels from entering U.S. waters. The USCG has implemented revised regulations on ballast water management by establishing standards on the allowable concentration of living organisms in ballast water discharged from ships in U.S. waters. As of January 1, 2014, vessels were technically subject to the phasing-in of these standards, and the USCG must approve any technology before it is placed on a vessel. The USCG first approved said technology in December 2016, and continues to review ballast water management systems. The USCG may also provide waivers to vessels that demonstrate why they cannot install the new technology. The USCG has set up requirements for ships constructed before December 1, 2013 with ballast tanks trading with exclusive economic zones of the U.S. to install water ballast treatment systems as follows: (1) ballast capacity 1,500-5,000m3-first scheduled drydock after January 1, 2014; and (2) ballast capacity above 5,000m3-first scheduled drydock after January 1, 2016. All of our vessels have ballast capacities over 5,000m3, and those of our vessels trading in the U.S. will have to install water ballast treatment plants at their first drydock after January 1, 2016, unless an extension is granted by the USCG.
The EPA, on the other hand, has taken a different approach to enforcing ballast discharge standards under the VGP. On December 27, 2013, the EPA issued an enforcement response policy in connection with the new VGP in which the EPA indicated that it would take into account the reasons why vessels do not have the requisite technology installed, but will not grant any waivers. In addition, through the CWA certification provisions that allow U.S. states to place additional conditions on the use of the VGP within state waters, a number of states have proposed or implemented a variety of stricter ballast requirements including, in some states, specific treatment standards. Compliance with the EPA, USCG and state regulations could require the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.
Two recent United States court decisions should be noted. First, in October 2015, the Second Circuit Court of Appeals issued a ruling that directed the EPA to redraft the sections of the 2013 VGP that address ballast water. However, the Second Circuit stated that 2013 VGP will remain in effect until the EPA issues a new VGP. The effect of such redrafting remains unknown. Second, on October 9, 2015, the Sixth Circuit Court of Appeals stayed the Waters of the United States rule (WOTUS), which aimed to expand the regulatory definition of “waters of the United States,” pending further action of the court. In response, regulations have continued to be implemented as they were prior to the stay on a case-by-case basis. In February 2017, the U.S. President issued an executive order directing the EPA and U.S. Army Corps of Engineers publish a proposed rule rescinding or revising the WOTUS rule. In January 2018, the EPA and Army Corps of Engineers issued a final rule pursuant to the President’s order, under which the Agencies will interpret the term “waters of the United States” to mean waters covered by the regulations, as they are currently being implemented, within the context of the Supreme Court decisions and agency guidance documents, until February 6, 2020. Litigation regarding the status of the WOTUS rule is currently underway, and the effect of future actions in these cases upon our operations is unknown.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. Regulation (EU) 2015/757 of the European Parliament and of the Council of 29 April 2015 (amending EU Directive 2009/16/EC) governs the monitoring, reporting and verification of carbon dioxide emissions from maritime transport, and, subject to some exclusions, requires companies with ships over 5,000 gross tonnage to monitor and report carbon dioxide emissions annually which may cause us to incur additional expenses.
The European Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as determined by type, age, and flag as well as the number of times the ship has been detained. The European Union also adopted and extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply. Furthermore, the EU has implemented regulations requiring vessels to use reduced sulfur content fuel for their main and auxiliary engines. The EU Directive 2005/33/EC (amending Directive 1999/32/EC) introduced requirements parallel to those in Annex VI relating to the sulfur content of marine fuels. In addition, the EU imposed a 0.1% maximum sulfur requirement for fuel used by ships at berth in the Baltic, the North Sea and the English Channel (the so called “SOx-Emission Control Area”). As of January 2020, EU ports.member states must also ensure that vessels in all EU waters, except the SOx-Emission Control Area, use fuels with a 0.5% maximum sulfur content.
On September 15, 2020, the European Parliament voted to include greenhouse gas emissions from the maritime sector in the European Union's carbon market, Emissions Trading System (“EU ETS”) as part of its “Fit-for-55” legislation to reduce net greenhouse gas emissions by at least 55% by 2030. On July 14, 2021, the European Parliament formally proposed its plan, which would involve gradually including the maritime sector and phasing the sector in over a three-year period. This will require shipowners to buy permits to cover these emissions. The Environment Council adopted a general approach on the proposal in June 2022. On December 18, 2022, the Environmental Council and European Parliament agreed on a gradual introduction of obligations for shipping companies to surrender allowances equivalent to a portion of their carbon emissions: 40% for verified emissions from 2024, 70% for 2025 and 100% for 2026. Most large vessels will be included in the scope of the EU ETS from the start. Big offshore vessels of 5,000 gross tonnage and above will be included in the 'MRV' on the monitoring, reporting and verification of CO2 emissions from maritime transport regulation from 2025 and in the EU ETS from 2027. General cargo vessels and off-shore vessels between 400-5,000 gross tonnage will be included in the MRV regulation from 2025 and their inclusion in EU ETS will be reviewed in 2026. Furthermore, starting from January 1, 2026, the ETS regulations will expand to include emissions of two additional greenhouse gases: nitrous oxide and methane. Compliance with the Maritime EU ETS will result in additional compliance and administration costs to properly incorporate the provisions of the Directive into our business routines. Additional EU regulations which are part of the EU’s "Fit-for-55," could also affect our financial position in terms of compliance and administration costs when they take effect.
International Labour Organization
The International LaborLabour Organization (the “ILO”"ILO") is a specialized agency of the UN that has adopted the Maritime LaborLabour Convention 2006 (“("MLC 2006”2006"). A Maritime LaborLabour Certificate and a Declaration of Maritime LaborLabour Compliance is required to ensure compliance with the MLC 2006 for all ships abovethat are 500 gross tonstonnage or over and are either engaged in international trade.voyages or flying the flag of a Member and operating from a port, or between ports, in another country. We believe that all our vessels are in substantial compliance with and are certified to meet MLC 2006.
Greenhouse Gas Regulation
Currently, the emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions with targets extended through 2020. International negotiations are continuing with respect to a successor to the Kyoto Protocol, and restrictions on shipping emissions may be included in any new treaty. In December 2009, more than 27 nations, including the U.S. and China, signed the Copenhagen Accord, which includes a non-binding commitment to reduce greenhouse gas emissions. The 2015 United Nations Climate Change Conference in Paris resulted in the Paris Agreement, which entered into force on November 4, 2016 and does not directly limit greenhouse gas emissions from ships. OnThe U.S. initially entered into the agreement, but on June 1, 2017, theformer U.S. presidentPresident Trump announced that it is withdrawingthe United States intends to withdraw from the Paris Agreement. The timingAgreement, and effect of such action has yetthe withdrawal became effective on November 4, 2020. On January 20, 2021, U.S. President Biden signed an executive order to be determined.rejoin the Paris Agreement, which the U.S. officially rejoined on February 19, 2021.
At MEPC 70 and MEPC 71, a draft outline of the structure of the initial strategy for developing a comprehensive IMO strategy on reduction of greenhouse gas emissions from ships was approved. In accordance with this roadmap, in April 2018, nations at the MEPC 72 adopted an initial IMO strategy for reduction of greenhouse gas emissions is expected to be adopted at MEPC 72 in April 2018. The IMO may implement market-based mechanisms to reduce greenhouse gas emissions from ships. The initial strategy identifies “levels of ambition” to reducing greenhouse gas emissions, including (1) decreasing the carbon intensity from ships through implementation of further phases of the EEDI for new ships; (2) reducing carbon dioxide emissions per transport work, as an average across international shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008 emission levels; and (3) reducing the upcomingtotal annual greenhouse emissions by at least 50% by 2050 compared to 2008 while pursuing efforts towards phasing them out entirely. The initial strategy notes that technological innovation, alternative fuels and/or energy sources for international shipping will be integral to achieve the overall ambition. These regulations could cause us to incur additional substantial expenses. At MEPC session.77, the Member States agreed to initiate the revision of the Initial IMO Strategy on Reduction of GHG emissions from ships, recognizing the need to strengthen the ambition during the revision process. In July 2023, MEPC 80 adopted a revised strategy, which includes an enhanced common ambition to reach net-zero greenhouse gas emissions from international shipping around or close to 2050, a commitment to ensure an uptake of alternative zero and near-zero greenhouse gas fuels by 2030, as well as i). reducing the total annual greenhouse gas emissions from international shipping by at least 20%, striving for 30%, by 2030, compared to 2008; and ii). reducing the total annual greenhouse gas emissions from international shipping by at least 70%, striving for 80%, by 2040, compared to 2008.
The EU made a unilateral commitment to reduce overall greenhouse gas emissions from its member states from 20% of 1990 levels by 2020. The EU also committed to reduce its emissions by 20% under the Kyoto Protocol’s second period from 2013 to 2020. Starting in January 2018, large ships over 5,000 gross tonnage calling at EU ports are required to collect and publish data on carbon dioxide emissions and other information. Under the European Climate Law, the EU committed to reduce its net greenhouse gas emissions by at least 55% by 2030 through its “Fit-for-55” legislation package. As part of this initiative, regulations relating to the inclusion of greenhouse gas emissions from the maritime sector in the European Union's carbon market, or EU ETS are also forthcoming.
In the United States, the EPA issued a finding that greenhouse gases endanger the public health and safety, adopted regulations to limit greenhouse gas emissions from certain mobile sources, and proposed regulations to limit greenhouse gas emissions from large stationary sources. However, in March 2017, theformer U.S. President Trump signed an executive order to review and possibly eliminate the EPA’s plan to cut greenhouse gas emissions and in August 2019, the Administration announced plans to weaken regulations for methane emissions. The outcome of this order is not yet known. AlthoughOn August 13, 2020, the mobile source emissions regulations do not applyEPA released rules rolling back standards to greenhouse gascontrol methane and volatile organic compound emissions from vessels,new oil and gas facilities. However, U.S. President Biden recently directed the EPA to publish a proposed rule suspending, revising, or individual U.S.rescinding certain of these rules. On November 2, 2021, the EPA issued a proposed rule under the CAA designed to reduce methane emissions from oil and gas sources. The proposed rule is expected to reduce 41 million tons of methane emissions between 2023 and 2035 and cuts methane emissions in the oil and gas sector by approximately 74 percent compared to emissions from this sector in 2005. EPA issued a supplemental proposed rule in November 2022 to include additional methane reduction measures. On December 2, 2023, the Biden Administration announced the final rule that includes updated and strengthened standards for methane and other air pollutants from new, modified, and reconstructed sources, as well as Emissions Guidelines to assist states in developing plans to limit methane emissions from existing sources. These new regulations could enact environmental regulations that wouldpotentially affect our operations. For example, California has introduced a cap-and-trade program for greenhouse gas emissions, aiming to reduce emissions 40% by 2030.
Any passage of climate control legislation or other regulatory initiatives by the IMO, the EU, the U.S. or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol or Paris Agreement, that restricts emissions of greenhouse gases could require us to make significant financial expenditures which we cannot predict with certainty at this time. Even in the absence of climate control legislation, our business may be indirectly affected to the extent that climate change may result in sea level changes or more intensecertain weather events.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001 in the United States, there have been a variety of initiatives intended to enhance vessel security such as the U.S. Maritime Transportation Security Act of 2002 (“MTSA”).MTSA. To implement certain portions of the MTSA, the USCG issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States and at certain ports and facilities, some of which are regulated by the EPA.
Similarly, Chapter XI-2 of the SOLAS Convention imposes detailed security obligations on vessels and port authorities and mandates compliance with the International Ship and Port FacilitiesFacility Security Code (“the ISPS(the “ISPS Code”). The ISPS Code is designed to enhance the security of ports and ships against terrorism. To trade internationally, a vessel must attain an International Ship Security Certificate (“ISSC”) from a recognized security organization approved by the vessel’s flag state. Ships operating without a valid certificate may be detained, expelled from, or refused entry at port until they obtain an ISSC. The following are among the various requirements, some of which are found in the SOLAS Convention:Convention, include, for example:
•on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed and navigational status;
•on-board installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;
•the development of vessel security plans;
•ship identification number to be permanently marked on a vessel’s hull;
•a continuous synopsis record kept onboard showing a vessel's history including the name of the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship's identification number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and
•compliance with flag state security certification requirements.
The USCG regulations, intended to be alignedalign with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security measures, provided such vessels have on board a valid ISSC that attests to the vessel’s compliance with the SOLAS Convention security requirements and the ISPS Code. Future security measures could have a significant financial impact on us. We intend to comply with the various security measures addressed by MTSA, the SOLAS Convention and the ISPS Code.
The cost of vessel security measures has also been affected by the escalation in the frequency of acts of piracy against ships, notably off the coast of Somalia, including the Gulf of Aden and Arabian Sea area. Substantial loss of revenue and other costs may be incurred as a result of detention of a vessel or additional security measures, and the risk of uninsured losses could significantly affect our business. Costs are incurred in taking additional security measures in accordance with Best Management Practices to Deter Piracy, notably those contained in the BMP5 industry standard.
Offshore Drilling Regulations
Our offshore drilling unitsrigs are subject to many of the above environmental laws and regulations relating to vessels, but are also subject to laws and regulations focused on offshore drilling operations. We may incur costs to comply with these revised standards.
Rigs must comply with applicable MARPOL limits on sulfur oxide and nitrogen oxide emissions, chlorofluorocarbons, and the discharge of other air pollutants, except that the MARPOL limits do not apply to emissions that are directly related to drilling, production, or processing activities.
Our drilling units are subject not only to MARPOL regulation of air emissions, butand also towith the Bunker Convention's strict liability for pollution damage caused by discharges of bunker fuel in jurisdictional waters of ratifying states. We believe that all of our drilling units are currently compliant in all material respects with these regulations.
Furthermore, any drilling unitsrigs that we may operate in U.S. waters, including the U.S. territorial sea and the 200 nautical mile exclusive economic zone around the United States, would have to comply with OPA and CERCLA requirements, among others, that impose liability (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges of oil or other hazardous substances, other than discharges related to drilling.substances.
The U.S. Bureau of Ocean Energy Management, or
BOEM periodically issues guidelines for rig fitness requirements in the Gulf of Mexico and may take other steps that could increase the cost of operations or reduce the area of operations for our units, thus reducing their marketability. Implementation of BOEM guidelines or regulations may subject us to increased costs or limit the operational capabilities of our units, and could materially and adversely affect our operations and financial condition.
In addition to the MARPOL, OPA and CERCLA requirements described above, our international offshore drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the importation of and operation of drilling unitsrigs and equipment, currency conversions and repatriation, oil and gas exploration and development, environmental protection, taxation of offshore earnings and earnings of expatriate personnel, the use of local employees and suppliers by foreign contractors, and duties on the importation and exportation of drilling unitsrigs and other equipment. New environmental or safety laws and regulations could be enacted, which could adversely affect our ability to operate in certain jurisdictions. Governments in some countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration for oil and gas, and other aspects of the oil and gas industries in their countries. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil and gas companies and may continue to do so. For example, on December 20, 2016, theformer U.S. President Obama invoked a law that banned offshore oil and gas drilling in large areas of the Arctic and the Atlantic Seaboard. ItIn April 2017, former President Trump signed an executive order sought to loosen that ban but was blocked by a federal court ruling in Alaska in March 2019. The Trump administration appealed the decision and in April 2021, a federal appeals court affirmed the ruling and found that President Biden's reinstatement of Obama-era protections makes moot the Trump administration's attempts to allow oil development in the Atlantic and Arctic waters. In November 2021, the House of Representatives passed the Build Back Better Act, which initially included provisions that banned offshore drilling in both the Atlantic and Pacific Oceans, as well as the eastern Gulf of Mexico, and cancelled drilling leases and blocked future oil and gas extraction in the Arctic National Wildlife Refuge. However, the Senate stripped the ban on offshore drilling from the bill, although the ban on energy extraction activities in the Arctic National Wildlife Refuge is presently unclear how long thisstill in place. Negotiations on the Build Back Better Act are currently stalled. On July 27, 2022, the Senate announced the Inflation Reduction Act, which was the final result of the Build Back Better Act negotiations, and despite significant investments in climate solutions, failed to restore protections for the Arctic National Wildlife Refuge. President Biden signed the Inflation Reduction Act into law on August 16, 2022. The Inflation Reduction Act of 2022 establishes a program designed to reduce methane emissions from certain oil and natural gas facilities, which includes a charge on methane emissions above certain thresholds. In September 2023, the Biden Administration announced significant steps to protect the Arctic National Wildlife Refuge, including the cancellation of the remaining seven oil and gas leases issued by the previous administration in the Coastal Plain.
In conjunction with the 2016 U.S. ban, will remain in effect. A ban onthe government of Canada simultaneously banned new drilling in Canadian Arctic waters was announced simultaneously.and in August 2019, issued an order prohibiting oil and gas activities under existing leases in the Canadian Arctic offshore. The Canadian government imposed a five-year moratorium on its 2016 ban of new Canadian Arctic drilling. Operations in less developed countries can be subject to legal systems that are not as mature or predictable as those in more developed countries, which can lead to greater uncertainty in legal matters and proceedings. Implementation of new environmental laws or regulations that may apply to ultra-deepwater drilling unitsrigs may subject us to increased costs or limit the operational capabilities of our drilling unitsrigs and could materially and adversely affect our operations and financial condition.
Inspection by Classification Societies
The hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry. The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and SOLAS. Most insurance underwriters make it a condition for insurance coverage and lending that a vessel be certified “in class” by a classification society which is a member of the International Association of Classification Societies, the IACS. The IACS has adopted harmonized Common Structural Rules, or the Rules,"the Rules", which apply to oil tankers and bulk carriers constructedcontracted for construction on or after July 1, 2015. The Rules attempt to create a level of consistency between IACS Societies. All of our vessels are certified as being “in class” by all the applicable Classification Societies (e.g., American Bureau of Shipping, Lloyd's Register of Shipping).
A vessel must undergo annual surveys, intermediate surveys, drydockings and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period. Every vessel is also required to be drydockedcarry out a bottom survey every 30 to 36 months for inspection of the underwater parts of the vessel.vessel as dictated by statutory and class regulations. If any vessel does not maintain its class and/or fails any annual survey, intermediate survey, drydocking or special survey, the vessel will be unable to carry cargo between ports and will be unemployable and uninsurable which could cause us to be in violation of certain covenants in our loan agreements. Any such inability to carry cargo or be employed, or any such violation of covenants, could have a material adverse impact on our financial condition and results of operations.
The managed vessels, depending on the flag administration requirements, are inspected during the stipulated periodicities. These inspections are arranged on a timely basis and the findings (if any) are addressed for corrective actions, close-out and acceptance purposes. The findings are also finally reviewed by the relevant flag administration, in order to record the actions taken by the Company and close-out the findings on their systems.
Risk of Loss and Liability Insurance
General
The operation of any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss or damage and business interruption due to political circumstances in foreign countries, piracy incidents, hostilities and labor strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon shipowners, operators and bareboat charterers of any vessel trading in the exclusive economic zone of the United States for certain oil pollution accidents in the United States, has made liability insurance more expensive for shipowners and operators trading in the United States market. We carry insurance coverage as customary in the shipping industry. However, not all risks can be insured, specific claims may be rejected, and we might not be always able to obtain adequate insurance coverage at reasonable rates.
Hull and Machinery Insurance
We procure hull and machinery insurance, protection and indemnity insurance, which includes environmental damage and pollution insurance and war risk insurance and freight, demurrage and defense insurance for our fleet. We generally maintain insurance against loss of hire on our operated fleet, which covers business interruptions that result in the loss of use of a vessel.
Protection and Indemnity Insurance
Protection and indemnity insurance is provided by mutual protection and indemnity associations, or “P&I Associations,” and covers our third-party liabilities in connection with our shipping activities. This includes third-party liability and other related expenses of injury or death of crew, passengers and other third parties, loss or damage to cargo, claims arising from collisions with other vessels, damage to other third-party property, pollution arising from oil or other substances and salvage, towing and other related costs, including wreck removal. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and indemnity mutual associations, or “clubs”.
Our current protection and indemnity insurance coverage for pollution is $1.0 billion per vessel per incident, except for certain excluded High Risk Areas. The 13 P&I Associations that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities. The International Group’s website states that the Pool provides a mechanism for sharing all claims in excess of $10.0 million up to, currently, approximately $8.9 billion. As a member of a P&I Association, which is a member of the International Group, we are subject to calls payable to the associations based on our claim records as well as the claim records of all other members of the individual associations and members of the shipping pool of P&I Associations comprising the International Group.
The insurance of our vessels which are chartered on a bareboat basis or on a time charter basis to the Golden Ocean Charterer is the responsibility of the bareboat charterers or Golden Ocean Management, respectively, who arrange insurance in line with standard industry practice. We are responsible for the insurance of our other time chartered and voyage chartered vessels. In accordance with standard practice, we maintain marine hull and machinery and war risks insurance, which include the risk of actual or constructive total loss, and protection and indemnity insurance with mutual assurance associations. From time to time we carry insurance covering the loss of hire resulting from marine casualties in respect of some of our vessels. Currently, the amount of coverage for liability for pollution, spillage and leakage available to us on commercially reasonable terms through protection and indemnity associations and providers of excess coverage is up to $1.0 billion per vessel per occurrence, except for certain excluded High Risk Areas. P&I Associations are mutual marine indemnity associations formed by shipowners to provide protection from large financial loss to one member by contribution towards that loss by all members.
We believe that our current insurance coverage is adequate to protect us against the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage, consistent with standard industry practice. However, there is no assurance that all risks are adequately insured against, that any particular claims will be paid, or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.
Seasonality
MostA large part of our vessels are chartered at fixed rates on a long-term basis and seasonal factors do not have a significant direct effect on our business. Our tankers on charter to Frontline Shipping, our dry bulk carriers on charter to the Golden Ocean Charterer and our offshore supply vessels on charter to the Solstad Charterer are subject to profit sharing agreements and to the extent that seasonal factors affect the profits of the charterers of these vessels we will also be affected. We also have seven Handysize dry bulk carriers two car carriers and two Suezmax tankers and one container vessel trading in the spot or short termshort-term time charter market, and the effects of seasonality may affect the earnings of these vessels. Following scrubber installations on seven container vessels on charter to Maersk and one car carrier on charter to Eukor, the agreements were amended to include sharing of fuel cost savings with these charterers. Scrubber installations on seven Capesize bulk carriers to Golden Ocean will potentially lead to fuel cost savings affecting earnings and profit share. The fuel savings will depend on the price difference between IMO compliant fuel and IMO non-compliant fuel that is subsequently made compliant by the scrubbers.
C. ORGANIZATIONAL STRUCTURE
See Exhibit 8.1 for a list of our significant subsidiaries.
D. PROPERTY, PLANTS AND EQUIPMENT
We own a substantially modern fleet of vessels.vessels and rigs. The following table sets forth the fleet that we own or charter-in including those in our associated companies as of March 26, 2018. All14, 2024.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Approximate | | | | Lease | | Charter Termination |
Vessel | | Built | | Capacity | | Flag | | Classification * | | Date* |
| | | | | | | | | | | |
| | | | | | | | | | | |
Suezmaxes | | | | | | | | | | | |
Marlin Santorini | | 2019 | | 150,000 Dwt | | MI | | Operating | | 2026 | (9) |
Marlin Sicily | | 2019 | | 150,000 Dwt | | MI | | Operating | | 2027 | (9) |
Marlin Shikoku | | 2019 | | 150,000 Dwt | | MI | | Operating | | 2027 | (9) |
SFL Albany | | 2020 | | 160,000 Dwt | | MI | | Operating | | 2028 | (9) |
SFL Fraser | | 2020 | | 160,000 Dwt | | MI | | Operating | | 2028 | (9) |
SFL Ottawa | | 2015 | | 160,000 Dwt | | MI | | Operating | | 2028 | (9) |
SFL Thelon | | 2015 | | 160,000 Dwt | | MI | | Operating | | 2028 | (9) |
| | | | | | | | | | | |
Capesize Dry Bulk Carriers | | | | | | | | | | | |
Belgravia | | 2009 | | 170,000 Dwt | | MI | | Operating | | 2025 | (1) |
Battersea | | 2009 | | 170,000 Dwt | | MI | | Operating | | 2025 | (1) |
Golden Magnum | | 2009 | | 180,000 Dwt | | HK | | Operating | | 2025 | (1) |
Golden Beijing | | 2010 | | 176,000 Dwt | | HK | | Operating | | 2025 | (1) |
Golden Future | | 2010 | | 176,000 Dwt | | HK | | Operating | | 2025 | (1) |
Golden Zhejiang | | 2010 | | 176,000 Dwt | | HK | | Operating | | 2025 | (1) |
Golden Zhoushan | | 2011 | | 176,000 Dwt | | HK | | Operating | | 2025 | (1) |
KSL China | | 2013 | | 180,000 Dwt | | MI | | Operating | | 2025 | (1) |
| | | | | | | | | | | |
Kamsarmax Dry Bulk Carriers | | | | | | | | | | | |
SFL Yangtze (ex Sinochart Beijing) | | 2012 | | 82,000 Dwt | | HK | | n/a | | n/a | (2) |
SFL Pearl (ex Min Sheng 1) | | 2012 | | 82,000 Dwt | | HK | | n/a | | n/a | (2) |
| | | | | | | | | | | |
Supramax Dry Bulk Carriers | | | | | | | | | | | |
SFL Hudson | | 2009 | | 57,000 Dwt | | MI | | n/a | | n/a | (2) |
SFL Yukon | | 2010 | | 57,000 Dwt | | HK | | n/a | | n/a | (2) |
SFL Sara | | 2011 | | 57,000 Dwt | | HK | | n/a | | n/a | (2) |
SFL Kate | | 2011 | | 57,000 Dwt | | HK | | n/a | | n/a | (2) |
SFL Humber | | 2012 | | 57,000 Dwt | | HK | | n/a | | n/a | (2) |
| | | | | | | | | | | |
Product Tankers | | | | | | | | | | | |
SFL Trinity | | 2017 | | 114,000 Dwt | | MI | | Operating | | 2024 | |
SFL Sabine | | 2017 | | 114,000 Dwt | | MI | | Operating | | 2024 | |
SFL Puma | | 2015 | | 115,000 Dwt | | MI | | Operating | | 2026 | (9) |
SFL Tiger | | 2015 | | 115,000 Dwt | | MI | | Operating | | 2026 | (9) |
SFL Lion | | 2014 | | 115,000 Dwt | | MI | | Operating | | 2027 | (9) |
SFL Panther | | 2015 | | 115,000 Dwt | | MI | | Operating | | 2027 | (9) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Container vessels | | | | | | | | | | | |
MSC Margarita | | 2002 | | 5,800 TEU | | LIB | | Sales Type | | 2024 | (1) (5) |
MSC Vidhi | | 2001 | | 5,800 TEU | | LIB | | Sales Type | | 2024 | (1) (5) |
MSC Vaishnavi R. | | 2002 | | 4,100 TEU | | LIB | | Sales Type | | 2025 | (1) (7) |
MSC Julia R. | | 2002 | | 4,100 TEU | | LIB | | Sales Type | | 2025 | (1) (7) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
MSC Arushi R. | | 2002 | | 4,100 TEU | | LIB | | Sales Type | | 2025 | (1) (7) |
MSC Katya R. | | 2002 | | 4,100 TEU | | LIB | | Sales Type | | 2025 | (1) (7) |
MSC Anisha R. | | 2002 | | 4,100 TEU | | LIB | | Sales Type | | 2025 | (1) (7) |
MSC Vidisha R. | | 2002 | | 4,100 TEU | | LIB | | Sales Type | | 2025 | (1) (7) |
MSC Zlata R. | | 2002 | | 4,100 TEU | | LIB | | Sales Type | | 2025 | (1) (7) |
Asian Ace | | 2005 | | 1,700 TEU | | LIB | | Operating | | 2025 | |
Green Ace | | 2005 | | 1,700 TEU | | LIB | | Operating | | 2024 | |
San Felipe | | 2014 | | 8,700 TEU | | MI | | Operating | | 2025 | (10) |
San Felix | | 2014 | | 8,700 TEU | | MI | | Operating | | 2024 | |
San Fernando | | 2015 | | 8,700 TEU | | MI | | Operating | | 2025 | |
San Francisca | | 2015 | | 8,700 TEU | | MI | | Operating | | 2025 | |
Maersk Sarat | | 2015 | | 9,500 TEU | | LIB | | Operating | | 2025 | |
Maersk Skarstind | | 2016 | | 9,500 TEU | | LIB | | Operating | | 2025 | (10) |
Maersk Shivling | | 2016 | | 9,300 TEU | | LIB | | Operating | | 2024 | |
Maersk Phuket | | 2022 | | 2,500 TEU | | LIB | | Operating | | 2029 | |
Maersk Pelepas | | 2022 | | 2,500 TEU | | LIB | | Operating | | 2029 | (4) |
MSC Anna | | 2016 | | 19,200 TEU | | LIB | | Direct Financing | | 2031 | (1) (3) |
MSC Viviana | | 2017 | | 19,200 TEU | | LIB | | Direct Financing | | 2032 | (1) (3) |
Thalassa Axia | | 2014 | | 14,000 TEU | | LIB | | Operating | | 2024 | (4) (6) |
Thalassa Doxa | | 2014 | | 14,000 TEU | | LIB | | Operating | | 2024 | (4) (6) |
Thalassa Mana | | 2014 | | 14,000 TEU | | LIB | | Operating | | 2024 | (4) (6) |
Thalassa Tyhi | | 2014 | | 14,000 TEU | | LIB | | Operating | | 2024 | (4) (6) |
Cap San Vincent | | 2015 | | 10,600 TEU | | MI | | Operating | | 2024 | (1) (4) |
Cap San Lazaro | | 2015 | | 10,600 TEU | | MI | | Operating | | 2024 | (1) (4) |
Cap San Juan | | 2015 | | 10,600 TEU | | MI | | Operating | | 2024 | (1) (4) |
MSC Erica | | 2016 | | 19,400 TEU | | LIB | | Direct Financing | | 2033 | (1) (3) |
MSC Reef | | 2016 | | 19,400 TEU | | LIB | | Direct Financing | | 2033 | (1) (3) |
SFL Maui | | 2013 | | 6,800 TEU | | LIB | | Operating | | 2027 | (1) (4) |
SFL Hawaii | | 2014 | | 6,800 TEU | | LIB | | Operating | | 2027 | (1) (4) |
Maersk Zambezi | | 2020 | | 5,300 TEU | | MI | | Operating | | 2028 | (1) |
Savannah Express (ex Thalassa Patris) | | 2013 | | 15,400 TEU | | LIB | | Operating | | 2028 | (4) |
Thalassa Elpida | | 2014 | | 14,000 TEU | | LIB | | Operating | | 2024 | (4) (6) |
| | | | | | | | | | | |
Car Carriers | | | | | | | | | | | |
SFL Composer | | 2005 | | 6,500 CEU | | LIB | | Operating | | 2026 | (4) |
SFL Conductor | | 2006 | | 6,500 CEU | | LIB | | Operating | | 2027 | (4) |
Arabian Sea | | 2010 | | 4,900 CEU | | MI | | Operating | | 2028 | (4) |
Emden | | 2023 | | 7,000 CEU | | LIB | | Operating | | 2033 | (4) |
Wolfsburg | | 2023 | | 7,000 CEU | | LIB | | Operating | | 2034 | (4) |
Odin Highway | | 2024 | | 7,000 CEU | | LIB | | Operating | | 2034 | (4) (11) |
| | | | | | | | | | | |
Jack-Up Drilling Rig | | | | | | | | | | | |
Linus | | 2014 | | 450 ft | | NOR | | n/a | | n/a | (8) |
| | | | | | | | | | | |
Ultra-Deepwater Drill Unit | | | | | | | | | | | |
Hercules | | 2008 | | 10,000 ft | | CYP | | n/a | | n/a | (8) |
* Lease classifications and charter termination dates are as of
the VLCCs, Suezmax tankers, product tankers and chemical tankers are double-hull vessels.December 31, 2023. |
| | | | | | | | | | | | |
| | Approximate | | | | Lease | | Charter Termination |
Vessel | | Built | | Dwt. | | Flag | | Classification | | Date |
VLCCs | | | | | | | | | | | |
Front Ariake | | 2001 | | 299,000 |
| | BA | | Capital lease | | 2023 | |
Front Serenade | | 2002 | | 299,000 |
| | LIB | | Capital lease | | 2024 | |
Front Hakata | | 2002 | | 298,500 |
| | BA | | Capital lease | | 2025 | |
Front Stratus | | 2002 | | 299,000 |
| | LIB | | Capital lease | | 2025 | |
Front Falcon | | 2002 | | 309,000 |
| | BA | | Capital lease | | 2025 | |
Front Page | | 2002 | | 299,000 |
| | LIB | | Capital lease | | 2025 | |
Front Energy | | 2004 | | 305,000 |
| | MI | | Capital lease | | 2027 | |
Front Force | | 2004 | | 305,000 |
| | MI | | Capital lease | | 2027 | |
| | | | | | | | | | | |
Suezmaxes | | | | |
| | | | | | | |
Glorycrown | | 2009 | | 156,000 |
| | MI | | n/a | | n/a | (4) |
Everbright | | 2010 | | 156,000 |
| | MI | | n/a | | n/a | (4) |
| | | | | | | | | | | |
Capesize Dry Bulk Carriers | | | | | | | | | | | |
Belgravia | | 2009 | | 170,000 |
| | MI | | Operating lease | | 2025 | (1) |
Battersea | | 2009 | | 170,000 |
| | MI | | Operating lease | | 2025 | (1) |
Golden Magnum | | 2009 | | 180,000 |
| | HK | | Operating lease | | 2025 | (1) |
Golden Beijing | | 2010 | | 176,000 |
| | HK | | Operating lease | | 2025 | (1) |
Golden Future | | 2010 | | 176,000 |
| | HK | | Operating lease | | 2025 | (1) |
Golden Zhejiang | | 2010 | | 176,000 |
| | HK | | Operating lease | | 2025 | (1) |
Golden Zhoushan | | 2011 | | 176,000 |
| | HK | | Operating lease | | 2025 | (1) |
KSL China | | 2013 | | 180,000 |
| | MI | | Operating lease | | 2025 | (1) |
| | | | | | | | | | | |
Kamsarmax Dry Bulk Carriers | | | | | | | | | | | |
Sinochart Beijing | | 2012 | | 82,000 |
| | HK | | Operating lease | | 2022 | |
Min Sheng 1 | | 2012 | | 82,000 |
| | HK | | Operating lease | | 2022 | |
| | | | | | | | | | | |
Handysize Dry Bulk Carriers | | | | |
| | | | | | | |
SFL Spey | | 2011 | | 34,000 |
| | HK | | n/a | | n/a | (4) |
SFL Medway | | 2011 | | 34,000 |
| | HK | | n/a | | n/a | (4) |
SFL Trent | | 2012 | | 34,000 |
| | HK | | n/a | | n/a | (4) |
SFL Kent | | 2012 | | 34,000 |
| | HK | | n/a | | n/a | (4) |
SFL Tyne | | 2012 | | 32,000 |
| | HK | | n/a | | n/a | (4) |
SFL Clyde | | 2012 | | 32,000 |
| | HK | | n/a | | n/a | (4) |
SFL Dee | | 2013 | | 32,000 |
| | HK | | n/a | | n/a | (4) |
| | | | | | | | | | | |
Product Tankers | | | | | | | | | | | |
SFL Trinity | | 2017 | | 114,000 |
| | MI | | Operating lease | | 2024 | |
SFL Sabine | | 2017 | | 114,000 |
| | MI | | Operating lease | | 2024 | |
|
| | | | | | | | | | | | |
Chemical Tankers | | | | |
| | | | | | | |
Maria Victoria V | | 2008 | | 17,000 |
| | PAN | | Operating lease | | 2018 | (1) |
SC Guangzhou | | 2008 | | 17,000 |
| | PAN | | Operating lease | | 2018 | (1) |
| | | | | | | | | | | |
Container vessels | | | | |
| | | | | | | |
MSC Margarita | | 2001 | | 5,800 TEU |
| | LIB | | Operating lease | | 2019 | (1) |
MSC Vidhi | | 2002 | | 5,800 TEU |
| | LIB | | Operating lease | | 2019 | (1) |
MSC Vaishnavi R. | | 2002 | | 4,100 TEU |
| | LIB | | Operating lease | | 2019 | (1) |
MSC Julia R. | | 2002 | | 4,100 TEU |
| | LIB | | Operating lease | | 2019 | (1) |
MSC Arushi R. | | 2002 | | 4,100 TEU |
| | LIB | | Operating lease | | 2019 | (1) |
MSC Katya R. | | 2002 | | 4,100 TEU |
| | LIB | | Operating lease | | 2019 | (1) |
MSC Anisha R. | | 2002 | | 4,100 TEU |
| | LIB | | Operating lease | | 2020 | (1) |
MSC Vidisha R. | | 2002 | | 4,100 TEU |
| | LIB | | Operating lease | | 2020 | (1) |
MSC Zlata R. | | 2002 | | 4,100 TEU |
| | LIB | | Operating lease | | 2020 | (1) |
MSC Alice | | 2003 | | 1,700 TEU |
| | MI | | Capital Lease | | 2022 | (1) |
Heung-A Green | | 2005 | | 1,700 TEU |
| | MAL | | Operating lease | | 2020 | (1) |
Green Ace | | 2005 | | 1,700 TEU |
| | MAL | | Operating lease | | 2020 | (1) |
SFL Avon | | 2010 | | 1,700 TEU |
| | MI | | n/a | | n/a | (4) |
San Felipe | | 2014 | | 8,700 TEU |
| | MI | | Operating lease | | 2021 | |
San Felix | | 2014 | | 8,700 TEU |
| | MI | | Operating lease | | 2021 | |
San Fernando | | 2015 | | 8,700 TEU |
| | MI | | Operating lease | | 2022 | |
San Francisca | | 2015 | | 8,700 TEU |
| | MI | | Operating lease | | 2022 | |
Maersk Sarat | | 2015 | | 9,500 TEU |
| | LIB | | Operating lease | | 2020 | |
Maersk Skarstind | | 2016 | | 9,500 TEU |
| | LIB | | Operating lease | | 2021 | |
Maersk Shivling | | 2016 | | 9,300 TEU |
| | LIB | | Operating lease | | 2021 | |
MSC Anna | | 2016 | | 19,200 TEU |
| | LIB | | Capital lease | | 2031 | (5) |
MSC Viviana | | 2017 | | 19,200 TEU |
| | LIB | | Capital lease | | 2032 | (5) |
| | | | | | | | | | | |
Car Carriers | | | | | | | | | | | |
Glovis Composer | | 2005 | | 6,500 CEU |
| | HK | | n/a | | n/a | (4) |
Glovis Conductor | | 2006 | | 6,500 CEU |
| | PAN | | n/a | | n/a | (4) |
| | | | | | | | | | | |
Jack-Up Drilling Rigs | | | | | | | | | | | |
Soehanah | | 2007 | | 375 ft |
| | PAN | | Operating lease | | 2018 | (1) |
West Linus | | 2014 | | 450 ft |
| | NOR | | Capital lease | | 2029 | (1) |
| | | | | | | | | | | |
Ultra-Deepwater Drill Units | | | | | | | | | | | |
West Hercules | | 2008 | | 10,000 ft |
| | PAN | | Capital lease | | 2024 | (1) (6) |
West Taurus | | 2008 | | 10,000 ft |
| | PAN | | Capital lease | | 2024 | (1) (6) |
| | | | | | | | | | | |
Supramax Dry Bulk Carriers | | | | |
| | | | | | | |
SFL Hudson | | 2009 | | 57,000 |
| | MI | | Operating lease | | 2020 | |
SFL Yukon | | 2010 | | 57,000 |
| | HK | | Operating lease | | 2018 | |
SFL Sara | | 2011 | | 57,000 |
| | HK | | Operating lease | | 2019 | |
SFL Kate | | 2011 | | 57,000 |
| | HK | | Operating lease | | 2021 | |
SFL Humber | | 2012 | | 57,000 |
| | HK | | Operating lease | | 2022 | |
|
| | | | | | | | | | | | |
Offshore support vessels | | | | |
| | | | | | | |
Sea Leopard | | 1998 | | AHTS |
| (2) | CYP | | Capital lease | | 2027 | |
Sea Cheetah | | 2007 | | AHTS |
| (2) | CYP | | Operating lease | | 2027 | |
Sea Jaguar | | 2007 | | AHTS |
| (2) | CYP | | Operating lease | | 2027 | |
Sea Halibut | | 2007 | | PSV |
| (3) | CYP | | Operating lease | | 2027 | |
Sea Pike | | 2007 | | PSV |
| (3) | CYP | | Operating lease | | 2027 | |
Key to Flags: BA – Bahamas, CYP - Cyprus, MAL – Malta, HK – Hong Kong, LIB -– Liberia, MI -– Marshall Islands, PANNOR – Panama, NOR - Norway.Norway, CYP – Cyprus
Notes:
| |
(1) | Charterer has purchase options during the term of the charter. |
| |
(2) | Anchor handling tug supply vessel (AHTS). |
| |
(3) | Platform supply vessel (PSV). |
| |
(4) | Currently employed on a short-term charter or trading in the spot market. |
| |
(5) | Vessel chartered-in and out. |
| |
(6) | The period of the charters is subject to court approval of the Seadrill Restructuring Plan. |
(1)Charterer has purchase options or obligations during the term or at the end of the charter.
(2)Currently employed on a short-term charter or trading in the spot market.
(3)Vessel chartered-in and out on direct financing leases and included in associated companies.
(4)Vessel chartered-in as finance leases and out as operating leases.
(5)The charters in respect of these vessels were extended in 2019 and the lease classification changed from operating leases to sales type leases.
(6)The charters in respect of these vessels end in 2024 and the vessels are then contracted to commence a five-year time charter with another counterparty.
(7)The charters in respect of these vessels were extended in 2020 and lease classification changed from operating leases to sales type leases.
(8)Following redelivery from Seadrill in September 2022, Linus continued to be employed under its long-term drilling contract with ConocoPhillips which expires in the fourth quarter of 2028. The harsh environment semi-submersible drilling rig Hercules was employed on a bareboat charter to Seadrill until the end of December 2022, whereupon the rig was redelivered to us. Hercules is currently contracted on a short-term basis.
(9)Charterer has the right to trigger a sale to a third party, at any time after the first year, with net proceeds over an agreed sum to be shared between the charterer and SFL, with profit split on a previously agreed upon basis of calculation.
(10) Charter was extended in 2024. Lease assessment is preliminary and may change.
(11) Vessel was delivered in 2024. Lease assessment is preliminary and may change.
In addition to the above fleet of vessels and rigs, we also have one newbuilding dual-fuel 7,000 CEU car carrier designed to use LNG under construction, expected to be delivered during the first half of 2024.
Substantially, all of our owned vessels and rigs as of December 31, 2023 are pledged under mortgages, excluding three of thetwo 1,700 TEU container vessels, the jack-up drilling rig Soehanah five Supramax drybulk carriers andtwo 6,500 CEU car carriers. one 2,500 TEU container vessel.
Other than our interests in the vessels and drilling unitsrigs described above, we do not own any material physical properties. We lease office space in Oslo from SeatankersFront Ocean Management Norway AS, in Singapore from Golden Ocean Shipping Co Pte. Ltd., and in London from Frontline Corporate Services Ltd, bothall related parties.
| |
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
| |
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with Item 3. "Selected Financial Data", Item 4. "Information on the Company" and our audited consolidated financial statements and notes thereto included herein.
A. OPERATING RESULTS
Overview
Following our spin-off from Frontline and the purchase of our original fleet in 2004, we
We have established ourselves as a leading international maritime asset-owning company with a large and diverse asset base across the maritime and offshore industries. A full fleet list is provided in Item 4.D "Information“Item 4. Information on the Company"Company – D. Property, Plants and Equipment” showing the assets that we currently own and charter to our customers.
Fleet Development
The following table summarizes the development of our active fleet of vessels and rigs, including twofour chartered-in 19,200 TEU container vessels:vessels that are included in our associated companies and 12 container vessels and five car carriers financed through sale and leaseback transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Total fleet | | Additions/ Disposals | | Total fleet | | Additions/ Disposals | | Total fleet |
Vessel type | | December 31, 2021 | | 2022 | | December 31, 2022 | | 2023 | | December 31, 2023 |
Oil Tankers | | 6 | | 6 | | -2 | | 10 | | | | -3 | | 7 |
Chemical tankers | | 2 | | | | | | 2 | | | | -2 | | 0 |
Dry bulk carriers | | 15 | | | | | | 15 | | | | | | 15 |
Container vessels | | 35 | | 2 | | -1 | | 36 | | | | | | 36 |
Car carriers | | 2 | | 1 | | | | 3 | | 2 | | | | 5 |
Jack-up drilling rigs | | 1 | | | | | | 1 | | | | | | 1 |
Ultra-deepwater drill units | | 1 | | | | | | 1 | | | | | | 1 |
| | | | | | | | | | | | | | |
Product tankers | | 4 | | 2 | | | | 6 | | | | | | 6 |
| | | | | | | | | | | | | | |
Total Active Fleet | | 66 | | | +11 | | | -3 | | | 74 | | | +2 | | | -5 | | | 71 | |
Between January 1, 2024 and March 14, 2024, we took delivery of the Odin Highway, the third of four newbuild 7,000 CEU dual-fuel car carriers. The vessel immediately commenced its new 10-year time charter to K Line. |
| | | | | | | | | | | | | | | | | | | | | |
| | Total fleet | | Additions/ Disposals | | Total fleet | | Additions/ Disposals | | Total fleet |
Vessel type | | December 31, 2015 | | 2016 | | December 31, 2016 | | 2017 | | December 31, 2017 |
Oil Tankers | | 16 |
| | | | -1 |
| | 15 |
| | | | -4 | | 11 |
|
Chemical tankers | | 2 |
| | | | | | 2 |
| | | | | | 2 |
|
Dry bulk carriers | | 22 |
| | | | | | 22 |
| | | | | | 22 |
|
Container vessels | | 18 |
| | +3 |
| | | | 21 |
| | +1 | | | | 22 |
|
Car carriers | | 2 |
| | | | | | 2 |
| | | | | | 2 |
|
Jack-up drilling rigs | | 2 |
| | | | | | 2 |
| | | | | | 2 |
|
Ultra-deepwater drill units | | 2 |
| | | | | | 2 |
| | | | | | 2 |
|
Offshore support vessels | | 6 |
| | | | -1 |
| | 5 |
| | | | | | 5 |
|
Product tankers | | — |
| | | | | | — |
| | +2 | | | | 2 |
|
| | | | | | | | | | | | | | |
Total Active Fleet | | 70 |
| | +3 |
| | -2 |
| | 71 |
| | +3 |
| | -4 |
| | 70 |
|
Selected Financial Data
Our selected income statement and cash flow statement data with respect to the fiscal years ended December 31, 2023, 2022 and 2021 and our selected balance sheet data with respect to the fiscal years ended December 31, 2023 and 2022 have been derived from our consolidated financial statements included in “Item 18” of this annual report, prepared in accordance with accounting principles generally accepted in the United States, which we refer to as U.S. GAAP.
The following deliveries have taken place or are scheduled to take place afterselected income statement and cash flow statement data for the fiscal years ended December 31, 2017:2020 and 2019 and the selected balance sheet data for the fiscal years ended December 31, 2021, 2020 and 2019 have been derived from our consolidated financial statements not included herein. The following table should be read in conjunction with “Item 5- Operating and Financial Review and Prospects” and our consolidated financial statements and the notes to those statements included herein.
The VLCC Front Circassia was delivered to its new owner in February 2018.61
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
| (in thousands of dollars except common share and per share data) |
Income Statement Data: | | | | | | | | | |
Total operating revenues | 752,286 | | | 670,393 | | | 513,396 | | | 471,047 | | | 458,849 | |
Net operating income/(loss) | 240,184 | | | 275,474 | | | 242,838 | | | (138,174) | | | 137,777 | |
Net income/(loss) | 83,937 | | | 202,768 | | | 164,343 | | | (224,425) | | | 89,177 | |
Earnings/(loss) per share, basic | $ | 0.67 | | | $ | 1.60 | | | $ | 1.35 | | | $ | (2.06) | | | $ | 0.83 | |
Earnings/(loss) per share, diluted | $ | 0.66 | | | $ | 1.53 | | | $ | 1.30 | | | $ | (2.06) | | | $ | 0.83 | |
Dividends declared | 122,992 | | | 111,574 | | | 77,552 | | | 109,394 | | | 150,659 | |
Dividends declared per share | $ | 0.97 | | | $ | 0.88 | | | $ | 0.63 | | | $ | 1.00 | | | $ | 1.40 | |
In March 2018, we agreed to sell the 1,700 TEU container vessel SFL Avon with delivery
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
| (in thousands of dollars except common share and per share data) |
Balance Sheet Data (at end of period): | | | | | | | | | |
Cash and cash equivalents | 165,492 | | | 188,362 | | | 145,622 | | | 215,445 | | | 199,521 | |
Vessels, rigs and equipment, net (including capital improvements and newbuildings) | 2,740,791 | | | 2,744,249 | | | 2,288,267 | | | 1,250,797 | | | 1,435,347 | |
Vessels under finance lease, net | 573,454 | | | 614,763 | | | 656,072 | | | 697,380 | | | 714,476 | |
Investment in sales-type, direct financing leases and leaseback assets, including current portion | 55,739 | | | 119,023 | | | 204,766 | | | 677,543 | | | 994,387 | |
Investment in associated companies (including loans and receivables) | 61,484 | | | 61,557 | | | 61,640 | | | 151,207 | | | 368,222 | |
Total assets | 3,731,389 | | | 3,861,330 | | | 3,459,297 | | | 3,093,211 | | | 3,885,370 | |
Short and long term debt (including current portion) | 2,146,746 | | | 2,201,056 | | | 1,889,214 | | | 1,649,069 | | | 1,608,088 | |
Finance lease liability (including current portion) | 419,341 | | | 472,996 | | | 524,200 | | | 573,087 | | | 1,106,427 | |
Share capital | 1,386 | | | 1,386 | | | 1,386 | | | 1,278 | | | 1,194 | |
Stockholders' equity | 1,039,397 | | | 1,091,231 | | | 982,327 | | | 795,651 | | | 1,106,369 | |
Common shares outstanding (1) | 137,467,078 | | | 138,562,173 | | | 138,551,387 | | | 127,810,064 | | | 119,391,310 | |
Weighted average common shares outstanding (1) | 126,248,912 | | | 126,788,530 | | | 122,140,675 | | | 108,971,605 | | | 107,613,610 | |
| | | | | | | | | |
Cash Flow Data: | | | | | | | | | |
Cash provided by operating activities | 343,089 | | | 355,125 | | | 293,595 | | | 276,475 | | | 249,707 | |
Cash provided by/ (used in) investing activities | (103,894) | | | (499,088) | | | (389,050) | | | 176,339 | | | (169,881) | |
Cash provided by/ (used in) financing activities | (262,065) | | | 178,365 | | | 25,017 | | | (431,432) | | | (89,204) | |
(1) The number of common shares outstanding as of December 31, 2023 and 2022 includes 8,000,000 shares issued as part of a share lending arrangement relating to the new owner expectedCompany's issuance of 5.75% senior unsecured convertible bonds in October 2016 and 3,765,842 shares issued as part of a share lending arrangement relating to the Company's issuance of 4.875% senior unsecured convertible bonds in April and May 2018. The Company entered into a general share lending agreement with another counterparty and after the maturity of the bonds, 8,000,000 and 3,765,142 shares, respectively, from each issuance under the two initial share lending arrangements described above were transferred into such counterparty's custody. The remaining 700 shares are held with the Company's transfer agent. Accordingly, the total 11,765,842 of shares which had been issued under these arrangements, are not included in the weighted average number of common shares outstanding as of December 31, 2023 and 2022.
In March 2018, we announced that we have agreed to purchase 15 second-hand feeder size container vessels with delivery to us expected in April 2018.
Factors Affecting Our Current and Future Results
Principal factors that have affected our current results, since 2004, andor are expected to affect our future results of operations and financial position, include:
•the earnings of our vessels under time charters and bareboat charters to Frontline Shipping, the Seadrill Charterers,or rigs under drilling contracts, including Maersk, Evergreen, Hapag Lloyd, Trafigura, ConocoPhillips, the Golden Ocean Charterer and other charterers;
•the earnings of our vessels under short term charter or trading in the spot market impacted by freight market conditions;
•the amount we receive under the profit sharing arrangements with Frontline Shipping, the Golden Ocean Charterer, and the Solstad Charterer;sharing arrangements on fuel cost savings with Maersk and Eukor;
•the earnings and expenses related to any additional vessels that we acquire;
•earnings from the sale of assets and termination of charters;
•vessel management fees and operating expenses;
•vessel impairments;
•administrative expenses;
•interest expenses;
•mark-to-market movements on investment in equity securities; and
•mark-to-market adjustments to the valuation of our interest rate swaps and othermovements on derivative financial instruments.
Revenues
As discussed above, Frontline Shipping Limited (“Frontline Shipping”) was our principal customer when we were spun-off from Frontline in 2004.Since then, we have increased our customer base from one to 11more than 10 customers including the related partiesparty Golden Ocean. Frontline Shipping Seadrill and Golden Ocean. Inis no longer a customer, following the year endedsales of the last two VLCC tankers that were leased to them in April 2022.
As of December 31, 2017, Frontline Shipping2023:
•16 container vessels on time charters to Maersk accounted for approximately 15%28% of our consolidated operating revenues (2016: 28%(December 31, 2022: 31%, 2015: 33%)16 vessels). In the year ended December
•Five* container vessels on time charter to Evergreen accounted for approximately 13% of our consolidated operating revenues (December 31, 2017, the Company had eight2022: 15%, six vessels).
•Seven tanker vessels on time charter to Trafigura accounted for approximately 8% of our consolidated operating revenues (December 31, 2022: 9%, seven vessels).
•Eight Capesize dry bulk carriers leased to a subsidiary of Golden Ocean which accounted for approximately 14%7% of our consolidated operating revenues (2016: 12%(December 31, 2022: 8%, 2015: 5%)eight vessels).
In the year ended December 31, 2017, the Company also had 12 container vessels•One jack-up drilling rig on long-term bareboat charters to MSC, an unrelated party, whichdrilling contract revenue with ConocoPhillips accounted for approximately 10% of our consolidated operating revenues in the year ended (December 31, 2017 (2016: 4%2022: 3%, 2015: 4%)one rig).
* In September 2023, one of the vessels was redelivered from Evergreen to the Company and commenced the installation of efficiency upgrades. Following the installation of these upgrades, the vessel commenced a time charter contract with Hapag Lloyd for a duration of five years. The remaining five vessels are also expected to begin charters with Hapag Lloyd upon the completion of their current charters with Evergreen.
Our revenues arise primarily from our long-term, fixed-rate charters and as shown in Results of Operationsbelow the majority of our income is derived from time charter income, however we also have finance lease interest and serviceincome, voyage charter income and bareboat charter income from operating leases.drilling contract revenues.
Our future earnings are dependent upon the continuation of existing lease arrangements and our continued investment in new lease arrangements. Future earnings may be significantly affected by the sale of vessels or a default by counterparties under our chartering agreements. Investments and sales which have affected our earnings since January 1, 2017,2023, are listed in Item 4 above under acquisitions and disposals. Some of our lease arrangements contain purchase options which, if exercised by our charterers, will affect our future leasing revenues.
In 2013, we began to derive income from voyage charters. Currently, we have seven Handysize dry bulk carriers two car carriers and two suezmax tankers and one container vessel trading in the spot or short termshort-term time charter market, where the effects of seasonality may affect the earnings of these vessels.
We have revenue under profit sharing agreements with some of our charterers, in particular with Frontline Shipping, the Golden Ocean Charterer, and the Solstad Charterer.Ocean. Revenues received under profit sharing agreements depend upon the returns generated by the charterers from the deployment of our vessels. These returns are subject to market conditions which have historically been subject to significant volatility. OurHistorically, our main profit share income has arisen from our tankers chartered to Frontline Shipping. From July 1, 2015, the profit sharingThe profit-sharing percentage iswith Frontline Shipping was 50% of earnings above time-chartertime charter rates, payable on a quarterly basis. In addition to the tankers chartered toDuring 2022, Frontline Shipping ourceased to be a customer, following the sale of the last two VLCC tankers that were leased to them in April 2022. Our eight Capesize dry bulk carriers on long-term charter to the Golden Ocean Charterer and our five offshore support vessels on long-term charter to the Solstad Charterer include profit sharing arrangements whereby we earn respectively, a 33% or 50% share of profits earned by the vessels above threshold levels.
In May 2019 and March 2020, we agreed to extend the charters with Maersk on four 8,700 TEU container vessels (San Felipe, San Felix, San Francisca and San Fernando) and three 9,300 to 9,500 TEU Container vessels (Maersk Sarat, Maersk Skarstind and Maersk Shivling). The initial periods of the charters were extended for all vessels at a revised charter hire rate and for extended periods ranging between approximately three to four years, with additional optional periods at the charterer's option. As part of the charter agreement, we agreed to finance the scrubbers to be installed on these vessels and receive a share of the cost savings achieved by the charterer on fuel price from using the scrubbers. Also in November 2022, we took delivery of a 4,900 CEU car carrier, Arabian Sea, in combination with a six-year charter to Eukor which included similar share of the fuel savings in the charter agreement.
Vessel and Rig Management and Operating Expenses
Our vessel-owning subsidiaries with vessels on charter to Frontline ShippingGolden Ocean Charterer have entered into fixed rate management agreements with FrontlineGolden Ocean Management, a wholly-owned subsidiary of Golden Ocean, under which Frontline Management isthey are responsible for all technical management of the vessels. These subsidiaries each pay Frontline Management a fixed fee of $9,000 per day per vessel for these services. This daily fee has been payable since July 1, 2015, when the amendments to the charter agreements became effective, before which the fixed daily fee was $6,500. An exception to this arrangement is for any vessel chartered to Frontline Shipping which is sub-chartered by them on a bareboat basis, for which no management fee is payable for the duration of bareboat sub-charter. Similarly, the vessels on time-charter to thepaid Golden Ocean Charterer payManagement a fixed fee of $7,000 per day per vessel, to Golden Ocean Management, a wholly-owned subsidiary of Golden Ocean, for all technical management of the vessels.
In addition to the eight vessels on charter to Frontline Shipping and the Golden Ocean Charterer, we also have seven23 container vessels, six car carriers, seven dry bulk carriers,Suezmax tankers and twosix product tankers employed on time charters, and two Suezmax tankers,and seven dry bulk carriers two car carriers and one container vessel employedtrading in the spot or short termshort-term time charter market.market. We have outsourced the technical management for these vessels and we pay operating expenses for the vessels as they are incurred. Operating expenses include mainly crew costs, repairs and maintenance, spares and supplies, insurance, management fees and drydocking.
The remaining vessels we own that have charters attached to them are employed on bareboat charters, where the charterer pays all operating expenses, including maintenance, drydocking and insurance.
In addition, we have engaged Odfjell for the operational management of our two drilling rigs, Linus and Hercules. We pay Odfjell a management fee and provide funding for the rigs' running costs as they are incurred.
Vessel and Rig Impairments
The vessels and rigs held and used by us are reviewed for impairment on a quarterly basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, an impairment charge is recognized if the estimate of future undiscounted cash flows expected to result from the use of the vessel or rig and its eventual disposal is less than its carrying amount.
Administrative Expenses
Administrative expenses consist of general corporate overhead expenses, including personnel costs, property costs, legal and professional fees, and other administrative expenses. Personnel costs include, among other things, salaries, pension costs, fringe benefits, travel costs and health insurance. We have entered into administrative services agreements with Frontline Management, Seatankers Management Norway AS and Seatankers Management Co. Ltd. (collectively “Seatankers”), or Seatankers,Front Ocean Management AS and Front Ocean Management Ltd. (collectively “Front Ocean”), under which they provide us with certain administrative support services, and have agreed to reimburse them for reasonable third party costs, if any, advanced on our behalf. Some of the compensation paid to Frontline Management and Seatankers is based on cost sharing for the services rendered, based on actual incurred costs plus a margin.
Our chief information security officer (CISO), who is employed by Front Ocean, a related party, is responsible for assessing and managing cybersecurity threats, reporting cybersecurity updates and reporting to the Board material cybersecurity incidents. For more information on our cybersecurity risk management and strategy, please see “Item 16K. Cybersecurity.”
Mark-to-Market AdjustmentsMovements on derivative financial instruments
In order to hedge against fluctuations in interest rates, we have entered into interest rate swaps which effectively fix the interest payable on a portion of our floating rate debt. We have also entered into interest/currency swaps in order to fix both the interest and exchange rates applicable to the payment of interest and eventual settlement on our floating rate NOK bonds. Although the intention is to hold such financial instruments until maturity, USU.S. GAAP requires us to record them at market valuation in our financial statements. Adjustments to the mark-to-market valuation of these derivative financial instruments, which are caused by variations in interest and exchange rates, are reflected in results of operations and other comprehensive income. Accordingly, our financial results may be affected by fluctuations in interest and exchange rates.
Mark-to-Market Movements on investment in equity securities
We hold investments in shares consisting of approximately 1.3 million shares in NorAm Drilling with a fair value of $5.1 million, trading on the Euronext Growth exchange in Oslo. Upon the adoption of ASU 2016-01 from January 2018, we recognize any changes in the fair value of these equity investments in the statement of operations.
Interest Expenses
Other than the interest expense associated with our senior unsecured convertible bonds, and our senior unsecured NOK bonds, the amount of our interest expense will be dependent on our overall borrowing levels and may significantly increase when we acquire vessels or on the delivery of newbuildings. Interest incurred during the construction of a newbuilding is capitalized in the cost of the newbuilding. Interest expense may also change with prevailing interest rates, although the effect of these changes may be reduced by interest rate swaps or other derivative instruments that we enter into.
Equity in earnings of associated companies
Our income earned from Seadrill is through three wholly owned subsidiaries which are accounted for using the equity method, that lease drilling units to subsidiaries of Seadrill. In the year ended December 31, 2017,2023 and December 31, 2022, we earned income from our 49.9% investment in River Box Holding Inc. (“River Box”), which has been accounted for using the equity method.
The total income from associated companies accounted for 38.6%8.8% of our net income (2016: 31.7%, 2015: 24.7%). The Company and these three wholly owned subsidiaries, agreed to the Restructuring Plan announced by Seadrill in September 2017. As part of the agreement, Ship Finance and these subsidiaries agreed to reduce the contractual charter hire payable by the relevant Seadrill subsidiaries by approximately 29% for five years starting in 2018, with the reduced amounts added back in the period thereafter. See the risk factor in Item 3: "Recently Seadrill announced that they have reached a global settlement in its Chapter 11 proceedings. Although Seadrill has confirmed that its business operations remain unaffected by its restructuring efforts at this time, we may be adversely impacted if the Restructuring Plan is not approved by the court."year ended December 31, 2023 (December 31, 2022 : 3.6% of net income).
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with USU.S. GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. The following is a discussion of the accounting policies we apply that are considered to involve a higher degree of judgment in their application. For details of all our material accounting policies, see Note 2“Note 2: Accounting Policies” to our consolidated financial statements.
Revenue Recognition
We generate our revenues from the charter hire of our vessels and offshore related assets, and freight billings. Revenues are generated from time charter andhire, bareboat charter hires,hire, direct financing lease interest income, sales-type lease interest income, leaseback assets interest income, direct financing lease service revenues, profit sharing arrangements, voyage charters and other freight billings.
In a time charter voyage, freight billings,the vessel is hired by the charterer for a specified period of time in exchange for consideration which is based on a daily hire rate. Generally, the charterer has the discretion over the ports called on, shipping routes and vessel speed. The contract/charter party generally provides typical warranties regarding the speed and performance of the vessel. The charter party generally has some owner protective restrictions such that the vessel is sent only to safe ports by the charterer and carries only lawful or non-hazardous cargo. In a time charter contract, we are recognized on an accrual basis. Eachresponsible for all the costs incurred for running the vessel such as crew costs, vessel insurance, repairs and maintenance and lubrication oils ("lubes") and other costs relevant to operating the vessel. The charterer bears the voyage related costs such as bunker expenses, port charges, canal tolls during the hire period. The performance obligations in a time charter agreementcontract are satisfied over the term of the contract beginning when the vessel is evaluateddelivered to the charterer until it is redelivered back to us. The charterer generally pays the charter hire in advance of the upcoming contract period. The time charter contracts are either operating or direct financing or sales-type leases. Where time charters and classified as an operating lease or a capital lease (see Leases below). Rental receipts frombareboat charters are considered operating leases revenues are recognized in incomerecorded over the periodterm of the charter as a service is provided. When a time charter contract is linked to whichan index, we recognize revenue for the payment relates. Voyage revenues are recognized ratably over the estimated length of each voyage, and accordingly are allocated between reporting periodsapplicable period based on the relative transit time in eachactual index for that period. Voyage expenses are recognized as incurred. Probable losses on voyages are provided for in full at the time such losses can be estimated.
Rental payments from direct financing and sales-type leases and leaseback assets are allocated between lease service revenues, if applicable, lease interest income and repayment of net investment in leases.capital repayments. The amount allocated to lease service revenue is based on the estimated fair value, at the time of entering the lease agreement, of the services provided which consist of ship management and operating services.
In a voyage charter contract, the charterer hires the vessel to transport a specific agreed-upon cargo for a single voyage. The consideration in such a contract is determined on the basis of a freight rate per metric ton of cargo carried or occasionally on a lump sum basis. The charterer is responsible for any short loading of cargo or "dead" freight. The voyage charter party generally has standard payment terms with freight paid on completion of discharge. The voyage charter party generally has a "demurrage" clause. As per this clause, the charterer reimburses us for any potential delays exceeding the allowed laytime as per the charter party clause at the ports visited, which is recorded as voyage revenue. Estimates and judgments are required in ascertaining the most likely outcome of a particular voyage and actual outcomes may differ from estimates. Such estimate is reviewed and updated over the term of the voyage charter contract. In a voyage charter contract, the performance obligations begin to be satisfied once the vessel begins loading the cargo.
We have determined that our voyage charter contracts consist of a single performance obligation of transporting the cargo within a specified time period. Therefore, the performance obligation is met evenly as the voyage progresses, and the revenue is recognized on a straight-line basis over the voyage days from the commencement of loading to completion of discharge. Contract assets with regards to voyage revenues are reported as "Voyages in progress" as the performance obligation is satisfied over time. Voyage revenues typically become billable and due for payment on completion of the voyage and discharge of the cargo, at which point the receivable is recognized as "Trade accounts receivable, net".
In a voyage contract, we bear all voyage related costs such as fuel costs, port charges and canal tolls. To recognize costs incurred to fulfill a contract as an asset, the following criteria shall be met: (i) the costs relate directly to the contract, (ii) the costs generate or enhance resources of the entity that will be used in satisfying performance obligations in the future and (iii) the costs are expected to be recovered. The costs incurred during the period prior to commencement of loading the cargo, primarily bunkers, are deferred as they represent setup costs and recorded as a current asset and are subsequently amortized on a straight-line basis as we satisfy the performance obligations under the contract. Costs incurred to obtain a contract, such as commissions, are also deferred and expensed over the same period.
For our vessels operating under revenue sharing agreements, or in pools, revenues and voyage expenses are pooled and allocated to each pool’s participants in accordance with an agreed-upon formula. Revenues generated through revenue sharing agreements are presented gross when we are considered the principal under the charter parties with the net income allocated under the revenue sharing agreement presented as within voyage charter income. For revenue sharing agreements that meet the definition of a lease, we account for such contracts as variable rate operating leases and recognize revenue for the applicable period based on the actual net revenue distributed by the pool.
The activities that drive the revenue earned from our drilling contract primarily includes providing a drilling rig and the crew and supplies necessary to operate the rig, but may also in the future include mobilizing and demobilizing the rig to and from the drill site and performing rig preparation activities and/or modifications required for the contract with a customer. We account for these integrated services as a single performance obligation that is (i) satisfied over time and (ii) comprised of a series of distinct time increments of service.
We recognize drilling contract revenues for activities that correspond to a distinct time increment of service within the contract term in the period when the services are performed. We recognize consideration for activities that are (i) not distinct within the context of our contracts and (ii) do not correspond to a distinct time increment of service, ratably over the estimated contract term. We determine the total transaction price for each individual contract by estimating both fixed and variable consideration expected to be earned over the term of the contract. The amount estimated for variable consideration may be constrained and is only included in the transaction price to the extent that it is probable that a significant reversal of previously recognized revenue will not occur throughout the term of the contract. When determining if variable consideration should be constrained, we consider whether there are factors outside of our control that could result in a significant reversal of revenue as well as the likelihood and magnitude of a potential reversal of revenue. We reassess these estimates each reporting period as required.
Consideration received for drilling contracts mainly comprises of dayrate drilling revenue which provide for payment on a dayrate basis, with higher rates for periods when the drilling rig is operating and lower rates or zero rates for periods when drilling operations are interrupted or restricted. The dayrate invoices billed to the customer are typically determined based on the varying rates applicable to the specific activities performed on an hourly basis. Such dayrate consideration is allocated to the distinct hourly incremental service it relates to. Revenue is recognized in line with the contractual rate billed for the services provided for any given hour.
Any contingent elements of rental income, such as profit share, fuel savings payments or interest rate adjustments, are recognized when the contingent conditions have materialized.
Prior to December 31, 2011, Frontline Shipping and Frontline Shipping II Limited (“Frontline Shipping II”), together the Frontline Charterers, paid the Company a profit sharing rate of 20% of their earnings above average threshold charter rates on a time-charter equivalent basis from their use of the Company's fleet each fiscal year. For each profit sharing period, the threshold is calculated as the number of days in the period multiplied by the daily threshold TCE rates for the applicable vessels. Starting on January 1, 2012, amendments to the charter agreements increased the profit sharing percentage to 25% for earnings above those threshold levels. Additionally, those amendments provided that during the four year period of a temporary reduction in charter rates, the Frontline Charterers would pay the Company 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day. Under the terms of the amendments to the charter agreements, we received a compensation payment of $106 million, of which $50 million represented a non-refundable advance relating to the 25% profit sharing agreement. In 2015, further amendments were made to the charter agreements reducing the charter rates and increasing the profit sharing percentage to 50% for earnings above the new time-charter rates with effect from July 1, 2015. The Company did not recognize any income under the 25% profit sharing agreement, as the cumulative share of earnings did not attain the starting level of $50 million over the three and a half years of the agreement's duration. The new 50% profit sharing agreement with Frontline Shipping is not subject to any such constraints, and is payable on a quarterly basis.
In 2015, we acquired eight Capesize dry bulk carriers from subsidiaries of Golden Ocean and immediately upon delivery each vessel commenced a ten year time-charter10-year time charter to the Golden Ocean Charterer. The terms of the charters provide that we will receive a profit sharing rate of 33% of their earnings above average threshold charter rates, calculated quarterly on a time-chartertime charter equivalent basis.
In 2016,During 2019 and 2020, the charter agreements relating to five offshore support vesselsseven containerships chartered to the Solstad ChartererMaersk on a bareboattime charter basis were amended after we agreed to install scrubbers on the vessels. The installation of scrubbers was completed in 2020 and restated, including provisions whereby2021. As part of the charter agreements, we will receive a profit sharing rate of 50% of each vessel's earnings above average threshold charter rates, calculated on a time-charter equivalent basis.
In the past, we have also received a 50% share of profits earned by some our dry bulk carriers operatingthe fuel savings, dependent on short-term time charters to United Freight Carriers, or UFC, a related party. All profit sharing revenues are recorded when earnedthe price difference between IMO compliant fuel and realizable.
Available-for-sale securities
Available-for-sale securities heldIMO non-compliant fuel that is subsequently made compliant by the Company consistscrubbers. As of 2023, scrubber savings revenue is also earned from one car carrier chartered to Eukor and has a profit share investmentsmechanism between the owners and interest-earning listed and unlisted corporate bonds. Any premium paid on their acquisition is amortized over the lifecharterer. As part of the bond. Available-for-sale securitiescharter agreement, we are entitled to a share of the difference between the prices paid and the Platts bunker prices at the time and place of bunkering. Amounts receivable under these arrangements are accrued on the basis of amounts earned at the reporting date.
Vessels, rigs and equipment (including operating lease assets)
Vessels, rigs and equipment are recorded at fair value, with unrealized gainshistorical cost less accumulated depreciation and, losses recorded as a separate component of other comprehensive income. If circumstances arise which lead the Company to believe that the issuer of a corporate bond may be unable meet its payment obligations in full, or that the fair value at acquisition of the share investment or corporate bond may otherwise not be fully recoverable, then to the extent that a loss is expected to arise that unrealized loss is recorded as anif appropriate, impairment in the statement of operations, with an adjustment if necessary to any unrealized gains or losses previously recorded in other comprehensive income. In determining whether the Company has an other-than-temporary impairment in its investment in shares, the Company considers the period of decline, the amount and the severity of the decline and the ability of the investment to recover in the near to medium term. In determining whether the Company has an other-than temporary impairment in its investment in corporate bonds, in addition to the Company’s intention and ability to hold the investments until the market recovers, the Company evaluates if the underlying security provided by the bonds is sufficient to ensure that the decline in fair value of these bonds did not result in an other-than-temporary impairment.
charges. The cost of disposals or reclassifications from other comprehensive income is calculated on an average cost basis, where applicable.
The fair value of unlisted corporate bonds is determined from an analysis of projected cash flows, based on factors including the terms, provisions and other characteristics of the bonds, credit ratings and default risk of the issuing entity, the fundamental financial and other characteristics of that entity, and the current economic environment and trading activity in the debt market.
Vessels and Depreciation
The cost of vessels and rigsthese assets less estimated residual value areis depreciated on a straight linestraight-line basis over theirthe estimated remaining economic useful lives.life of the asset. The estimated economic useful life of our offshore assets, including drilling rigs and drillships, is 30 years and for all other vessels it is 25 years. These are common life expectancies applied
Where an asset is subject to an operating lease that includes fixed price purchase options, the projected net book value of the asset is compared to the option price at the various option dates. If any option price is less than the projected net book value at an option date, the initial depreciation schedule is amended so that the carrying value of the asset is written down on a straight line basis to the option price at the option date. If the option is not exercised, this process is repeated so as to amortize the remaining carrying value, on a straight line basis, to the estimated recycling value or the option price at the next option date, as appropriate.
This accounting policy for fixed assets has the effect that if an option is exercised there will be either a) no gain or loss on the sale of the asset or b) in the shippingevent that the option is exercised at a price in excess of the net book value at the option date, a gain will be reported in the statement of operations at the date of delivery to the new owners, under the heading "gain on sale of assets".
We capitalize and offshore industries.depreciate the costs of significant replacements, renewals and upgrades to its vessels over the shorter of the vessel’s remaining useful life or the life of the renewal or upgrade. The amount capitalized is based on management’s judgment as to expenditures that extend a vessel’s useful life or increase the operational efficiency of a vessel. Costs that are not capitalized are recorded as a component of direct vessel operating expenses during the period incurred. Expenses for routine maintenance and repairs are expensed as incurred. Advances paid in respect of vessel upgrades in relation to Exhaust Gas Cleaning Systems ("EGCS") and Ballast water treatment systems ("BWTS") are included within "Capital improvements, newbuildings and vessel purchase deposits", until such time as the equipment is installed on a vessel, at which point it is transferred to "Vessels, rigs and equipment, net".
If the estimated economic useful life or estimated residual value of a particular vessel is incorrect, or circumstances change and the estimated economic useful life and/or residual value have to be revised, an impairment loss could result in future periods. We monitor the carrying values of our vessels, including direct financing lease assets, and revise the estimated useful lives and residual values of any vessels where appropriate, particularly when new regulations are implemented.
Vessels and Equipment under Finance lease
We charter-in certain vessels and equipment under leasing agreements. Leases of vessels and equipment, where we have substantially all the risks and rewards of ownership, are classified as "vessels under finance lease", with corresponding finance lease liabilities recorded.
We capitalize and depreciate the costs of significant replacements, renewals and upgrades to its vessels over the shorter of the vessel’s remaining useful life or the life of the renewal or upgrade. The amount capitalized is based on management’s judgment as to expenditures that extend a vessel’s useful life or increase the operational efficiency of a vessel. Costs that are not capitalized are recorded as a component of direct vessel operating expenses during the period incurred. Expenses for routine maintenance and repairs are expensed as incurred. Advances paid in respect of vessel upgrades in relation to EGCS and BWTS are included within "Capital improvements, newbuildings and vessel purchase deposits", until such time as the equipment is installed on a vessel, at which point it is transferred to "Vessels under finance lease, net".
Depreciation of vessels and equipment under finance lease is included within "Depreciation" in the consolidated statement of operations. Vessels and equipment under finance lease are depreciated on a straight-line basis over the vessels' remaining economic useful lives or on a straight-line basis over the term of the lease. The method applied is determined by the criteria by which the lease has been assessed to be a finance lease.
Drydocking provisions for vessels
Normal vessel repair and maintenance costs are charged to expense when incurred. The Company recognizes the cost of a drydocking at the time the drydocking takes place, that is, it applies the "expense as incurred" method.
Special Periodic Survey ("SPS") for rigs
Costs related to periodic overhauls of drilling rigs are capitalized and amortized over the anticipated period between overhauls, which is generally five years. Related costs are primarily yard costs and the cost of employees directly involved in the work. We include amortization costs for periodic overhauls in depreciation expense. Costs for other repair and maintenance activities are included in rig operating expenses and are expensed as incurred.
Investment in Sales-Type and Direct Financing Leases
Leases (charters) of our vessels where we are the lessor are classified as either direct financing, sales-type leases, operating leases, or capital leases,leaseback assets based on an assessment of the terms of the lease. For charters classified as capitaldirect financing leases, the minimum lease payments reduced(reduced in the case of time-charteredtime chartered vessels by projected vessel operating costs,costs) plus the estimated residual value of the vessel are recorded as the gross investment in the direct financing lease.
For direct financing leases, the difference between the gross investment in the lease and the carrying value of the vessel is recorded as unearned lease interest income. The net investment in the lease consists of the gross investment less the unearned income. Over the period of the lease each charter payment received, net of vessel operating costs if applicable, is allocated between "lease interest income" and "repayment of investment in lease" in such a way as to produce a constant percentage rate of return on the balance of the net investment in the direct financing lease. Thus, as the balance of the net investment in each direct financing lease decreases, a lower proportion of each lease payment received is allocated to lease interest income and a greater proportion is allocated to lease repayment. For direct financing leases relating to time chartered vessels, the portion of each time charter payment received that relates to vessel operating costs is classified as "lease service revenue".
The implicit rate of return for each of the Company's"service revenue - direct financing leases is derived in accordance with Accounting Standards Codification, or ASC, Topic 840 "Leases" using the fair value of the asset at the lease inception, the minimum contractual lease payments and the estimated residual values.leases".
For sales-type leases, the difference between the gross investment in the lease and the present valuesvalue of its components, i.e. the minimum lease payments and the estimated residual value, is recorded as unearned lease interest income. The discount rate used in determining the present values is the interest rate implicit in the lease, as defined in ASC Topic 840-10-20.lease. The present value of the minimum lease payments, computed using the interest rate implicit in the lease, is recorded as the sales price, from which the carrying value of the vessel at the commencement of the lease is deducted in order to determine the profit or loss on sale. As is the case for direct financing leases, the unearned lease interest income is amortized to income over the period of the lease so as to produce a constant periodic rate of return on the net investment in the lease. In addition, in the case of a sales-type lease, the
The difference between the fair value (or sales price)of the leased asset and the carryingcosts results in a selling profit or loss. A selling profit is recognized at lease commencement for sales-type leases and over the lease term for direct financing leases. Selling loss is recognized at lease commencement for both sales-type and direct financing leases. The fair value (or cost)is considered to be the cost of acquiring the vessel unless a significant period has elapsed between the acquisition of the asset is recognized as "profit on sale" invessel and the period in whichcommencement of the lease commences.lease.
We estimate the unguaranteed residual value of our direct financing lease assets at the end of the lease period by calculating depreciation in accordance with our accounting policies over the estimated useful life of the asset. Residual values are reviewed at least annually to ensure that original estimates remain appropriate.
There is a degree of uncertainty involved in the estimation of the unguaranteed residual values of assets leased under both operating and capitaldirect financing or sales-type leases. Global effects of supply and demand for oil and other cargoes, and changes in international government regulations cause volatility in the spot market for second-hand vessels. Where assets are held until the end of their useful lives the unguaranteed residual value (i.e. scraprecycling value) will fluctuate with the price of steel and any changes in laws related to the ship scrappingrecycling process, commonly known as ship breaking.
Classification of a lease involves the use of estimates or assumptions about fair values of leased vessels and expected future values of vessels. We generally base our estimates of fair value on independent broker valuations of each of our vessels. Our estimates of expected future values of vessels are based on current fair values amortized in accordance with our standard depreciation policy for owned vessels.
If the terms of an existing lease are agreed to be amended, the modification is evaluated to consider if it is a contract which occurs when the modification grants the lessee an additional right-of-use not included in the original lease and the lease payments increase commensurate with the standalone price for the additional right of use, adjusted for the circumstances of the particular contract. If both conditions are met, the amendments are treated as a separate lease. If the conditions are not met, the lease is re-evaluated under ASC 842 as a new lease with the new terms.
Finance lease liability and Lease debt financing
Similar to the leaseback assets, any vessels sold and leased back from the same party are also evaluated under sale and leaseback accounting guidance contained in ASC 842 to determine whether it is appropriate to account for the transaction as a sale of an asset. If control is deemed not to have passed to the buyer, it is deemed as "a failed sale and leaseback transaction" and we account for the transaction as a financing arrangement and describes this as "lease debt financing". We do not derecognize the underlying vessel and continue to depreciate the asset. The sales proceeds received from the buyer-lessor are recorded as a financial liability. Charter hires paid by us to the buyer-lessor are allocated between interest expense and principal repayment of the financial liability.
Furthermore, we charter-in seven container vessels through sale and leaseback financing arrangements, under previously adopted ASC 840, with corresponding lease assets classified as "vessels under finance lease". Leases of vessels and equipment, where we have substantially all the risks and rewards of ownership, are classified as finance lease liabilities. Each lease payment is allocated between reduction in liability and finance charges to achieve a constant rate on the capital balance outstanding. The interest element of the capital cost is charged to the Consolidated Statements of Operations over the lease period.
Fixed Price Purchase Options
Where an asset is subject to an operating lease that includes fixed price purchase options, the projected net book value of the asset is compared to the option price at the various option dates. If any option price is less than the projected net book value at an option date, the initial depreciation schedule is amended so that the carrying value of the asset is written down on a straight line basis to the option price at the option date. If the option is not exercised, this process is repeated so as to amortize the remaining carrying value, on a straight line basis, to the estimated scraprecycling value or the option price at the next option date, as appropriate.
Similarly, where a sales-type lease, direct financing or sales-type lease relates to aleaseback asset charter arrangement containing fixed price purchase options, the projected carrying value of the net investment in the lease is compared to the option price at the various option dates. If any option price is less than the projected net investment in the lease at an option date, the rate of amortization of unearned finance lease interest income is adjusted to reduce the net investment in the lease to the option price at the option date. If the option is not exercised, this process is repeated so as to reduce the net investment in the lease to the un-guaranteed residual value or the option price at the next option date, as appropriate.
Thus, for operating assets and direct financing and sales-type lease assets or leaseback asset, if an option is exercised there will either be (a) no gain or loss on the exercise of the option or (b) in the event that an option is exercised at a price in excess of the net book value of the asset or the net investment in the lease, as appropriate, at the option date, a gain will be reported in the statement of operations at the date of delivery to the new owners.
Impairment of Long-Lived Assets
The vessels and rigs held and used by us are reviewed for impairment on a quarterly basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge would be recognized if the estimate of future undiscounted cash flows expected to result from the use of the vessel or rig and its eventual disposal is less than its carrying amount. When testing for impairment, we consider daily rates currently in effect for existing charters, the possibility of any medium or long-term charter arrangements being terminated early and, using historical trends, estimated daily rates for each vessel or rig for its remaining useful life not covered by existing charters. In assessing the recoverability of carrying amounts, we must make assumptions regarding estimated future cash flows. These assumptions include assumptions about spot market rates, operating costs and the estimated economic useful life of these assets. In making these assumptions we refer to five-year and ten-year historical trends and performance, as well as any known future factors. Factors we consider important which could affect recoverability and trigger impairment include significant underperformance relative to expected operating results, new regulations that change the estimated useful economic lives of our vessels and rigs, and significant negative industry or economic trends.
In the year ended December 31, 2015,2023, reviews of the carrying value of long-lived assets indicated that two offshore support vessels and two container vesselschemical tankers were impaired, and charges were taken against these assets. No impairment was recognized in 2022. In the year ended December 31, 2016,2021, reviews of the carrying value of long-lived assets indicated that one VLCC classified as held for sale and one container vessel weredrilling rig was impaired, and charges were taken against these assets. In 2017, the reviews of the carrying value of long-lived assets resulted in no impairment charge being required.asset.
Vessel and Rig Market Values
As we obtain information from various industry and other sources, our estimates of vessel and rig market values are inherently uncertain. In addition, charter-free market values are highly volatile and any estimate of market value may not be indicative of the current or future basic market value of our vessels or prices that we could achieve if we were to sell them. Moreover, we are not holding our vessels for sale, except as otherwise noted in this report, and most of our vessels and one of our rigs are currently employed under long-term charters or leases or other arrangements. There is not a ready liquid market for vessels and rigs that are subject to such arrangements.
During the past few years, the charter-free market valuesAs of vessels have experienced particular volatility, with substantial declines in many vessel classes. As a result, the charter-free market values of many of our vessels have declined below those vessels' carrying value. However, we would not impair those vessels' carrying value under our accounting impairment policy, if we expect future cash flows receivable from the vessels over their remaining useful lives, including existing charters, to exceed the carrying values of such vessels.
At December 31, 2017,2023, we owned 6858 vessels and two rigs. Including the two ultra-deepwater drilling units and the harsh-environment jack-up drilling rig which are owned by equity accounted subsidiaries, theThe aggregate carrying value of these 6860 assets atas of December 31, 2017,2023, was $3.2$2.7 billion, as summarized in the table below. The table is presented in the context of the markets in which the vessels operate, with crude oil tankers and oil product tankers and chemical tankers grouped together under "Tanker vessels", container vessels and car carriers grouped together under "Liners" and a jack-up drilling rigs,rig and an ultra-deepwater drilling units and offshore support vesselsrig grouped together under "Offshore units".
| | | | | Aggregate carrying value at |
|
| Number of
|
| | December 31, 2017 |
|
| owned vessels
|
| | ($ millions)
|
|
| | | Aggregate carrying value at | | | | | Aggregate carrying value at |
| Number of | | | Number of | | December 31, 2023 |
| owned vessels | | | owned vessels | | ($ millions) |
Tanker vessels (1) | 15 |
| | 549 |
|
Dry bulk carriers (2) | 22 |
| | 570 |
|
Liners (3) | 22 |
| | 810 |
|
Offshore units (4) | 9 |
| | 1,259 |
|
| 68 |
| | 3,188 |
|
| |
(1) | Includes 15 vessels with an aggregate carrying value of $549 million, which we believe exceeds their aggregate charter-free market value by approximately $136 million. |
| |
(2) | Includes 14 vessels with an aggregate carrying value of $336 million, which we believe exceeds their aggregate charter-free market value by approximately $147 million and 8 vessels with an aggregate carrying value of $234 million, which we believe is approximately $15 million less than their aggregate charter-free market value. |
| |
(3) | Includes 19 vessels with an aggregate carrying value of $749 million, which we believe exceeds their aggregate charter-free market value by approximately $119 million, and 3 vessels with an aggregate carrying value of $61 million, which we believe is approximately $8 million less than their aggregate charter-free market value. |
| |
(4) | Includes six vessels with an aggregate carrying value of $520 million, which we believe exceeds their aggregate charter-free market value by approximately $39 million, and three vessels with an aggregate carrying value of $739 million, which we believe is approximately $107 million less than their aggregate charter-free market value. |
(1)Includes 13 vessels with a carrying value of $586.3 million which we believe is approximately $311.0 million less than their charter-free market value.
(2)Includes seven vessels with an aggregate carrying value of $132.4 million, which we believe exceeds their aggregate charter-free market value by approximately $28.7 million and eight vessels with a carrying value of $142.9 million which we believe is approximately $40.9 million less than their charter-free market value.
(3)Includes 11 vessels with an aggregate carrying value of $687.6 million which we believe exceeds their aggregate charter-free market value by approximately $55.3 million and 19 vessels with an aggregate carrying value of $515.6 million, which we believe is approximately $273.8 million less than their charter-free market value.
(4)Includes one jack-up drilling rig with an aggregate carrying value of $312.4 million which we believe exceeds its aggregate charter-free market value by approximately $44.9 million and one ultra-deepwater drilling rig with an aggregate carrying value of $333.4 million, which we believe is approximately $16.6 million less than its charter-free market value.
The above aggregate carrying value of $3,188 million at$2.7 billion as of December 31, 2017,2023 is made up of (a) $334$55.7 million investments in capitaldirect finance leases (excluding the chartered-in container vessels, MSC Anna, andMSC Vivianna)Viviana, MSC Erica and MSC Reef, in our associated companies), and (b) $1,763$2,654.7 million vessels, rigs and equipment (c) $1,091 million carrying value of two ultra-deepwater drilling units and one jack-up drilling rig owned by equity accounted subsidiaries.
Obligations under capital lease
The Company charters-in two(excluding seven container vessels on a bareboat basisincluded in vessels under long term leasing agreements. Leases of vessels and equipment, where the Company has substantially all the risks and rewards of ownership, are classified as capital leases. Each lease payment is allocated between liability and finance charges to achieve a constant rate on the capital balance outstanding. The interest element of the capital cost is charged to the Consolidated Statement of Operations over the lease period.lease).
Convertible bonds
The Company accounts for debt instruments with convertible features in accordance with the details and substance of the instruments at the time of their issuance. For convertible debt instruments issued at a substantial premium to equivalent instruments without conversion features, or those that may be settled in cash upon conversion, it is presumed that the premium or cash conversion option represents an equity component. Accordingly, the Company determines the carrying amounts of the liability and equity components of such convertible debt instruments by first determining the carrying amount of the liability component by measuring the fair value of a similar liability that does not have an equity component. The carrying amount of the equity component representing the embedded conversion option is then determined by deducting the fair value of the liability component from the total proceeds from the issue. The resulting equity component is recorded, with a corresponding offset to debt discount which is subsequently amortized to interest cost using the effective interest method over the period the debt is expected to be outstanding as an additional non-cash interest expense. Transaction costs associated with the instrument are allocated pro-rata between the debt and equity components.
Mark-to-Market Valuation of Financial Instruments
The Company entersWe enter into interest rate and currency swap transactions, total return bond swaps and total return equity swaps. As required by ASC Topic 815 "Derivatives and Hedging", the mark-to-market valuations of these transactions are recognized as assets or liabilities, with changes in their fair value recognized in the consolidated statements of operations or, in the case of swaps designated as hedges to underlying loans, in other comprehensive income. To determine the market valuation of these instruments, we use a variety of assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Variable Interest Entities
A variable interest entity is defined in ASC Topic 810 "Consolidation" ("ASC 810") as a legal entity where either (a) the total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated support; (b) equity interest holders as a group lack either i) the power to direct the activities of the entity that most significantly impact on its economic success, ii) the obligation to absorb the expected losses of the entity, or iii) the right to receive the expected residual returns of the entity; or (c) the voting rights of some investors in the entity are not proportional to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.
ASC 810 requires a variable interest entity to be consolidated by its primary beneficiary, being the interest holder, if any, which has both (1) the power to direct the activities of the entity which most significantly impact on the entity's economic performance, and (2) the right to receive benefits or the obligation to absorb losses from the entity which could potentially be significant to the entity.
In applying the provisions of ASC 810, we must make assessments in respect of, but not limited to, the sufficiency of the equity investment in the underlying entity and the extent to which interest holders have the power to direct activities. These assessments include assumptions about future revenues and operating costs, fair values of assets, and estimated economic useful lives of assets of the underlying entity.
Recent accounting pronouncements
In May 2014, December 2023, the Financial Accounting Standards BoardFASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("FASB"ASU 2023-09") issued Accounting Standards Update ("ASU") 2014-09 "Revenue from Contracts with Customers" which will replace almost all existing revenue recognition guidance. Among other things, these amendments require that public business entities on an annual basis (1) disclose specific categories in U.S. GAAPthe rate reconciliation and is intended to improve and converge with international standards(2) provide additional information for reconciling items that meet a quantitative threshold (if the financial reporting requirements for revenue from contracts with customers. The core principleeffect of ASU 2014-09those reconciling items is that an entity should recognize revenue for the transfer of goods or services equal to or greater than 5 percent of the amount that it expects to be entitled to receive for those goodscomputed by multiplying pretax income or services. ASU 2014-09 also requires additional disclosures aboutloss by the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which will beapplicable statutory income tax rate). The amendments are effective for the Company beginning January 1, 2018. We have closely assessedafter December 15, 2024. As of the new guidance, including the interpretations by the FASB Transition Resource Group for Revenue Recognition, throughout 2017 andyear ended December 31, 2023, we have concluded that the ASU will impact our vessels operating on voyage charters. Revenue from voyage charters will continue to be recognized over time, however the period over which it is recognized will change from discharge-to-discharge to load-to-discharge. The Company believes that performance obligations under a voyage charter begin to be met from the point at which a cargo is loaded until the point at which a cargo is discharged. While this represents a change in the period over which revenue is recognized, the total voyage results recognized over all periods would not change, however, each period’s voyage results could differ materially from the same period’s voyage results recognized based on the present revenue recognition guidance. The Company has elected to adopt the amendments in ASU 2014-09 on a modified retrospective basis. The Company doesdo not expect the adoption of the standardchanges prescribed in ASU 2023-09 to have a material impact on theits consolidated financial statements and related disclosures, however, we will re-evaluate the amendments based on the facts and circumstances at the time of implementation of the Company and upon adoption, the Company will recognize the cumulative effect of adopting this guidance as a minor adjustment to its opening balance of retained earnings as of January 1, 2018. Prior periods will not be retrospectively adjusted.guidance.
In January 2016,November 2023, the FASB issued ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities"No. 2023-07, Segment Reporting (Topic 280): Improvements to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. Reportable Segment Disclosures ("ASU 2016-01 particularly relates to the fair value and impairment of equity investments, financial instruments measured at amortized cost, and the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. ASU 2016-01 is effective for fiscal years2023-07"), which expands annual and interim periods beginning after December 15, 2017. Earlydisclosure requirements for reportable segments. On adoption, is only permitted for certain particular amendments within ASU 2016-01, where financial statements have not yet been issued. ASU 2016-01 will require the Company to recognize any changes in the fair value of certain equity investments in net income. These changes are currently recognized in other comprehensive income. The effect of the adoption of ASU 2016-01disclosure improvements will be that $100.4 million of net unrealized losses will be reclassified from other comprehensive incomeapplied retrospectively to retained earnings.
In February 2016, the FASB issuedprior periods presented. The ASU 2016-02 "Leases" to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 creates a new Accounting Standards Codification Topic 842 "Leases" to replace the previous Topic 840 "Leases." ASU 2016-02 affects both lessees and lessors, although for the latter the provisions are similar to the previous model, but updated to align with certain changes to the lessee model and also the new revenue recognition provisions contained in ASU 2014-09 (see above). ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-02 on its consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued ASU 2016-13 "Financial Instruments - Credit Losses" to introduce new guidance for the accounting for credit losses on instruments within its scope. ASU 2016-13 requires among other things, the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of ASU 2016-13 on its consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments", to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. It addresses the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (COLIs) (including bank-owned life insurance policies (BOLIs)); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments are effective for fiscal years beginning after December 15, 2017,2023, and interim periods within those fiscal years with early adoption permitted. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company does not expect the adoption of the standard to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash", to address diversity
in practice that exists in the classification and presentation of changes in restricted cash and require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The standard will be effective for fiscal years beginning after December 15, 2017, and interim periods within those years. Early2024, with early adoption is permitted. TheWe are currently evaluating the impact that ASU 2023-07 will have on the consolidated financial statements of the Company will depend on the facts and circumstances of any specific future transactions.
In January 2017, the FASB issued ASU 2017-01 "Business Combinations (Topic 805) -Clarifying the Definition of a Business" which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively and will be effective for the Company beginning January 1, 2018. The impact on the consolidated financial statements of the Company will depend on the facts and circumstances of any specific future transactions.
In March 2017, the FASB issued ASU 2017-08 "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities" to amend the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The impact on the consolidated financial statements of the Company will depend on the facts and circumstances of any specific future transactions.
In May 2017, the FASB issued ASU 2017-09 "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting" to clarify and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. ASU 2017-09 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The impact on the consolidated financial statements of the Company will depend on the facts and circumstances of any specific future transactions.
In August 2017, the FASB issued ASU 2017-12 "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities" to enable entities to better portray the economics of their risk management activities in theCompany's financial statements and enhance the transparency and understandability of hedge results. The amendments also simplify the application of hedge accounting in certain situations. ASU 2017-12 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating the impact of this standard update on its Consolidated Financial Statements and related disclosures.
Market Overview
The Oil Tanker Market
The crude tanker freight market has experienced volatility during the last decade. According to industry sources, theduring 2023, average tanker freight rates experienced an increase in 2014earnings remained at historically high levels, mainly due to geopolitical factors along with strong Atlantic export and 2015 from the low levels in 2013. This increase was abruptly halted in 2016. Spotfirm Asian demand. The average spot charter rates for VLCCs averaged over $100,000were approximately $43,200 per vessel per day (or $50,600 per day for scrubber fitted vessels) in 2023, a significant increase from $23,900 per day in December 2015,2022. In 2021 the highest level since 2008, but by September 2016 had fallen to below $17,000average spot charter rates for VLCCs were approximately $3,200 per day as a result of significant capacity increases following delivery of newbuilding vessels. In December 2016, spot rates recovered to an average of $54,000 per day. Rates fell again in 2017 and reached a low of $8,120 in September 2017 but recovered in October to $21,430 before falling steadily to $10,377 in December 2017. Suezmax tanker spot rates also fell from $35,199 in December 2016saw improved market earnings, with average spot rates at approximately $53,500 (or $57,500 per day for scrubber fitted vessels) compared to $16,749 in December 2017.$44,300 per day for 2022.
Since 2013, global oil production has increased by nearly 6%. Overall, tonnage demand for crude tankers has increased by more than 12% from 2014an estimated 5.9% in 2023, compared to 2017, with 5%an increase of this growth occurring9.0% in 2017. However, on2022. On the supply side, crude oil tanker capacity has grownincreased by more than 13% since 2014, with 5.8% of this3.7% in 2017.2023.
This increase in capacity relative to demand resulted in TCE rates for modern VLCCs and Suezmax tankers in 2017 averaging approximately $28,800 and $22,500 per day, respectively, lower by 12% and 14% than average rates in 2016.
The fall in rates is partly attributable to increase in supply due to too many vessels being delivered. In addition, in early 2017 OPEC agreed with its members to cut production which has also been a factor, while the lows of September 2017 were attributable partly to China’s low monthly imports.
According to industry sources, atAt the end of 20172023, the total orderbook for new VLCCs and Suezmax tankers consisted respectively, of 9323 vessels and 6167 vessels, respectively, representing approximately 11% and 12%5% of the existing fleet. These are lower levels thanrespective fleets.
According to industry sources, the oil tanker market outlook remains firm with total crude tanker demand projected to expand by 3.8% at a point with a small orderbook however with risks related to developments in the endglobal economy and introduction of 2016, which were approximately 14% and 17%, respectively, of the existing fleet at the time, reflecting relatively high levels of newbuilding orders placed in 2016, followed by low levels placed in 2017.new emission regulations.
The Dry Bulk Shipping Market
According to industry sources, theThe dry bulk shipping market has experienced a good year in 2017volatile market conditions and has started 2024 with strong earnings following a difficult year in 2016 where average earnings reached their lowest levels for sixteen years. Overall, industry sources indicate thatstrong Brazilian exports and Red Sea disruptions. During 2023 fleet capacity increased by 3%approximately 3.0%, while tonnage demand for vessels registeredincreased by an estimated 4.4%. At the start of 2024, industry sources estimated that seaborne dry bulk trade was projected to grow by 1.6% in tonne-miles in 2024. This is less than the projected fleet capacity growth of almost 4%2.3%. A number of risk factors may impact the outlook including seasonal trends, disruptions to iron ore output, underlying pressure from weak global economic conditions and reduced port congestion.
Accordingly, the marketThe average earnings during 2023 for a Capesize, a Panamax and a Supramax dry bulk carriers showed significant improvement throughout 2017. The average one-year time charter rates for Capesize, Supramax and Handysize dry bulk carrierscarrier were respectively, $15,200$12,400 per day $9,800($16,600 per day for a scrubber fitted Capesize), $12,000 per day and $8,100$12,400 per day, representing increases from 2016 of 83%, 51% and 53%, respectively.
During 2017,the year, contracting for newbuilding dry bulk carriers increased to 36.2an estimated 40.2 million dwt up from 1535.9 million dwt in 2016,2022, while deliveries of new vessels amounted to 38approximately 35.1 million dwt and scrappingrecycling removed some 15approximately 5.5 million dwt. Thus,As a result, fleet capacity increased by 2529.6 million dwt, equivalent to approximately 3%3.0% of the total fleet size. At the end of 2017,size year on year. During December 2023, the total orderbook for new dry bulk carriers was 8186.8 million dwt, equivalent to 10%9% of the existing fleet.
Since 2016, the freight market enjoyed a relatively quick recovery, with Capesize spot rates for December 2017 averaging $23,700 per day compared with $12,132 per day in December 2016. Much of this rally can be attributed to a combination of seasonal developments, positive sentiment, and increased activity. On the demand side, there are both driver and detractors, particularly when considering Chinese demand. While renewed infrastructure stimulus has helped boost demand for key raw material, coal and iron ore in particular, the Chinese strategy to fuel growth through infrastructure development may not continue. Furthermore, China has made declarations to try to reduce its industrial pollution, which may also reduce infrastructure development.
The Freight Liner Market (Containerships and Car Carriers)
AccordingThe container charter market experienced, according to industry sources, a strong upswing during the container charter market saw improvementsend of 2023 and during the beginning of 2024 with elevated freight markets following disruptions in 2017 followingthe Red Sea and rerouting of ships. While markets have seen an increase due to disruptions increasing ton mile demand, it is expected that strong supply pressure with a challenging market environmentsignificant number of newbuild vessels deliveries will result in 2016. Charter rates generally improved through most ofdownward pressure on the year, with some variation across the vessel sizes due in part to a reduction in excess capacity.freight and chartering market.
GlobalIn 2023, global container trade (TEU-miles) is estimated to have grownincreased by 5.2%1.6%, following a decrease of 5.3% in 2017 to reach 192 million TEU, on the back of firm growth on the Transpacific, North-South2022 where demand side was impacted by inflation, macroeconomic headwinds and intra-regional trades, and representing an acceleration from growth of 4.1% and 2.2%a shift in 2016 and 2015, respectively.consumer spending.
Containership fleet capacity delivered in the full year 2017 picked up compared to 2016, totaling 148 vessels of 1.1 million TEU, although remaining relatively subdued compared to average levels seen in 2013-15. The first boxships sized in excess of 20,000 TEU were delivered in 2017, and around a quarter of capacity delivered in the year was accounted forexpanded by vessels in this size range.
Although down slightly from the record year of 2016, containership recycling activity stood at historically elevated levels in 2017, despite some easing towards the end of the year. A total of 141 containerships of 0.4 million TEU were demolished, with the average age of vessels sold for scrap standing at 21 years. Following the trend seen each year since 2013, there was firm scrapping of vessels in the ‘old Panamax’ sector, with more than 40% of the capacity demolished in 2017 accounted for by vessels of this type.
Industry sources indicate that container vessel contracting activity remained relatively limited in the full year 2017, with orders placed for a total of 108 boxships8.0% in 2023 compared to 4.0% in 2022. With a large orderbook, fewer vessels were contracted during 2023 with 189 vessels of 0.701.6 million TEU. For mostTEU, down from 422 vessels of 2.8 million TEU in 2022. During the year, ordering was focused onstart of 2024, the smaller container vessel sizes, with sub-3,000 TEU ‘feeder’ vessels accounting for over 70% of the total number of orders placed, although orders for 20 ‘mega’ boxships, each of 22,000 TEU, were placed in the third quarter of 2017. There was also some interest in vessels at the smaller end of the large container vessel sector, with nine orders placed in 2017 for vessels sized 12-14,999 TEU. While newbuilding prices in the larger sectors generally eased in 2017, prices in the small and intermediate size ranges saw slight increases. At the end of 2017, the containership newbuilding price indexorderbook stood at 70 points, remaining close to the record low837 vessels of 69 points seen6.9 million TEU.
The car carrier market remains at end 2016.
Accordingall-time high according to industry sources,sources. Car carrier operators are reporting strong profits following record car trade volumes and a shift towards long haul trading routes. The Global deep-sea car trade was projected to grow by 17% in 2023, which will be 12% above pre-COVID levels. While demand remains strong, challenges still remain due to macroeconomic trends and potential impacts from inflation.
Seaborne car trade on an annualized basis was calculated to have increased by approximately 17% in 2023, excluding the seaborne car trade returned to growth in 2017, with volumes estimated to have risen by 5% to 21.5 million units (excluding intra-EU trade) in the full year. Historically, seaborne car trade had been one of the faster growing parts of seaborne trade, but expansion had been very limited in recent years. In 2016, seaborne car trade fell by 1% to 20.3 million units, 2% lower than trade in 2013, with volumes also still below the 2008 peak.within Europe. The low commodity price environment significantly undermined consumer demand in many developing countries in 2016, with car imports into some regions dropping sharply. However, a slight improvement in commodity prices so far in 2017, combined with a pickup in global economic growth has supported a return to faster expansionincrease in seaborne car trade this year, outperforming initial expectations. Seaborne imports into North America and Europe as a whole is estimated to have grown by 5% and 10% respectivelyvolumes follows an increase of 8% in 2017, whilst imports into key developing regions seem to have stabilised somewhat after sharp falls in 2016. Exports2022. During the fourth quarter of 2023, the total fleet stood at 760 vessels which totaled 4.0 million CEU of capacity, up 0.8% from Japan and South Korea are estimated to have grown by 3% and 4% respectively in 2017.the start of 2023.
The Offshore Drilling Market
According to industry sources,The offshore drilling market has experienced significant volatility over the past decade. The oil price of oil (Brent crude spot) averaged around $110has fluctuated between $20 in 2020 and above $100 dollars per barrel from 2011 to 2013, which was attractive toin 2022.
Increased global demand for oil and gas combined with diminishing global supply as a result of natural production depletion of existing oil and gas fields combined with underinvestment in new oil and gas production, has resulted in higher oil prices recently. A general increase in capital expenditures by oil and gas companies and prompted them to substantially increase their investmenthas recently resulted in offshoremore exploration and development activity. This resulted in almost full utilization and record high day ratesactivity increasing demand for mobile offshore drilling units in 2013, and prompted substantial contracting for new assets. However, over the course of 2014 the oil price fell to below $50 per barrel in December 2014 and the fall continued to under $30 per barrel in January 2016, although this recovered to an average of $43 per barrel in 2016 and increased to an average of $54 per barrel in 2017. As a consequence of this fall in oil prices, oil and gas companies have significantly reduced their exploration and development activities, resulting in decidedly weaker demand in thedrilling. In addition, lower supply of offshore drilling market. Worldwide demand for drilling units has declined from 744 units at the end of 2013 to 375 units at the end of 2017, and asset utilizations have declined from 96% of the active supply at the end of 2013 to 66% at the end of 2017, while global average day rates have declined by more than 50% since the beginning of 2014.
The oil price increases are partly attributable to the agreement made between OPEC and other significant oil producers suchrigs as Russia which continued to hold through the second half of 2017. Full-year compliance with the 1.73 million barrels per day, or bpd, of oil output cuts came in at 113% (largely due to Saudi Arabia making deeper than stipulated cuts). Furthermore, in November, OPEC and the other significant oil producers agreed to extend the cuts from the end of March 2018 until the close of 2018. This extension made a fairly significant contribution to positive oil price sentiment.
Through 2017, the number of active units in the jack-up sector, increased by 4% compared to 2016. However, industry sources suggest that the jack-up fleet remains oversupplied. As of February 2018, utilisation of the jack-up fleet stood at 66%, indicating that over 30% of vessels being actively marketed for work were without a contract. Jack-up owners have made relatively little progress in addressing the surplus of units since the downturn began in 2014, with the marketable jack-up fleet declining in size by less than one percentage point in the period between 2014 and the start of 2018. Additionally, in early 2018, 84 units were on order, equivalent to 27% of the total fleet, though many of theseolder rigs are now on yard account with no firm time lines for delivery.
Since the start of 2014, the number of marketable floaters has declined by 25% to stand at 203 at the start of 2018. This compares favorably to the jack-up sector, where the number of marketable units has effectively plateaued during the past few years. This reflects not only relatively robust cold stacking of units by international drillers, but also comparatively high levels of scrapping. 105 floaters have been scrapped since the start of 2014, compared to 61 jack-ups. Oversupply does, however, remain particularly acute in the ultradeepwater fleet, which now carries out most non-specialised deepwater drilling.
The Offshore Support Vessel ("OSV") Market
According to industry sources, the OSV market remains one of the most severely affected by the offshore downturn. Despite small signs of demand-side improvement, whichretired and demolished has helped to offer marginal improvements in some dayrate levels in early 2018, there are severe supply side challenges forimproved the market still to solve. There are more than 1,100 OSVs in lay-up, and many more idle or under-utilized. Itoutlook for these rigs. As a result, the utilization of offshore drilling rigs has improved since 2020, however there is not expectedno certainty that all such unemployed unitsthis will be reactivated as some are too elderly or degraded in condition to be economically viable candidates.continue.
Summary
The above overviews of the various sectors in which we operate are based on current market conditions. However, market developments cannot always be predicted and may differ from our current expectations. The overviews provided are based on information, data and estimates derived from industry sources available as of the date of this annual report, and there can be no assurances that such trends will continue or that any anticipated developments referenced in such section will materialize. This information, data and estimates involve a number of assumptions and limitations, are subject to risks and uncertainties, and are subject to change based on various factors. You are cautioned not to give undue weight to such information, data and estimates. We have not independently verified any third-party information, verified that more recent information is not available and undertake no obligation to update this information unless legally obligated.
Inflation
MostSome of our time chartered vessels are subject to operating and management agreements that have the charges for these services fixed for the term of the charter. Thus, although inflation has a moderate impact on our corporate overheadsHowever the majority are not fixed, and our vessel operating expenses, we do not consider inflation to be a significant risk to direct costs in light of the current and foreseeable economic environment. In addition, inenvironment, significant global inflationary pressures could increase the Company's operating, voyage, general and administrative and financing costs. Although we attempt to manage the effects of inflation by reviewing our suppliers regularly, there are no assurances that the effects of inflation will not have a shipping downturn, costs subject to inflation can usually be controlled because shipping companies typically monitor costs to preserve liquiditymaterial adverse impact on our business, financial condition, results of operation and encourage suppliers and service providers to lower rates and prices in the event of a downturn.cash flows.
Results of Operations
Year ended December 31, 2017,2023, compared with year ended December 31, 20162022
Net incomeprofit for the year ended December 31, 2017,2023, was $101.2$83.9 million compared to a decreasenet profit of 30.9%$202.8 million from the year ended December 31, 2016.2022.
| | (in thousands of $) | 2017 |
| | 2016 |
| (in thousands of $) | 2023 | | 2022 |
Total operating revenues | 380,878 |
| | 412,951 |
|
Gain/(loss) on sale of assets and termination of charters | 1,124 |
| | (167 | ) |
Gain on sale of assets | |
Total operating expenses | 227,376 |
| | 244,695 |
|
Net operating income | 154,626 |
| | 168,089 |
|
| Interest income | 19,330 |
| | 21,736 |
|
| Interest income | |
| Interest income | |
| Interest expense | (90,414 | ) | | (71,843 | ) |
Gain/(loss) on purchase of bonds | (2,305 | ) | | (8,802 | ) |
| Interest expense | |
| Interest expense | |
Loss on purchase of bonds and debt extinguishment | |
| Other non-operating items (net) | |
| Other non-operating items (net) | |
| Other non-operating items (net) | (3,794 | ) | | 9,461 |
|
Equity in earnings of associated companies | 23,766 |
| | 27,765 |
|
| Tax expense | |
| Tax expense | |
| Tax expense | |
Net income | 101,209 |
| | 146,406 |
|
Net operating income for the year ended December 31, 2017,2023, was $154.6$240.2 million, compared with $168.1net operating income of $275.5 million for the year ended December 31, 2016.2022. The decrease was principally due to lower profit sharing revenues. Overallactivities in respect of the two drilling rigs. The harsh environment semi-submersible drilling rig Hercules was redelivered from Seadrill in December 2022. The rig completed its third SPS and related upgrade work in Norway in mid-June 2023 upon which it mobilized to Canada for a drilling contract with ExxonMobil which was completed in September 2023. In mid-November the rig commenced a drilling contract with Galp Energia in Namibia after a short stay in Las Palmas for relevant upgrades and preparations. The jack-up drilling rig Linus was also redelivered to SFL from Seadrill in September 2022 and the rig started earning drilling contract revenue directly from the charterer. The above activities resulted in an increase in operating revenues, which were slightly offset by an increase in operating expenses. In the year ended December 31, 2023, the gain on sale of assets was $18.7 million which arose from the sale of two Suezmax tankers, two chemical tankers and one VLCC, compared to a gain of $13.2 million in 2022 a from the sale of two VLCCs and one container vessel. The overall net income for 2017 decreased by $45.2 million2023 compared with 2016to 2022 was a decrease of $118.8 million. This was mainly due to the decrease indecreased net operating income described above and an increase in interest expense. In addition, lower interest and dividend income from investments, exchange losses and costs arising fromexpense by $49.7 million due to new loans obtained by the redemptionCompany to finance the acquisition of bonds and impairment charges for certain investments included in othervessels. Other non-operating items all contributed to the decrease in overall net income. This was partly offset by an increase in incomedecreased from the mark-to-market of derivatives.
Three ultra-deepwater drilling units were accounted for under the equity method during 2017 and 2016. The operating revenues of the wholly-owned subsidiaries owning these assets are included under "equity in earnings of associated companies", where they are reported net of operating and non-operating expenses.
|
| | | | | |
(in thousands of $) | 2017 |
| | 2016 |
|
Direct financing lease interest income | 38,265 |
| | 23,181 |
|
Finance lease service revenues | 35,010 |
| | 44,523 |
|
Profit sharing revenues | 5,814 |
| | 51,544 |
|
Time charter revenues | 238,409 |
| | 226,748 |
|
Bareboat charter revenues | 40,596 |
| | 45,039 |
|
Voyage charter revenues | 21,037 |
| | 19,329 |
|
Other operating income | 1,747 |
| | 2,587 |
|
Total operating revenues | 380,878 |
| | 412,951 |
|
Total operating revenues decreased by 7.8%$33.8 million gain in the year ended December 31, 2017,2022 to a $1.9 million loss in the year ended December 31, 2023 mainly due to mark-to-market adjustments on non-designated derivatives and equity investments. In addition, tax expense of $3.3 million was reported in relation to Hercules and Linus in the year ended December 31, 2023 with no such expense in the same period in 2022.
Operating revenues
| | | | | | | | | | | |
(in thousands of $) | 2023 | | 2022 |
| | | |
| | | |
Sales-type, direct financing leases and leaseback assets interest income | 6,192 | | | 8,916 | |
Service revenues from direct financing leases | — | | | 1,746 | |
| | | |
| | | |
Profit sharing revenues | 13,162 | | | 27,830 | |
| | | |
| | | |
Time charter revenues | 544,434 | | | 475,988 | |
| | | |
| | | |
Bareboat charter revenues | — | | | 58,953 | |
Voyage charter revenues | 33,648 | | | 72,362 | |
Drilling contract revenues | 146,890 | | | 18,775 | |
Other operating income | 7,960 | | | 5,823 | |
Total operating revenues | 752,286 | | | 670,393 | |
Total operating revenues increased by 12.2% in the year ended December 31, 2023, compared with the year ended December 31, 2016.2022.
DirectSales-type, direct financing leases and sales-type leaseleaseback assets interest income arises
Sales-type, direct financing leases interest income arose on mostnine container vessels on long term charters to MSC. In addition, the Company had leaseback interest income from one VLCC which was reported as a leaseback asset until its disposal in August 2023.
In general, sales-type leases, direct financing leases and leaseback assets interest income reduces over the terms of our leases. A greater proportion of rental payment is treated as repayment of investment in the lease or loan and progressively, as the capital is repaid, interest payments by the applicable lessee decreases.
The $2.7 million decrease in sales-type, direct financing leases and leaseback assets interest income from 2022 to 2023 is mainly a result of the sale of one VLCC, which was delivered back to Landbridge in August 2023, following the exercise of the applicable purchase option in the charter contract. In addition, we soldtwocrude oil tankers on charter to Frontline Shipping one offshore support vessel on charter to the Solstad Chartererin April 2022 and three container vessels on long term charter to MSC. In general, direct financing lease interest income reduces over the terms of our leases, as progressively a lesser proportion of the lease rental payment is allocated to interest income and a greater proportion is treated as repayment on the lease. The $15.1 million increase in direct finance lease interest income from 2016 to 2017 is mainly a result of the addition of the three container vessels on long-term charter to MSC. Two of the vessels are chartered-in 19,200 TEU container vessels, accounted for as finance lease assets, which were delivered in December 2016 and March 2017, respectively. The third one a 1,700 TEU container vessel which was previously an operating lease asset, is now accounted for as a sales-type lease following the commencement of a five-year bareboat charterdelivered back to MSC in April 2017. 2022 following execution of the applicable purchase obligation in the charter contract.
Service revenues from direct financing leases
The increasevessels chartered on direct financing leases to Frontline Shipping were leased on time charter terms, whereby we were responsible for the management and operation of such vessels. This was managed by entering into fixed price agreements with Frontline Management, a wholly-owned subsidiary of Frontline, whereby we were paying them management fees of $9,000 per day for each vessel chartered to Frontline Shipping. Accordingly, $9,000 per day was allocated from each time charter payment received from Frontline Shipping to cover lease executory costs, and this was classified as "Direct financing lease service revenue". The $1.7 million reduction in service revenue from direct finance lease interest income was partly offset by the sale of two Suezmax tankers in May 2017 and August 2017, respectively, in additionfinancing leases is due to the sale of three VLCCthe last two crude oil tankers on charter to Frontline Shipping in July 2016, March 2017April 2022 and June 2017, respectively, and one offshore support vesselhence there was no such revenue in February 2016, all of which were accounted for as direct financing lease assets.the year ended December 31, 2023.
The $9.5 million reduction in finance lease service revenue arose as a result of the sale of the three VLCCs and two Suezmax tankers.
Profit share revenues
We have a profit sharing arrangement with Frontline Shippingrelated to the eight Capesize dry bulk vessels on charter to a subsidiary of Golden Ocean, whereby we earn a 33% profit share above the Company earnsbase charter rates, calculated and paid on a 50%quarterly basis. In the year ended December 31, 2023, we recorded a profit share revenue of profits earned by the vessels above threshold levels. The Company earned and recognized profit sharing revenue$0.0 million under this arrangement compared with $3.0 million profit share in 2022. The decrease is attributable to less favorable rates in 2023 for the Capesize dry bulk vessels.
In the year ended December 31, 2023, we recorded $13.2 million from fuel saving arrangements relating to seven container vessels on charter to Maersk, following the installation of $5.6scrubbers and one scrubber-fitted car carrier on charter to Eukor which was acquired in November 2022 (2022: $24.8 million relating to seven container vessels and one car carrier). The Company has an arrangement for these vessels whereby it is entitled to a share of the fuel savings dependent on the price difference between IMO compliant fuel and IMO non-compliant fuel.
Time charter revenues
During 2023, time charter revenues were earned by 23 container vessels, five car carriers, 15 dry bulk carriers, seven Suezmax tankers and six product tankers. The $68.4 million increase in time charter revenues in 2023 compared with 2022, was mainly the result of the acquisition of two 7,000 CEU car carriers in September 2023 and November 2023. respectively. We also acquired six Suezmax tankers, two product tankers, two container vessels and one car carrier in 2022.
Bareboat charter revenues
Bareboat charter revenues were earned by our vessels and rigs which were leased under operating leases on a bareboat basis. In the year ended December 31, 2023, we had no vessels or rigs on a bareboat basis, compared to two drilling rigs earning $59.0 million in the year ended December 31, 2017 compared2022. The bareboat contracts of the two rigs with $50.9 millionSeadrill were terminated in 2016. The decrease is attributableSeptember 2022 for Linus and in December 2022 for Hercules and the rigs were redelivered to the Company.
Voyage charter revenues
During 2023, voyage charter revenues were earned by two Suezmax tankers, Glorycrown and Everbright, which were trading in a less favourable tanker market in 2017pool together with two similar tankers owned by Frontline, two chemical tankers and also fewer vessels on charter to Frontline Shipping. In addition, the Company has eightfive dry bulk carriers operatingwhich are sometimes chartered on time-chartersa voyage-by-voyage basis. Between March 2023 and June 2023, we sold and delivered the two Suezmax tankers and the two chemical tankers to unrelated parties. During 2022, voyage charter revenues were earned by two Suezmax tankers, Glorycrown and Everbright, which were trading in a pool together with two similar tankers owned by Frontline, two chemical tankers, one product tanker and three dry bulk carriers which were occasionally chartered on a voyage-by-voyage basis. The $38.7 million decrease in voyage charter revenues in 2023 compared to 2022, was mainly due to the Golden Ocean Charterer, which includes profit sharing arrangements wherebysale of the Company earns a 33% share of profits earned by the vessels above threshold levels. two Suezmax tankers and two chemical tankers between March 2023 and June 2023.
Drilling contract revenues
In the year ended December 31, 2017,2023, we earned drilling contract revenues of $146.9 million from our two drilling rigs. In September 2022, the Company earned $0.2drilling rig. Linus was redelivered from Seadrill to SFL. Concurrently, the drilling contract of Linus with ConocoPhillips was assigned from Seadrill to SFL and we started earning drilling contract revenue directly from ConocoPhillips. The drilling rig, Hercules was redelivered from Seadrill to SFL in December 2022. The rig undertook its third SPS and related upgrade work which lasted until June 2023. Following the completion of its SPS, the Hercules mobilized to Canada for a drilling contract with ExxonMobil which was completed in September 2023. In mid-November the rig commenced a drilling contract with Galp Energia in Namibia after a short stay in Las Palmas for relevant upgrades and preparations. The rig is expected to start mobilizing towards Canada immediately after completing the Galp Energia contract in Namibia in the first half of 2024.
Cash flows arising from sales-type, direct financing leases and leaseback assets
The following table analyzes our cash flows from the sales-type, direct financing leases and leaseback assets with Frontline Shipping, MSC and Landbridge during 2023 and 2022, and shows how they are accounted for:
| | | | | | | | | | | |
(in thousands of $) | 2023 | | 2022 |
Charter hire payments accounted for as: | | | |
Sales-type, direct financing leases and leaseback assets interest income | 6,192 | | | 8,916 | |
Service revenue from direct financing leases | — | | | 1,746 | |
Repayments from sales-type, direct financing leases and leaseback assets | 13,906 | | | 17,025 | |
Total payments received from sales-type, direct financing leases and leaseback assets | 20,098 | | | 27,687 | |
Gain on sale of assets and termination of charters
In the year ended December 31, 2023, a net gain of $18.7 million income under this arrangement compared with no profit sharewas recorded arising from the disposal of two Suezmax tankers, Glorycrown and Everbright, two chemical tankers, SFL Weser and SFL Elbe and one VLCC, Landbridge Wisdom, previously on charter to Landbridge.
In the year ended December 31, 2022, a net gain of $13.2 million was recorded arising from the disposal of two VLCCs, Front Energy and Front Force, previously on charter to Frontline Shipping and one container vessel, MSC Alice, previously on charter to MSC following execution of the applicable purchase obligation in 2016. We also had a profit sharing agreement relatingthe charter contract. This gain includes $4.5 million compensation from Frontline Shipping due to early termination of the charters of the two VLCCs.
Operating expenses
| | | | | | | | | | | |
(in thousands of $) | 2023 | | 2022 |
| | | |
| | | |
Vessel operating expenses | 180,933 | | | 188,402 | |
Rig operating expenses | 112,823 | | | 16,741 | |
Depreciation | 214,062 | | | 187,827 | |
Vessel impairment charge | 7,389 | | | — | |
| | | |
| | | |
Administrative expenses | 15,565 | | | 15,177 | |
| 530,772 | | | 408,147 | |
Vessel operating expenses include operating and occasional voyage expenses for the container vessels, dry bulk carriers, chartered to UFC in 2016, which earned us $0.6 million in 2016. In 2017, we did not have any vesselsproduct, chemical and Suezmax tankers and car carriers operated on a time charter to UFC.
In addition, we had a profit sharing agreement on one ofbasis and managed by related and unrelated parties. Vessel operating expenses also include voyage expenses from our two Suezmax tankers which were trading in a pool together with two tankers owned by Frontline, two chemical tankers which earned uswere operating in the spot market and five dry bulk carriers operating in the spot market in the year ended December 31, 2023. The two Suezmax tankers and two chemical tankers were sold between March and June 2023. In addition, vessel operating expenses include predelivery and drydocking costs and payments to Golden Ocean Management AS of $7,000 per day for each vessel chartered to Golden Ocean Charterer, in accordance with the vessel management agreements. During 2022, vessel operating expenses also included similar payments to Frontline Management of $9,000 per day for the two vessel chartered to Frontline Shipping until their sale in April 2022.
Vessel operating expenses decreased by $7.5 million in 2023, compared with 2022. The decrease was driven by the sale of two Suezmax tankers and two chemical tankers between March and June 2023 which resulted in a reduction in both operating and voyage expenses. The above is slightly offset by the acquisition of two car carriers in September 2023 and November 2023, respectively. We also acquired six Suezmax tankers, two product tankers, two container vessels and one car carrier in 2022. In addition, 10 vessels had dry dock costs in the year ended December 31, 2023, compared to eight vessels in the same period in 2022.
Rig operating expenses relate to the harsh environment jack-up drilling rig, Linus, and the ultra-deepwater drilling rig, Hercules. In September 2022, Linus was redelivered from Seadrill to SFL and the drilling contract of Linus with ConocoPhillips was assigned from Seadrill to SFL and began incurring rig operating expenses. In December 2022, Hercules was also redelivered from Seadrill to SFL and began incurring rig operating expenses.
Depreciation expenses relate to vessels and rigs owned by the Company or vessels chartered-in under finance leases, that are not accounted for as investments in sales-type, direct financing and leaseback assets. The increase in depreciation of $26.2 million for 2023, compared to the same period in 2022, was mainly due to the acquisition of two car carriers in September 2023 and November 2023 as well as due to capitalized SPS costs, ballast water treatment systems and other capital upgrades for the rig Hercules. We also acquired six Suezmax tankers, two product tankers, two container vessels and one car carrier in 2022. The above is slightly offset by the sale of two Suezmax tankers and two chemical tankers between March and June 2023.
In the year ended December 31, 2023, we recorded an impairment charge of $7.4 million on two chemical tankers prior to their disposal in April 2023 and June 2023. No impairment charge was recorded in the year ended December 31, 2022.
The 3% increase in administrative expenses for 2023, compared with 2022, is mainly due to increased professional and legal fees arising from the business activities such as acquisition and financing as well as a slight increase in marketing and investor relations costs.
Interest income
Total interest income increased to $13.6 million in the year ended December 31, 2023, comparing to $8.0 million in the year ended December 31, 2022, mainly due to higher interest received on bank and short-term deposits.
Interest expense
| | | | | | | | | | | |
(in thousands of $) | 2023 | | 2022 |
Interest on U.S. dollar floating rate loans | 79,657 | | | 50,943 | |
Interest on U.S. dollar fixed rate loan | 9,570 | | | — | |
| | | |
Interest on NOK 700 million senior unsecured floating rate bonds due 2023 | 2,458 | | | 4,832 | |
Interest on NOK 700 million senior unsecured floating rate bonds due 2024 | 5,551 | | | 4,688 | |
Interest on NOK 600 million senior unsecured floating rate bonds due 2025 | 4,687 | | | 3,597 | |
| | | |
| | | |
| | | |
Interest on 4.875% senior unsecured convertible bonds due 2023 | 1,746 | | | 6,723 | |
Interest on 7.25% senior unsecured sustainability-linked bonds due 2026 | 10,875 | | | 10,875 | |
Interest on 8.875% senior unsecured sustainability-linked bonds due 2027 | 12,166 | | | — | |
Interest on lease debt financing | 22,500 | | | 6,227 | |
Interest on finance lease obligation | 21,123 | | | 23,531 | |
Swap interest (income)/expense | (5,627) | | | 576 | |
Other interest | 110 | | | 377 | |
Capitalized interest | (5,537) | | | (2,239) | |
Amortization of deferred charges | 7,731 | | | 7,209 | |
| 167,010 | | | 117,339 | |
As of December 31, 2023, the Company, including its consolidated subsidiaries, had total debt principal outstanding of $2.2 billion (December 31, 2022: $2.2 billion) comprising of:
| | | | | | | | | | | |
(in thousands of $) | 2023 | | 2022 |
| | | |
4.875% senior unsecured convertible bonds due 2023 | — | | | 137,900 | |
NOK 700 million senior unsecured floating rate bonds due 2023 | — | | | 71,243 | |
NOK 700 million senior unsecured floating rate bonds due 2024 | 68,426 | | | 70,734 | |
NOK 600 million senior unsecured floating rate bonds due 2025 | 58,089 | | | 60,048 | |
7.25% senior unsecured sustainability-linked bonds due 2026 | 150,000 | | | 150,000 | |
U.S. dollar denominated fixed rate debt due 2026 | 148,875 | | | — | |
8.875% senior unsecured sustainability-linked bonds due 2027 | 150,000 | | | — | |
Lease debt financing due through 2033 | 573,456 | | | 394,555 | |
| | | |
Total Fixed Rate and Foreign Debt | 1,148,846 | | | 884,480 | |
U.S. dollar denominated floating rate debt due through 2029 | 1,014,842 | | | 1,329,156 | |
| 2,163,688 | | | 2,213,636 | |
Interest expense for 2023 was $167.0 million compared with $117.3 million for 2022. The increase in interest expense in the year ended December 31, 2023, compared with the same period in 2022, is mainly due to new loans obtained by the Company for the vessels purchased in 2022 and the increased interest rates in the period for floating rate debt and refinanced fixed loans. The daily SOFR rate was an average of 5.01% and the average three-month London Interbank Offered Rate, or LIBOR, was 5.39% in the year ended December 31, 2023, compared to an average three-month LIBOR of 2.39% in 2022. Changes in interest related to the bonds are due to changes in foreign currency exchange rate, new bond issuances, repayments and redemptions. These include the 4.875% senior unsecured convertible bonds due 2023 and the NOK700 million senior unsecured floating rate bonds due 2023 which were repaid in 2023 and the interest expense from the 8.875% senior unsecured sustainability-linked bonds due 2027 which the Company issued in February 2023.
The interest on lease debt financing in 2023 is also increased compared to 2022. This is due to new financing obtained by the Company for the two car carriers delivered in September and November 2023, one car carrier and one container vessel in the year ended December 31, 2023. In addition, there is an increase on lease debt financing from the refinancing of two container vessels and two car carriers in the year ended December 31, 2022.
As of December 31, 2023, the Company and its consolidated subsidiaries were party to interest rate and currency swap contracts, which effectively fix our interest rates on $0.4 billion (2022: $0.6 billion) of floating rate debt. The decrease in swap interest expense is primarily due to fluctuations in average LIBOR, SOFR and Norwegian Interbank Offered Rate, or NIBOR, rates.
Other interest expense in 2023 of $0.1 million (2022: $0.4 million) mainly includes interest expense from a $60 million loan facility drawn down by the Company and secured against 11.8 million of the Company's shares lent under a general share lending agreement (2022: $30.0 million loan facility secured against 8.0 million shares lent). In addition, other interest expense in 20172022, includes interest from the forward contract to repurchase Frontline shares which was accounted for as a secured borrowing. In September 2022, we terminated the forward contract and recorded the sale of the shares and full repayment of the outstanding debt of $15.6 million. (See Note 21: Short-Term and Long-Term Debt).
The above finance lease interest expense represents the interest portion of our finance lease obligations on seven vessels (2022: seven vessels) under a sale and leaseback transaction with an Asia based financial institution. The interest expense on our finance lease obligations is slightly decreased in 2023, compared with $0.12022, due to the finance lease repayments occurred in 2023.
Loss on purchase of bonds and debt extinguishment
During the year ended December 31, 2023, we recorded a loss of $0.5 million from the buyback of the 4.875% senior unsecured convertible bonds due 2023 and the NOK700 million senior unsecured floating rate bonds due 2023 which were repaid in 2023. There were no such cases in the year ended December 31, 2022.
Other non-operating items
| | | | | | | | | | | | | |
(in thousands of $) | 2023 | | 2022 | | |
Dividend received from related parties | 1,246 | | | 128 | | | |
(Loss)/gain on investments in debt and equity securities | (1,912) | | | 18,171 | | | |
| | | | | |
Other financial items, net | (1,192) | | | 15,528 | | | |
| (1,858) | | | 33,827 | | | |
During the year ended December 31, 2023, we received dividends of $1.2 million from NorAm Drilling (2022: $0.1 million).
Theloss on investments in debt and equity securities in the year ended December 31, 2023, relates to a mark to market loss of $1.9 million from the NorAm Drilling shares. The gain on investments in debt and equity securities in the year ended December 31, 2022 principally relates to gain from the sale of Frontline shares of $4.6 million, gain of $2.7 million from the redemption of NT Rig Holdco Liquidity Bonds 7.5%, gain of $2.0 million from the redemption of NT Rig Holdco Liquidity Bonds 12% and gain of $0.5 million from the redemption of NorAm Drilling bonds. The gain on investments in debt and equity securities in 2022 also includes a mark to market gain of $5.8 million from the NorAm Drilling shares and $2.6 million from the shares held in Frontline, until their sale in the third quarter of 2022. (See Note 11: Investments in Debt and Equity Securities).
Other financial items, net have decreased by $16.7 million in 2016.2023 compared to 2022. The 2023 amount mainly includes a loss of $8.4 million (2022: gain of $17.1 million) in the fair value of non-designated derivatives, a net cash inflow on non-designated derivatives of $5.3 million (2022: expense of $0.3 million) and a net income of $1.5 million arising mainly from the distribution of a no claims bonus of $2.6 million from Den Norske Krigsforsikring for Skib (“DNK”), the Norwegian Shipowners’ Mutual War Risks Insurance Association. This was slightly offset by agency fees and revaluation of foreign currency bank accounts, marketable securities, payables and receivable balances and other items (2022: loss of $1.8 million). (See Note 10: Other Financial Items, Net).
Following amendments made to agreementsAs reported above, certain assets were accounted for under the equity method in 2016, we also have a profit share arrangement relating2023 and 2022. Their non-operating expenses, including net interest expenses, are not included above, but are reflected in “equity in earnings of associated companies” - see below under “Results of Operations”.
Equity in earnings of associated companies
River Box holds investments in direct financing leases, through its subsidiaries, related to the five offshore supply19,200 and 19,400 TEU containerships MSC Anna, MSC Viviana, MSC Erica and MSC Reef. The Company holds 49.9% ownership in River Box and is accounted for under the equity method. The remaining 50.1% of the shares of River Box are held by a subsidiary of Hemen, the Company’s largest shareholder and a related party. (Refer to Note 18: Investment in Associated Companies). The net income of the River Box group is reflected in “Equity in earnings of associated companies”. The total equity in earnings of associated companies in the year ended December 31, 2023, was $2.8 million (year ended December 31, 2022: $2.8 million).
Tax expense
In the year ended December 31, 2023, we recorded a tax expense of $3.3 million in relation to the operations of our drilling rigs Hercules and Linus. We recorded no such tax expense in the year ended December 31, 2022.
Results of Operations
Year ended December 31, 2022, compared with year ended December 31, 2021
Net profit for the year ended December 31, 2022, was $202.8 million compared to a net profit of $164.3 million from the year ended December 31, 2021.
| | | | | | | | | | | |
(in thousands of $) | 2022 | | 2021 |
Total operating revenues | 670,393 | | | 513,396 | |
Gain on sale of assets | 13,228 | | | 39,405 | |
| | | |
Total operating expenses | 408,147 | | | 309,963 | |
Net operating income | 275,474 | | | 242,838 | |
| | | |
| | | |
| | | |
Interest income | 7,973 | | | 7,450 | |
Interest expense | (117,339) | | | (97,090) | |
Loss on purchase of bonds and debt extinguishment | — | | | (727) | |
| | | |
| | | |
| | | |
| | | |
Other non-operating items (net) | 33,827 | | | 7,678 | |
Equity in earnings of associated companies | 2,833 | | | 4,194 | |
Net income | 202,768 | | | 164,343 | |
Net operating income for the year ended December 31, 2022, was $275.5 million, compared with net operating income of $242.8 million for the year ended December 31, 2021. The increase was principally due to higher operating revenues in 2022 resulting from the acquisition of new vessels. There was also higher revenue from the two drilling rigs since the ultra-deepwater drilling rig Hercules was consolidated for the whole of 2022, as it ceased to be accounted for as an associate since August 2021. The jack-up drilling rig Linus was also delivered to SFL from Seadrill in September 2022 and the rig started earning drilling contract revenue directly from the charterer. This increase is slightly offset by increased operating expenses in 2022 compared to 2021 derived from the higher number of vessels and the two rigs discussed above. In the year ended December 31, 2022, the gain on sale of assets was $13.2 million which arose from the sale of two crude oil tankers and one container vessel, compared to a gain of $39.4 million in 2021 mainly from the sale of seven Handysize dry bulk carriers. The overall net income for 2022 compared to 2021 was a positive movement of $38.4 million mainly due to the increased operating revenues described above, and net gains of $33.8 million recorded in other non-operating items in 2022, compared to gains of $7.7 million in 2021. Other non-operating items, net for 2022 mainly relate to a net gain of $18.2 million from investments in debt and equity securities and a gain in fair value of non-designated derivatives of $17.1 million.
River Box was previously a wholly-owned subsidiary of the Company. It holds investments in direct financing leases, through its subsidiaries, related to the 19,200 and 19,400 TEU containerships MSC Anna, MSC Viviana, MSC Erica and MSC Reef. On December 31, 2020, the Company sold 50.1% of the shares of River Box to a subsidiary of Hemen, a related party, and has accounted for the remaining 49.9% ownership in River Box using the equity method. (See Note 18: Investment in Associated Companies). The net income of the River Box group is included under “Equity in earnings of associated companies” during 2022 and 2021.
In August 2021, the wholly-owned subsidiary owning the ultra-deepwater drilling rig, Hercules, ceased to be accounted for as an associate and became consolidated. The net income of this subsidiary is included under “Equity in earnings of associated companies”, for the period the subsidiary was accounted for under the equity method.
Operating revenues
| | | | | | | | | | | |
(in thousands of $) | 2022 | | 2021 |
| | | |
| | | |
Sales-type leases, direct financing leases and leaseback assets interest income | 8,916 | | | 19,524 | |
Service revenues from direct financing leases | 1,746 | | | 6,570 | |
| | | |
| | | |
Profit sharing revenues | 27,830 | | | 20,704 | |
| | | |
| | | |
Time charter revenues | 475,988 | | | 369,745 | |
| | | |
| | | |
Bareboat charter revenues | 58,953 | | | 30,696 | |
Voyage charter revenues | 72,362 | | | 61,804 | |
Drilling contract revenues | 18,775 | | | — | |
Other operating income | 5,823 | | | 4,353 | |
Total operating revenues | 670,393 | | | 513,396 | |
Total operating revenues increased by 30.6% in the year ended December 31, 2022, compared with the year ended December 31, 2021.
Sales-type leases, direct financing leases and leaseback assets interest income
Sales-type leases and direct financing leases interest income arose on two crude oil tankers on charter to Frontline Shipping which were sold in April 2022 and 10 container vessels on charter to MSC, from which one vessel was delivered back to MSC in April 2022 following execution of the Solstad Charterer, wherebyapplicable purchase obligation in the charter contract. In addition, the Company had leaseback interest income from one VLCC vessel.
In general, sales-type leases, direct financing leases and leaseback assets interest income reduces over the terms of our leases. A greater proportion of rental payment is treated as repayment of investment in the lease or loan and progressively, as the capital is repaid, interest payments by the applicable lessee decreases.
The $10.6 million decrease in sales-type, direct financing leases and leaseback assets interest income from 2021 to 2022 is mainly a result of the sale and delivery of twocrude oil tankers on charter to Frontline Shipping in April 2022 and one container vessel which was delivered back to MSC in April 2022 following execution of the applicable purchase obligation in the charter contract. Similarly, between August 2021 and September 2021, 18 feeder container vessels were delivered back to MSC following the exercise of the applicable purchase options in their lease contracts. Also, one drilling rig which was on charter to Seadrill was reclassified as an operating lease on March 9, 2021.
Service revenues from direct financing leases
The vessels chartered on direct financing leases to Frontline Shipping were leased on time charter terms, whereby we were responsible for the management and operation of such vessels. This was managed by entering into fixed price agreements with Frontline Management, a subsidiary of Frontline, whereby we were paying them management fees of $9,000 per day for each vessel chartered to Frontline Shipping. Accordingly, $9,000 per day was allocated from each time charter payment received from Frontline Shipping to cover lease executory costs, and this is classified as "Direct financing lease service revenue". The $4.8 million reduction in service revenue from direct financing leases is due to the sale of the last two crude oil tankers on charter to Frontline Shipping in April 2022.
Profit share revenues
We had a profit sharing arrangement with Frontline Shipping in relation to two crude oil tankers, whereby we were entitled to a 50% profit share above the base charter rates, calculated and paid on a quarterly basisbasis. We earned and recognized profit sharing revenue under this arrangement of $0.0 million in the year ended December 31, 2022 compared with $0.3 million in 2021. The decrease is attributable to a less favorable tanker market in the first quarter of 2022. Also in April 2022, we sold the two crude oil tankers on charter to Frontline Shipping.
We have a profit sharing arrangement related to the eight dry bulk vessels on charter to a subsidiary of Golden Ocean, whereby we earn a 33% share of profit above the base charter rates, calculated and paid on a vessel by vesselquarterly basis. NoIn the year ended December 31, 2022, we recorded a profit share revenue was earned byof $3.0 million under this arrangement compared with $9.8 million profit share in 2021. The decrease is attributable to less favorable rates in 2022 for the dry bulk vessels.
We recorded $24.8 million from a fuel saving arrangement relating to seven container vessels in 2017 or in 2016 as all fiveon charter to Maersk and one car carrier on charter to Eukor, following the installation of scrubbers (2021: $10.6 million relating to seven container vessels). The Company has an arrangement for these vessels are in lay-up.whereby it is entitled to a share of the fuel savings dependent on the price difference between IMO compliant fuel and IMO non-compliant fuel.
Time charter revenues
During 2017,2022, time charter revenues were earned by eight23 container vessels, twothree car carriers, 2215 dry bulk carriers, oneseven Suezmax tankertankers and two oilsix product tankers. The $11.7$106.2 million increase in time charter revenues in 20172022 compared with 2016 ,2021, was mainly due to the additionresult of the acquisition of two Suezmax and two product tankers delivered fromin the shipyardfirst quarter of 2022, two Suezmax tankers and one container vessel in August 2017the third quarter of 2022 and two Suezmax tankers, one container vessel and one car carrier in the fourth quarter of 2022. We also due to a full year of earnings in 2017 from two of the three 9,300 - 9,500 TEUsacquired five container vessels that commenced time charter contracts in February and May 2016, respectively. These increases to time charter revenues were partly offset by the 1,700 TEU container vessel, MSC Alice earning time charter revenue in 2016 but none in the same periodthird quarter of 2021 and two product tankers and one Suezmax tanker in 2017.the fourth quarter of 2021.
Bareboat charter revenues
Bareboat charter revenues are earned by our vessels and rigs which are leased under operating leases on a bareboat basis. In 2017 and 2016, these2022, this consisted of four offshore support vessels,two drilling rigs, compared to two drilling rigs and two chemical tankers in 2021. The $28.3 million increase in bareboat revenue in 2022 compared with 2021, was a result of the reclassification ofthe Linus lease from a direct financing lease to an operating lease in March 2021. In addition, in August 2021, the wholly-owned subsidiary owning the ultra-deepwater drilling rig Hercules ceased to be accounted for as an associate and became consolidated. In September 2022, Linus was redelivered from Seadrill to SFL and started earning drilling contract revenue and in December 2022, Hercules was also redelivered from Seadrill to SFL and began a SPS. In June 2021 and November 2021, our chemical tankers completed their respective bareboat charters and were subsequently chartered in the spot market.
Voyage charter revenues
During 2022, voyage charter revenues were earned by two Suezmax tankers, Everbright and Glorycrown, trading in a pool together with two similar tankers owned by Frontline, two chemical tankers, one jack-up drilling rig, two 1,700 TEU container vessels, two 5,800 TEU container vesselsproduct tanker and seven 4,100 TEU container vessels. The $4.4 million decrease in bareboat charter revenues is mainly due to the jack-up drilling rig Soehanah, which earned $1.8 million lower bareboat revenue in 2017 compared with 2016. The rig received no charter hires during the first quarter of 2017 and was redelivered to us in April 2017, following a full 10-year special survey paid for by the previous charterer. In June 2017, the rig commenced a drilling contract with a national oil company in Asia for a period of 12 months, with an option to extend the charter by an additional 12 months. In addition, amendments to the charter agreements of the offshore support vessels on charter to the Solstad Charterer, which were effective from June 2016 and July 2017, respectively, also resulted in a reduction in bareboat charter revenue.
Two of our vessels, the Suezmax tankers Everbright and Glorycrown, and four Handysizethree dry bulk carriers operated on a voyage charter basis during 2016. In 2017, five Handysize dry bulk carriers and one of the Suezmax tankers operated on a voyage charter basis.carriers. The $1.7$10.6 million increase in voyage charter revenues from 2016 to 2017 is predominantlyin 2022 compared with 2021, was mainly due to the additional Handysize dry bulk carriers commencing trading on a voyage charter basis in 2017 partly offset by onerelative higher earnings of the two Suezmax tankers, previously tradingdue to a more favorable market for these vessels in 2022 compared with 2021. In addition, our five Supramax dry bulk carriers were redelivered from their long term charters and are now sometimes chartered on a voyage-by-voyage basis. Three of these vessels had voyage charter basis commencingrevenue in 2022. Finally, both our chemical tankers completed their bareboat charters in June and November 2021 respectively and were subsequently chartered in the spot market. The above increase is slightly offset by the sale of seven Handysize dry bulk carriers in the fourth quarter of 2021, which were sometimes chartered on a time chartervoyage-by-voyage basis.
Drilling contract part way through 2016.revenues
During 2022, we earned drilling contract revenues of $18.8 million from one of our rigs. In September 2022, the drilling rig Linus was redelivered from Seadrill to SFL. Concurrently, the drilling contract of Linus with ConocoPhillips was assigned from Seadrill to SFL and we started earning drilling contract revenue directly from ConocoPhillips.
Cash flows arising from sales-type leases, direct financing leases
and leaseback assets
The following table analyzes our cash flows from the sales-type leases, direct financing leases and leaseback assets with Frontline Shipping, the Solstad charterer,Seadrill, MSC and MSCLandbridge during 20172022 and 2016,2021, and shows how they are accounted for:
| | | | | | | | | | | |
(in thousands of $) | 2022 | | 2021 |
Charter hire payments accounted for as: | | | |
Sales-type lease, direct financing lease and leaseback assets interest income | 8,916 | | | 19,524 | |
Service revenue from direct financing leases | 1,746 | | | 6,570 | |
Repayments from sales-type leases, direct financing leases and leaseback assets | 17,025 | | | 36,276 | |
Total direct financing and sales-type lease payments received | 27,687 | | | 62,370 | |
|
| | | | | |
(in thousands of $) | 2017 |
| | 2016 |
|
Charterhire payments accounted for as: | | | |
Direct financing and sales-type lease interest income | 38,265 |
| | 23,181 |
|
Finance lease service revenues | 35,010 |
| | 44,523 |
|
Direct financing lease repayments | 31,929 |
| | 30,410 |
|
Total direct financing and sales-type lease payments received | 105,204 |
| | 98,114 |
|
The vessels chartered on direct financing leases to Frontline Shipping, are leased on time-charter terms, where we are responsible for the management and operation of such vessels. This has been effected by entering into fixed price agreements with Frontline Management whereby we pay them management fees of $9,000 per day for each vessel chartered to Frontline Shipping. Accordingly, $9,000 per day is allocated from each time charter payment received from Frontline Shipping to cover lease executory costs, and this is classified as "finance lease service revenue". If any vessel chartered on a direct financing lease to Frontline Shipping is sub-chartered on a bareboat basis, then the charter payments for that vessel are reduced by $9,000 per day for the duration of the bareboat sub-charter.
Gain/(loss)Gain on sale of assets and termination of charters
In 2017,2022, there was a net gain of $1.1$13.2 million due to the disposal of two crude oil tankers on charter to Frontline Shipping and the delivery of one container vessel back to MSC following execution of the applicable purchase obligation in the charter contract. This gain includes $4.5 million compensation from Frontline due to early termination of the charters of the two crude oil tankers (See Note 9: Gain on Sale of Assets and Termination of Charters).
In 2021, a net gain of $39.4 million was recorded, arising from the disposalsdisposal of four crude oil tankers,18 feeder container vessels, previously on long term charter to MSC, seven Handysize dry bulk carriers, previously operating in the commencement of a sales-type lease for the 1,700 TEU container vessel MSC Alicespot market and the early termination of the previous charter for the jack-upone drilling rig Soehanah. (see Note 8: Gain on sale of assets and termination of charters). In 2016, a loss of $0.2 million(West Taurus), which was recorded on the disposals of the offshore supply vessel Sea Bear, sold in February 2016 and the VLCC Front Vanguard in July 2016.for recycling.
Operating expenses
| | | | | | | | | | | |
(in thousands of $) | 2022 | | 2021 |
| | | |
| | | |
Vessel operating expenses | 188,402 | | | 156,732 | |
Rig operating expenses | 16,741 | | | — | |
Depreciation | 187,827 | | | 138,330 | |
Vessel impairment charge | — | | | 1,927 | |
| | | |
| | | |
Administrative expenses | 15,177 | | | 12,974 | |
| 408,147 | | | 309,963 | |
|
| | | | | |
(in thousands of $) | 2017 |
| | 2016 |
|
Vessel operating expenses | 131,794 |
| | 136,016 |
|
Depreciation | 88,150 |
| | 94,293 |
|
Vessel impairment charge | — |
| | 5,314 |
|
Administrative expenses | 7,432 |
| | 9,072 |
|
| 227,376 |
| | 244,695 |
|
Vessel operating expenses consist of payments to Frontline Management of $9,000 per day for each vessel chartered to Frontline Shipping and also payments to Golden Ocean Management of $7,000 per day for each vessel chartered the Golden Ocean Charterer, in accordance with the vessel management agreements. In addition, vessel operating expenses include operating and occasional voyage expenses for the container vessels, dry bulk carriers, product, chemical and Suezmax tankers and car carriers operated on a time charter basis and managed by related and unrelated parties, andparties. Vessel operating expenses also include voyage expenses from our two Suezmax tankers trading in a pool together with two tankers owned by Frontline, two chemical tankers operating in the spot market since June and November 2021 and certain Handysize dry bulk carriers operating in the spot market during 2017.
Vesselmarket. In addition, vessel operating expenses decreased by $4.2 million in 2017, compared with 2016. The decrease is mainly due to the sale of five tankers between July 2016 and August 2017, described above, from the fleet of crude oil tankers on charter to Frontline Shipping. The decrease was partly offset by the two product tankers delivered from the shipyard in August 2017 and the increases in voyage expenses from the net additional increase in Handysize dry bulk carriers that commenced trading on a voyage charter basis during the period.
Depreciation expenses relate to the vessels on charters accounted for as operating leases and on voyage charters. The decrease in depreciation by $11.5 million for 2017 compared with 2016, is mainly due to a lower depreciation charge on the jack-up drilling rig Soehanah, following the termination of its previous bareboat charter agreement. The basis of the previous higher depreciation was an amortization to an option price within the terminated agreement.
During 2016, a review of the carrying value of long-lived assets indicated that the carrying values of one of our VLCCs, the sale of which was agreed in 2016 and which was delivered to its new owner in March 2017, and one of our 1,700 TEU container vessels were impaired and an impairment charge was taken. In 2017, no vessel impairment charge was recorded.
The 18% decrease in administrative expenses for 2017, compared with 2016, is mainly due to reduced salary costs, office costs, marketing and investor relations costs and service administration fees.
Interest income
Interest income decreased from $21.7 million in 2016 to $19.3 million in 2017, due to lower interest income from long term loans to associated companies. The decrease in the interest income from associates was partly offset by increased interest income from corporate bonds held as available-for-sale securities and interest income from short term deposits.
|
| | | | | |
(in thousands of $) | 2017 |
| | 2016 |
|
Interest on US$ floating rate loans | 33,466 |
| | 29,032 |
|
Interest on NOK floating rate bonds due 2017 | 2,082 |
| | 4,152 |
|
Interest on NOK floating rate bonds due 2019 | 4,691 |
| | 4,697 |
|
Interest on NOK floating rate bonds due 2020 | 1,852 |
| | — |
|
Interest on 3.75% convertible bonds due 2016 | — |
| | 329 |
|
Interest on 3.25% convertible bonds due 2018 | 5,107 |
| | 10,093 |
|
Interest on 5.75% convertible bonds due 2021 | 12,866 |
| | 3,127 |
|
Swap interest | 5,328 |
| | 9,165 |
|
Interest on capital lease obligation | 15,982 |
| | 246 |
|
Other interest | 26 |
| | 30 |
|
Amortization of deferred charges | 9,014 |
| | 10,972 |
|
| 90,414 |
| | 71,843 |
|
At December 31, 2017, the Company, including its consolidated subsidiaries, had total debt principal outstanding of $1.5 billion (2016: $1.6 billion), comprising $92.5 million (NOK758 million) outstanding principal amount of NOK floating rate bonds due 2019 (2016: $87.8 million, NOK758 million), $61.0 million (NOK 500 million) outstanding principal amount of NOK floating rate bonds due 2020 (2016 : $nil, NOKnil), $63.2 million outstanding principal amount of 3.25% convertible bonds due 2018 (2016: $184.2 million), $225.0 million outstanding principal amount of 5.75% convertible bonds due 2021 (2016: $225.0 million), and $1.1 billion under floating rate secured long term credit facilities (2016: $1.0 billion).
The average three-month US$ London Interbank Offered Rate, or LIBOR, was 1.26% in 2017 and 0.74% in 2016. The increase in interest expense associated with our floating rate debt for 2017, compared with 2016, is mainly due to the increase in LIBOR for the period.
The decrease in interest payable on the 3.75% convertible bonds and the NOK600 million floating rate bonds due 2017 is due to their redemption in February 2016 and July 2017, respectively. The decrease in interest payable on the 3.25% convertible bonds is due to repurchases in October 2016 and partial conversion in October 2017. The increase in interest payable on the 5.75% convertible bonds and NOK 500 million senior secured bonds is due to their issuance in October 2016 and June 2017, respectively.
At December 31, 2017, the Company and its consolidated subsidiaries were party to interest rate swap contracts, which effectively fix our interest rates on $1.1 billion of floating rate debt at a weighted average rate excluding margin of 2.85% per annum (2016: $1.2 billion of floating rate debt fixed at a weighted average rate excluding margin of 2.74% per annum).
In October 2015, we entered into agreements to charter in two 19,200 TEU container vessels on a bareboat basis, each for a period of 15 years from delivery by the shipyard, and to charter out each vessel for the same 15 year period. The first of these vessels was delivered in December 2016 and the second one was delivered in March 2017. These vessels are accounted for as a direct financing lease asset. The above capital lease interest expense represents the interest portion of our capital lease obligations from chartering-in these vessels from their third party owners.
As reported above, two ultra-deepwater drilling units and one harsh environment jack-up drilling rig were accounted for under the equity method in 2017 and 2016. Their non-operating expenses, including interest expenses, are not included above, but are reflected in "Equity in earnings of associated companies" below.
Other non-operating items
In 2017, other non-operating items amounted to a net loss of $3.8 million, compared to a net gain of $9.5 million in 2016. The net loss of $3.8 million for 2017 arose mainly from $5.1 million of net cash payments on non-designated interest rate swaps, an impairment loss recorded against available for sale investments of $4.4 million and $4.5 million of foreign exchange losses resulting mainly from the translation of de-designated NOK bonds. This expense was partly offset by a gain of $8.1 million from positive mark-to-market adjustments to financial instruments and $3.3 million dividend income received on the Frontline shares (see Note 15: Related party transactions).
The net gain of $9.5 million in 2016 mainly consists of a gain of $3.9 million from mark-to-market adjustments to financial instruments and $11.6 million dividend income received on the Frontline shares. The net gain was partly offset by $4.9 million cash payments on non-designated interest rate swaps.
Equity in earnings of associated companies
During 2017 and 2016, the Company had certain wholly-owned subsidiaries accounted for under the equity method, as discussed in the consolidated financial statements included herein (Note 16: Investment in associated companies). The total equity in earnings of associated companies in 2017 was $4.0 million lower than in the comparative period in 2016 mainly due to the reduction in finance lease interest income recorded by the ultra-deepwater drilling units West Taurus and West Hercules and the harsh environment jack-up drilling rig West Linus.
Year ended December 31, 2016, compared with year ended December 31, 2015
Net income for the year ended December 31, 2016, was $146.4 million, a decrease of 27.1% from the year ended December 31, 2015.
|
| | | | | |
(in thousands of $) | 2016 |
| | 2015 |
|
Total operating revenues | 412,951 |
| | 406,740 |
|
Gain/(loss) on sale of assets | (167 | ) | | 7,364 |
|
Total operating expenses | (244,695 | ) | | (248,058 | ) |
Net operating income | 168,089 |
| | 166,046 |
|
Interest income | 21,736 |
| | 39,142 |
|
Interest expense | (71,843 | ) | | (70,583 | ) |
Other non-operating items (net) | 659 |
| | 32,622 |
|
Equity in earnings of associated companies | 27,765 |
| | 33,605 |
|
Net income | 146,406 |
| | 200,832 |
|
Net operating income in 2016 was $2.0 million higher than in 2015, with the $6.2 million increase in operating revenues (see below) and the $3.4 million decrease in operating expenses (see below), largely offset by the net losses rather than gains on sale of vessels. However, lower interest income, other non-operating items (see below) and equity in earnings of associated companies, resulted in overall net income being $54.4 million lower.
Two ultra-deepwater drilling units and one harsh environment jack-up drilling rig were accounted for under the equity method during 2016 and 2015. The operating revenues of the wholly-owned subsidiaries owning these assets are included under "equity in earnings of associated companies", where they are reported net of operating and non-operating expenses.
|
| | | | | |
(in thousands of $) | 2016 |
| | 2015 |
|
Direct financing lease interest income | 23,181 |
| | 34,193 |
|
Finance lease service revenues | 44,523 |
| | 46,460 |
|
Profit sharing revenues | 51,544 |
| | 59,607 |
|
Time charter revenues | 226,748 |
| | 160,778 |
|
Bareboat charter revenues | 45,039 |
| | 68,015 |
|
Voyage charter revenues | 19,329 |
| | 35,783 |
|
Other operating income | 2,587 |
| | 1,904 |
|
Total operating revenues | 412,951 |
| | 406,740 |
|
Total operating revenues increased 1.5% in the year ended December 31, 2016, compared with the year ended December 31, 2015.
In general, direct financing lease interest income reduces over the terms of our leases, as progressively a lesser proportion of the lease rental payment is allocated to interest income and a greater proportion is treated as repayment on the lease. This contributed to the $11.0 million decrease in lease interest income from 2015 to 2016. However, the decrease is, to a greater extent, due to the reduction in charter rates incorporated into the leases from July 2015 onwards (see Note 23: Related party transactions) and the sale in 2016 of the VLCC Front Vanguard and the offshore support vessel Sea Bear and in 2015 of three Suezmax tankers (Front Glory, Front Splendour and Mindanao). Apart from Sea Bear, which was bareboat chartered to Deep Sea (now the Solstad Charterer), these direct financing lease assets were time-chartered to the Frontline Charterers. The container vessel MSC Anna, which is accounted for as a finance lease asset, was delivered towards the end of December 2016, and made a small contribution to direct financing lease interest income in 2016.
The reduction in finance lease service revenue associated with sales of time-chartered vessels in 2016 and 2015, as shown above, was largely offset by the increase in fixed vessel operating fees for the vessels on charter to Frontline Shipping from $6,500 per day to $9,000 per day from July 1, 2015 onwards (see Note 23).
Prior to December 31, 2011, the Frontline Charterers paid us profit sharing of 20% of their earnings from our vessels on a time-charter equivalent basis above average threshold charter rates each fiscal year. Amendments to the charter agreements made in December 2011, increased the profit sharing percentage to 25% for earnings above those threshold levels, and additionally provided that for the four year period of a temporary reduction in charter rates, the Frontline Charterers would pay us 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day per vessel - this latter item is called "cash sweep" income. Following further amendments to the charter agreements effective from July 1, 2015 onwards, the profit sharing percentage was increased to 50% payable on a quarterly basis and the cash sweep arrangement was terminated. In 2015 we earned $19.9 million in cash sweep income, $37.2 million under the 50% profit share arrangement and nothing under the 25% profit share arrangement. In 2016 we earned $50.9 million under the 50% profit sharing agreement. We also had a profit sharing agreement relating to dry bulk carriers chartered to UFC, which earned us $0.6 million in 2016, compared with $2.5 million in 2015.
During 2015, time-charter revenues were earned by seven container vessels, 22 dry bulk carriers and two car carriers. In 2016, we took delivery of two additional container vessels operating under time-charters and the Suezmax tanker Everbright commenced time-charter operations, having previously operated in the spot market. The 41% increase in time-charter revenues from 2015 to 2016 is due to these three additional vessels in 2016, and a full year of income from the eight Capesize dry bulk carriers delivered in the second half of 2015 and the 9,500 TEU container vessel delivered in November 2015.
Bareboat charter revenues are earned by our vessels which are leased under operating leases on a bareboat basis. In both 2015 and 2016, these consisted of four offshore support vessels, two chemical tankers, 11 container vessels and one jack-up drilling rig. The $23.0 million reduction in total bareboat revenues from 2015 to 2016 is due to no charter hire being received on the jack-up drilling rig since the first quarter of 2016 and agreed reductions in charter rates for the four offshore support vessels (see Note 23). Both of these adverse effects are the result of difficult trading conditions in the offshore market.
Two of our vessels, the Suezmax tankers Everbright and Glorycrown, were sold under sales-type lease agreements in 2010 and 2009, respectively. Following default by the purchaser, these vessels were returned to us in 2013, since when we have traded them both on a voyage charter basis, until Everbright commenced a two year time charter in January 2016. In addition, following the termination of their short-term charters, four Handysize dry bulk carriers started operating on a voyage charter basis during 2016. The $16.5 million reduction in voyage charter revenues from 2015 to 2016 is predominantly due to Everbright commencing its time charter in January 2016.
Cash flows arising from direct financing leases
The following table analyzes our cash flows from the direct financing leases with the Frontline Charterers, Deep Sea (now the Solstad Charterer), and MSC during 2016 and 2015, and shows how they are accounted for:
|
| | | | | |
(in thousands of $) | 2016 |
| | 2015 |
|
Charterhire payments accounted for as: | | | |
Direct financing and sales-type lease interest income | 23,181 |
| | 34,193 |
|
Finance lease service revenues | 44,523 |
| | 46,460 |
|
Direct financing lease repayments | 30,410 |
| | 35,946 |
|
Total direct financing and sales-type lease payments received | 98,114 |
| | 116,599 |
|
The vessels chartered on direct financing leases to Frontline Shipping, or the Frontline Charterers prior to July 1, 2015, are leased on time-charter terms, where we are responsible for the management and operation of such vessels. This has been effected by entering into fixed price agreements with Frontline Management whereby we pay them management fees of $9,000 per day for each vessel chartered to Frontline Shipping from July 1, 2015, onwards, before which the fee was $6,500 per day for each vessel chartered to the Frontline Charterers. Accordingly, $9,000 per day (previously $6,500 per day) is allocated from each time charter payment received from Frontline Shipping (previously the Frontline Charterers) to cover lease executory costs, and this is classified as "finance lease service revenue". If any vessel chartered on direct financing leases to Frontline Shipping is sub-chartered on a bareboat basis, then the charter payments for that vessel are reduced by $9,000 per day for the duration of the bareboat sub-charter.
(Loss)/gain on sale of assets
In 2016, net losses totaling $0.2 million were recorded on the disposal of the VLCC Front Vanguard and the offshore support vessel Sea Bear. In 2015 the gains totaling $7.4 million were recorded on the disposal of three Suezmax tankers (Front Glory, Front Splendour and Mindanao) and five 2,800 TEU container vessels.
Operating expenses
|
| | | | | |
(in thousands of $) | 2016 |
| | 2015 |
|
Vessel operating expenses | 136,016 |
| | 120,831 |
|
Depreciation | 94,293 |
| | 78,080 |
|
Vessel impairment charge | 5,314 |
| | 42,410 |
|
Administrative expenses | 9,072 |
| | 6,737 |
|
| 244,695 |
| | 248,058 |
|
Vessel operating expenses consist ofinclude payments to Frontline Management of $9,000 per day ($6,500 per day before July 1, 2015) for eachthe two vessel chartered to Frontline Shipping (the Frontline Charterers before July 1, 2015)until their sale in April 2022 and also payments to Golden Ocean Management of $7,000 per day for each vessel chartered to the Golden Ocean Charterer, in accordance with the vessel management agreements. In addition, vessel
Vessel operating expenses include operatingincreased by $31.7 million in 2022, compared with 2021. The increase was driven by the acquisition of new vessels in 2022 and occasional2021. We acquired two Suezmax and two product tankers in the first quarter of 2022, two Suezmax tankers and one container vessel in the third quarter of 2022 and two Suezmax tankers, one container vessel and one car carrier in the fourth quarter of 2022. We also acquired five container vessels in the third quarter of 2021 and two product tankers and one Suezmax tanker in the fourth quarter of 2021. There was also an increase in voyage expenses for two Suezmax tankers trading in a pool together with two tankers owned by Frontline, two chemical tankers operating in the container vessels, dry bulk carriers, car carriersspot market since June and Suezmax tanker operated on a time-charter basisNovember 2021 and managed by related and unrelated parties, and also voyage expenses for the Suezmax tanker andcertain Supramax dry bulk carriers operating in the spot market.
Vessel operating expenses increased by 13% from 2015 to 2016, as a result of full year operating costs for the eight Capesize dry bulk carriers delivered in the second half of 2015, operating costs for five 8,700-9,500 TEU container vessels delivered in 2015 and 2016, and the agreed increase in fixed daily fees payable to Frontline Management from July 1, 2015, onwards, all partlymarket, which was slightly offset by the sale of three Suezmax tankersseven Handysize dry bulk carriers in the fourth quarter of 2021. There was also a slight increase in dry dock costs from eight vessels that dry docked in 2022, compared to eight vessels that had dry dock costs in 2021.
Rig operating expenses relate to the harsh environment jack-up drilling rig Linus and the disposal of five 2,800 TEU container vessels in 2015ultra-deepwater drilling rig Hercules. In September 2022, Linus was redelivered from Seadrill to SFL and the saledrilling contract of one VLCC in 2016.Linus with ConocoPhillips was assigned from Seadrill to SFL and began incurring rig operating expenses. In December 2022, Hercules was also redelivered from Seadrill to SFL and began incurring rig operating expenses.
Depreciation expenses relate to vessels owned by the vessels on chartersCompany or vessel leased-in under finance leases, that are not accounted for as operating leasesinvestments in sales-type, direct financing and on voyage charters.leaseback assets. The increase from 2015 to 2016 is primarily duein depreciation of $49.5 million for 2022, compared to the delivery of eight dry bulk carrierssame period in the second half of 2015, the delivery of five 8,700-9,500 TEU container vessels in 2015 and 2016, partly offset by the disposal of five 2,800 TEU container vessels in 2015.
During 2016, a review of the carrying value of long-lived assets indicated that the carrying values of one of our VLCCs, the sale of which2021, was agreed in 2016 and which was delivered to its new owner in March 2017, and one of our 1,700 TEU container vessels were impaired and an impairment charge was taken. In 2015, an impairment charge was made against two of our offshore support vessels and two of our container vessels.
Administrative expenses were higher in 2016 compared with 2015 due mainly to increased salaries costs, marketing and investor relations costs and increased service administration fees.
Interest income
Interest income decreased from $39.1 million in 2015 to $21.7 million in 2016, mainly due to the redemptionacquisition of new vessels which are discussed above and also due to the consolidation of the two rigs during 2021.
In 2022, no impairment charge was recorded. In 2021, an impairment charge of $1.9 million was recorded on one of our rigs, West Taurus, which was sold for recycling in 2015 of Frontline loan notes,September 2021.
The 17% increase in administrative expenses for 2022, compared with 2021, is mainly due to increased salary costs due to increased headcount. Increases in office costs also contributed to the higher administrative expenses.
Interest income
Total interest income increased from $7.5 million in 2021 to $8.0 million in 2022, mainly due to higher interest received on which $13.4 million ofbank and short-term deposits. This was slightly offset by a reduction in the interest was receivedincome on the loans to associates. Interest income from associates in 2015, and a $5.3 million reduction in2022 represents interest receivable on corporate bonds heldthe outstanding balance of the loan granted to the 49.9% owned associate River Box. In August 2021, the wholly-owned subsidiary owning the ultra-deepwater drilling rig, Hercules, ceased to be accounted for as available-for-sale securities.an associate and became consolidated and as a result interest income for this rig is only recognized up to the consolidation date.
| | (in thousands of $) | 2016 |
| | 2015 |
| (in thousands of $) | 2022 | | 2021 |
Interest on US$ floating rate loans | 29,032 |
| | 23,726 |
|
Interest on NOK floating rate bonds due 2017 | 4,152 |
| | 4,628 |
|
Interest on NOK floating rate bonds due 2019 | 4,697 |
| | 5,604 |
|
Interest on 3.75% convertible bonds due 2016 | 329 |
| | 4,685 |
|
Interest on 3.25% convertible bonds due 2018 | 10,093 |
| | 11,375 |
|
| Interest on NOK 700 million floating rate bonds due 2023 | |
| Interest on NOK 700 million floating rate bonds due 2023 | |
| Interest on NOK 700 million floating rate bonds due 2023 | |
Interest on NOK 700 million floating rate bonds due 2024 | |
Interest on NOK 600 million floating rate bonds due 2025 | |
Interest on 5.75% convertible bonds due 2021 | 3,127 |
| | — |
|
Interest on 4.875% convertible bonds due 2023 | |
Interest on 7.25% senior unsecured sustainability-linked bonds due 2026 | |
Interest on lease debt financing | |
Swap interest | 9,165 |
| | 8,947 |
|
Interest on capital lease obligation | 246 |
| | — |
|
| Interest on finance lease obligation | |
Interest on finance lease obligation | |
Interest on finance lease obligation | |
Other interest | 30 |
| | 5 |
|
Capitalized interest | |
Amortization of deferred charges | 10,972 |
| | 11,613 |
|
| 71,843 |
| | 70,583 |
|
AtAs of December 31, 2016,2022, the Company, andincluding its consolidated subsidiaries, had total debt principal outstanding of $1.6$2.2 billion (2015: $1.7(2021: $1.9 billion) comprised of $65comprising of:
| | | | | | | | | | | |
(in thousands of $) | 2022 | | 2021 |
| | | |
4.875% senior unsecured convertible bonds due 2023 | 137,900 | | | 137,900 | |
NOK 700 million senior unsecured floating rate bonds due 2023 | 71,243 | | | 79,507 | |
NOK 700 million senior unsecured floating rate bonds due 2024 | 70,734 | | | 78,939 | |
NOK 600 million senior unsecured floating rate bonds due 2025 | 60,048 | | | 61,334 | |
7.25% senior unsecured sustainability-linked bonds due 2026 | 150,000 | | | 150,000 | |
Lease debt financing | 394,555 | | | 126,955 | |
Borrowings secured on Frontline shares | — | | | 15,639 | |
Total Fixed Rate and Foreign Debt | 884,480 | | | 650,274 | |
U.S. dollar denominated floating rate debt due through 2029 | 1,329,156 | | | 1,253,481 | |
| 2,213,636 | | | 1,903,755 | |
Interest expense for 2022 was $117.3 million (NOK565 million) net outstanding principal amount of NOK floating rate bonds due 2017 (2015: $64compared with $97.1 million NOK565 million), $88 million (NOK758 million) net outstanding principal amount of NOK floating rate bonds due 2019 (2015: $85 million, NOK758 million), $nil net outstanding principal amount of 3.75% convertible bonds (2015: $118 million), $184 million net outstanding principal amount of 3.25% convertible bonds (2015: $350 million), $225 million net outstanding principal amount of 5.75% convertible bonds (2015: $nil) and $1.0 billion under floating rate secured long term credit facilities (2015: $1.0 billion). The average three-month US$ London Interbank Offered Rate, or LIBOR, was 0.74% in 2016 and 0.32% in 2015. Total interest expense in 2016 was $1.3 million more than in 2015.
The decrease in interest payable on the NOK floating rate bonds due 2017 and 2019 is due to repurchases in 2015, which are being held as treasury bonds. The decrease in interest payable on the 3.75% convertible bonds is due to their redemption in February 2016. The decrease in interest payable on the 3.25% convertible bonds is due to repurchases in October 2016.for 2021. The increase in interest payable onexpense associated with our floating rate debt for 2022, compared to 2021, is mainly due to new loans obtained for the vessels purchased in 2022 and the increased LIBOR rates in the period. The average three-month LIBOR was 2.39% in 2022 compared to an average of 0.16% in 2021. Changes in interest related to the bonds are due to changes in exchange rate, new bond issuances, repayments and redemptions. These include the 5.75% convertible notes due 2021, which were fully repaid in 2021. The reduction in the interest expense from this bond was partially offset by interest expenses from the 7.25% senior unsecured sustainability-linked bonds due 2026 which the Company successfully placed in May 2021. The interest on lease debt financing in 2022 is also increased comparing to 2021, due to their issuefinancing arrangements in October 2016.
In October 2015, we entered into agreements to charter inconnection with the refinancing of two newbuilding container vessels on a bareboat basis, each for a periodand two car carriers in 2022 and the acquisition of 15 years from delivery by the shipyard, and to charter out each vessel for the same 15 year period. The first of thesetwo container vessels the MSC Anna, was delivered towards the endin 2021.
As of December 2016 and this vessel is accounted for as a direct financing lease asset. The above capitalized lease interest expense represents the lease interest portion of our charter payments on this vessel.
At December 31, 2016,2022, the Company and its consolidated subsidiaries were party to interest rate swap contracts, which effectively fixfixed our interest rates on $1.2$0.6 billion of floating rate debt at a weighted average rate excluding margin of 2.74%2.10% per annum (2015: $1.0(2021: $0.7 billion of floating rate debt fixed at a weighted average rate excluding margin of 3.02%1.93% per annum). The slight decrease in swap interest expense is due to changes in swaps and also due to fluctuations in average LIBOR and Norwegian Interbank Offered Rate, or NIBOR rates.
Other interest expense in 2022 of $0.4 million (2021: $0.3 million) arose mainly from the sale and subsequent forward contract to repurchase shares which was accounted for as a secured borrowing. In September 2022, we terminated the forward contract and recorded the sale of the shares and full repayment of the outstanding debt of $15.6 million. Other interest expense in 2022 also includes interest on a $30.0 million loan facility provided in connection with a share lending agreement in respect of 8,000,000 shares of the Company. (See Note 21: Short-Term and Long-Term Debt).
The above finance lease interest expense represents the interest portion of our finance lease obligations on seven vessels under a sale and leaseback transaction with an Asia based financial institution. The interest expense on our finance lease obligations is slightly decreased in 2022, compared with 2021, due to the finance lease repayments occurred in 2022.
Gain on purchase of bonds and debt extinguishment
During the year ended December 31, 2022, there were no such cases. During the year ended December 31, 2021, we repurchased various amounts of its own bonds which had a face value of $69.6 million at a premium and recorded a loss of $0.7 million.
Other non-operating items
| | | | | | | | | | | |
(in thousands of $) | 2022 | | 2021 |
Dividend received from related parties | 128 | | | — | |
Gain on investments in debt and equity securities | 18,171 | | | 995 | |
| | | |
Other financial items, net | 15,528 | | | 6,683 | |
| 33,827 | | | 7,678 | |
During the year ended December 31, 2022, we received dividends of $0.1 million from NorAm Drilling. No dividend income was received during the year ended December 31, 2021.
The gain on investments in debt and equity securities in 2022, principally relates to gain from the sale of Frontline shares of $4.6 million, gain of $2.7 million from the redemption of NT Rig Holdco Liquidity Bonds 7.5%, gain of $2.0 million from the redemption of NT Rig Holdco Liquidity Bonds 12% and gain of $0.5 million from the redemption of NorAm Drilling bonds. The gain on investments in debt and equity securities in 2022 also includes a mark to market gain of $5.8 million from the NorAm Drilling shares and $2.6 million from the shares held in Frontline, until their sale in the third quarter of 2022. The gain on investments in debt and equity securities in 2021, principally relates to a mark to market gain of $1.2 million on the Frontline shares held as of December 31, 2021, a realized gain of $0.7 million recognized on the sale of approximately 4.0 million shares in ADS Maritime Holding plc (“ADS Maritime Holding”) and an impairment loss of $0.8 million, which was recorded against the NT Rig Holdco 7.5% bonds. (See Note 11: Investments in Debt and Equity Securities).
Other financial items, net have increased by $8.8 million in 2022 compared to 2021. The 2022 amount mainly includes a gain of $17.1 million (2021: gain of $11.6 million) in the fair value of non-designated derivatives, a net cash expense on non-designated derivatives of $0.3 million (2021: $6.7 million) and a net loss of $1.8 million arising from the revaluation of foreign currency bank accounts, marketable securities, payables and receivable balances and other items (2021: gain of $1.1 million). (See Note 10: Other Financial Items, Net).
As reported above, two ultra-deepwater drilling units and one harsh-environment jack-up drilling rigcertain assets were accounted for under the equity method in 20162022 and 2015.2021. Their non-operating expenses, including net interest expenses, are not included above, but are reflected below in "Equity“Equity in earnings of associated companies" below.
Other non-operating items
Other non-operating items amounted to a net gain $0.7 million in 2016 (2015: net gain of $32.6 million). The net gain in 2016 consists of $11.6 million dividend income received on our Frontline shares (held as available-for-sale securities) and $4.4 million favorable mark-to-market valuation adjustments to non-designated interest rate swaps, largely offset by a loss of $8.8 million on the repurchases of bonds, $4.9 million cash payments on non-designated interest rate swaps and $1.6 million other costs (mainly bank and loan commitment fees). The net gain in 2015 consisted of gains of $44.6 million on the sale of loan notes in Horizon Lines, LLC and share warrants in Horizon Lines, Inc., $28.9 million on the redemption of Frontline loan notes and $1.0 million on purchases of our own bonds, offset by a $20.6 million impairment loss on available-for-sale securities, a $13.2 million adverse mark-to-market valuation adjustment to non-designated interest rate swaps, $6.5 million cash payments on non-designated interest rate swaps and $1.6 million other costs (mainly bank and loan commitment fees)companies”.
Equity in earnings of associated companies
During 2015In 2022 and 2016, the Company2021, we had certain wholly-owned subsidiariesinvestments accounted for underusing the equity method, as discussed in the consolidated financial statementsConsolidated Financial Statements included herein (Note 16:18: Investment in associated companies)Associated Companies). The total equity in earnings of associated companies in 20162022 was $5.8$1.4 million lesslower than in 2015, due2021. In August 2021, SFL Hercules Ltd. (“SFL Hercules”), our subsidiary, ceased to the $3.2 million reduction in earnings from the harsh environment jack-up drilling rig West Linus and the ultra-deepwater drilling units West Hercules and West Taurus, associated with reducing finance lease interest income and higher interest costs, and also the absence of income from Frontline, which contributed $2.6 million during the period in 2015 when our shareholding wasbe accounted for as an investmentassociate and became consolidated by the Company, following amendments to the bareboat charter and loan facility agreements. This was partially offset by the addition of River Box, previously a wholly-owned subsidiary of the Company. On December 31, 2020, we sold 50.1% of the shares of River Box to a subsidiary of Hemen, a related party. During the year ended December 31, 2022, we accounted for the remaining 49.9% ownership in associated companies.River Box using the equity method.
B. LIQUIDITY AND CAPITAL RESOURCES
We operate in a capital intensive industry. Our purchase of the tankers in the initial transaction with Frontline was financed through a combination of debt issuances, a deemed equity contribution from Frontline and borrowings from commercial banks. Our subsequentasset acquisitions have beenare financed through a combination of our own equity, and term loans, lease financing and revolving credit facilities from commercial banks. Providers of such borrowings generally require that the loans be secured by mortgages against the assets being acquired, and atas of December 31, 2017,2023, substantially all of our vessels and drilling unitsrigs are pledged as security.security or are held as finance leases. However, in common with many other companies, we also have unsecured borrowings as shown below. Providers of unsecured financing do so on the basis of the Company'sour assets and liabilities, cash flows, operating results and other factors, all of which affect the terms on which such unsecured financing is available. In general, unsecured financing is more expensive than borrowings secured against collateral.
Our liquidity requirements relate to servicing our debt, funding the equity portion of investments in vessels, funding working capital requirements and maintaining cash reserves against fluctuations in operating cash flows. Revenues from our time charters, and bareboat charters and drilling contracts are received approximately 15 days in advance, monthly in advance, or monthly in arrears. Vessel management and operating fees are payable monthly in advance for vessels chartered to Frontline Shipping and the Golden Ocean Charterer, and as incurred for other time-charteredtime chartered vessels.
Our funding and treasury activities are conducted within corporate policies to maximize investment returns while maintaining appropriate liquidity for both our short and long-term needs. This includes arranging borrowing facilities on a cost-effective basis. Cash and cash equivalents are held primarily in U.S. dollars, with minimal amounts held in Norwegian Kronerkroner and Pound Sterling.
Surplus funds may be deployed to acquire equity or debt interests in other companies, with the aim of generating competitive returns. Such investments may also utilize credit facilities arranged specifically to facilitate such investment.
Our short-term liquidity requirements relate to servicing our debt and funding working capital requirements, including required payments under our management agreements and administrative services agreements. Sources of short-term liquidity include cash balances, short-term investments, available amounts under revolving credit facilities and receipts from our charters. We
A significant portion of the our outstanding debt and finance lease liabilities are coming due within one year of March 14, 2024 for which we have initiated discussions and negotiations with financial institutions regarding the refinancing of credit facilities maturing in 2024 and early 2025. Given our extensive history and successful track record in obtaining financing and refinancing, we believe that ourwe will be able to secure the necessary refinancing for all such facilities before their maturity dates. Additionally, we anticipate that the cash flow generated from theour charters will be sufficientadequate to fundmeet our anticipated debt service obligations and working capital requirements forneeds in the short and medium term. However no assurance can be given that all such facilities will be timely refinanced on acceptable terms. See also “Item 3. Key Information—D. Risk Factors”.
Our long-term liquidity requirements include funding the equity portion of investments in new vessels, and repayment of long-term debt balances, including those relating to the following loan and lease debt financing agreements of the Companyus and itsour consolidated subsidiaries:subsidiaries as of December 31, 2023:
- 3.25% senior unsecured convertible bonds due 2018
- NOK600 million senior unsecured bonds due 2017
- NOK900 million senior unsecured bonds due 2019
- NOK500 million senior unsecured bonds due 2020
- 5.75% senior unsecured convertible bonds due 2021
- $53 million secured term loan facility due 2017
- $49 million secured term loan and revolving credit facility due 2018
- $54 million secured term loan facility due 2018
- $250 million secured revolving credit facility due 2018
- $45 million secured term loan and revolving credit facility due 2019
- $75 million secured term loan facility due 2019
- $20 million secured term loan facility due 2019
- $43 million secured term loan facility due 2019
- $43 million secured term loan facility due 2020
- $101 million secured term loan facility due 2023
- $128 million secured term loan facility due 2021
- $210 million secured term loan facility due 2021
- $128 million secured term loan facility due 2022
- $171 million secured loan facility due 2023
- $39 million secured term loan facility due 2022
- $166 million secured term loan facility due 2022
- $76 million secured term loan facility due 2024
Our long-term liquidity requirements also include repayment of the following long-term loan agreements of our equity-accounted subsidiaries:
| | |
- | $39045 million secured term loan and revolving credit facility due 2022 |
| 2025 |
- | $37520 million secured term loan and revolving credit facility due 2023 |
| 2024 |
- | $47576 million secured term loan and revolvingfacility due 2024 |
NOK700 million senior unsecured floating rate bonds due 2024 |
NOK600 million senior unsecured floating rate bonds due 2025 |
$175 million term loan facility due 2025 |
$50 million senior secured credit facility due 20232024 |
$51 million secured term loan facility due 2025 |
$51 million secured term loan facility due 2025 |
7.25% senior unsecured sustainability-linked bonds due 2026 |
$65 million leased debt financing due 2027 |
$65 million leased debt financing due 2027 |
$35 million term loan facility due 2029 |
$107.3 million term loan facility due 2027 |
$100 million term loan facility due 2027 |
$23.5 million leased debt financing due 2025 |
$25.3 million leased debt financing due 2025 |
$23.0 million term loan facility due 2024 |
$115 million term loan facility due 2025 |
$120 million leased debt financing due 2029 |
$120 million leased debt financing due 2029 |
$144.6 million term loan facility due 2025 |
8.875% senior unsecured sustainability-linked bonds due 2027 |
$23.3 million term loan facility due 2024 |
$23.3 million term loan facility due 2024 |
$150 million senior secured term loan facility due 2026 |
$45 million lease debt financing due 2028 |
$38.5 million lease debt financing due 2029 |
$150 million senior secured term loan facility due 2025 |
$8.4 million senior unsecured term loan facility due 2025 |
$72.2 million lease debt financing due 2033 |
$72.2 million lease debt financing due 2033 |
$60 million loan facility repayable on demand |
The above long-term loan agreements in our equity accounted subsidiaries relate to the three drilling units on charter to the Seadrill Charterers. In connection with Seadrill’s Restructuring Plan, the loan facilities have been extended by four years, with new maturity dates as set out above. The four year extension is subject approval by the courts of the Restructuring Plan.
The main security provided under the secured credit facilities include (i) guarantees from subsidiaries, as well as instances where the Company guaranteeswe guarantee all or part of the loans, (ii) a first priority pledge over all shares of the relevant asset owning subsidiaries and (iii) a first priority mortgage over the relevant collateral assets which includes substantially all of the vessels and the drilling unitsrigs that are currently owned by the Companyus as atof December 31, 2017,2023, excluding threetwo 1,700 TEU container vessels, two carfive Supramax drybulk carriers and a jack-up drilling rig.one 2,500 TEU container vessel.
At December 31, 2017, the Company had no commitments under contractsRefer to acquire newbuilding vessels (2016: $76.1 million). There were no other"Contractual Commitments" section further below for details of material contractual commitments atas of December 31, 2017.2023.
In addition, twoAs of December 31, 2023, seven (2022: seven) subsidiaries had a lease liabilityliabilities totaling $239.6$419.3 million at December 31, 2017(2022: $473.0 million) related to the charter-in of two 19,200 TEUseven (2022: seven) container vessels delivered in December 2016 and March 2017, respectively.vessels.
We expect that we will require additional borrowings or issuances of equity in the long term to meet our capital requirements.
As of December 31, 2017,2023, we had cash and cash equivalents of $153$165.5 million (2016: $62(2022: $188.4 million). In addition, we had $29 million net available to draw under secured revolving credit facilities as of December 31, 2017. The availability of such amounts under the secured revolving credit facilities, is subject to compliance with the loan covenants under the relevant agreements at the time of drawdown. Although we were in compliance with such loan covenants as of December 31, 2017, we cannot guarantee that we will be in compliance in the future, and the amounts may therefore not be available to draw, reducing our available liquidity. In the year ended December 31, 2017,2023, we generated cash of $177.8 million from operations and $48.4$343.1 million net from operating activities, used $103.9 million net in investing activities and used $135.5$262.1 million net in financing activities.
Cash flows provided by operating activities for 20172023 decreased from $355.1 million in 2022 to $177.8$343.1 million, from $230.1 million for 2016, mainly due to changes in nettotal operating income received and the timing of charter hire profit shareand trade and other related receivables.
Investing activities generated $48.4used cash of $103.9 million in 2017,2023, compared with $39.4to cash used of $499.1 million generated in 2016.2022. The higherdecrease in cash generated fromused for investing activities in 2023 is mainly due to higher proceedsthe decrease in cash outflow from the acquisition of vessels and newbuilding installments. In 2023, there was an outflow of $264.4 million arising from the SPS, and other capital upgrades performed on the harsh environment semi-submersible drilling rig, Hercules, and the acquisition of two dual-fuel 7,000 CEU newbuilding car carriers. In 2022, there was an outflow of $602.5 million arising from newbuilding installments and the acquisition of six Suezmax tankers, two product tankers, one car carrier and two newbuild eco-design feeder container vessels. In addition, in 2023, there was an inflow of $156.2 million arising from the sale of assetstwo Suezmax tankers, two chemical tankers and charter terminations by $45.7one very large crude carrier, compared to an inflow of $83.3 million in 2017 compared with 20162022 arising from the sale of two crude oil tankers and also $106.5one 1,700 TEU container vessel. This was partially offset by proceeds of $15.0 million less spending onreceived in 2022, from the acquisitionredemption of newbuildingsFrontline shares, NorAm Drilling bonds and NT Rig Holdco bonds.
Financing activities used cash of $262.1 million in 20172023, compared to 2016 levels. The current year increase inproviding net cash generations from investing activities was partly offset by the the reduction of $166.2$178.4 million in amounts received from associated companies2022. The net outflow in 2023 compared to 2016.
Net cash usedthe inflow in 2022, was mainly the result of an outflow of $205.8 million from financing activities for 2017 was $135.5 million, compared to $277.3 million net cash usedrepurchases of own bonds in 2016. The $141.8 million difference2023, with no such payments in cash used in financing activities was primarily due to higher bond repurchases and redemptions and2022. In addition, there were higher debt repayments in 2016. In 2017, the Company repurchased $68.4 million of our NOK600 million bonds compared with $296.8$781.1 million in 2016, relating2023, compared to $611.3 million in 2022. Proceeds from the repurchaseissuance of the remaining 3.75% convertible bondsshort-term and long-term debt were $944.6 million in February 2016 and $165.82023, compared to $959.6 million of the 3.25% convertible bonds in October 2016. In addition, $29.2 million was paid in 2017 in connection with the settlement of the cross currency swap following the repurchase.2022.
During the year ended December 31, 2017,2023, we paid four dividends totaling $1.60$0.97 per common share (2016:(2022: four dividends totaling $1.80$0.88 per common share), or a total of $153$123.0 million (2016: $168(2022: $111.6 million). All dividends paid in 20172023 and 20162022 were cash payments. A substantial portionPlease see “Item 8. Financial Information—A. Consolidated Statement and Other Financial Information—Dividend Policy”. Since 2020, we have implemented a dividend reinvestment plan, or DRIP, to facilitate investments by individual and institutional shareholders who wish to invest the dividend payments received in respect of our dividend capacity is generated from our leases with the Seadrill Charterers. As part of the Seadrill Restructuring Plan, which is still subject approval by the courts, we have agreed to reduce the contractual charter hire payable by the Seadrill Charterers by approximately 29% for a 5-year period starting in 2018, which will reduce the dividend capacity generated from the three units. Should the Restructuring Plan not be approved by the courts, there is a risk that the leases will be terminated, which may have a material adverse effect on our ability to pay dividends to our shareholderscommon shares owned or other cash amounts, in the future.Company's common shares on a regular basis, one time basis or otherwise. See “Item 10. Additional Information – B. Memorandum and Articles of Association” and “Note 23: Share Capital, Additional Paid-In Capital and Contributed Surplus” for further information on the DRIP program.
Borrowings
As of December 31, 2017,2023, we had total short-term and long-term debt outstanding of $1.5$2.2 billion (2016: $1.6(December 31, 2022: $2.2 billion). In addition, as of December 31, 2017, our wholly-owned subsidiaries SFL Deepwater Ltd., or SFL Deepwater, SFL Hercules Ltd., or SFL Hercules, and SFL Linus Ltd., or SFL Linus, had long term debt of $226 million, $251 million, and $309 million, respectively (2016: $248 million, $279 million and $356 million, respectively). These three subsidiaries are accounted for using the equity method, and their outstanding long-term debt is not included in the long-term debt shown on our consolidated balance sheet.
The following table presents an overall summary of our borrowings as atof December 31, 2017:2023:
| | | | | | |
| December 31, 2023 |
(in millions of $) | Outstanding balance on loan | |
Unsecured borrowings: | | |
NOK700 million senior unsecured floating rate bonds due 2024 | 68.4 | | |
NOK600 million senior unsecured floating rate bonds due 2025 | 58.1 | | |
7.25% senior unsecured sustainability-linked bonds due 2026 | 150.0 | | |
8.875% senior unsecured sustainability-linked bonds due 2027 | 150.0 | | |
Total bonds | 426.5 | | |
U.S. dollar denominated floating rate debt due through 2029 | 1,014.8 | | |
U.S. dollar denominated fixed rate debt due 2026 | 148.9 | | |
Lease debt financing due through 2033 | 573.5 | | |
Total borrowings | 2,163.7 | | |
Finance lease liabilities | 419.3 | | |
Finance lease liabilities in associated companies (1) | 197.1 | | |
Total borrowings and lease liabilities | 2,780.1 | | |
(1)This represents 49.9% of the finance lease liabilities within River Box. |
| | | | | |
| December 31, 2017 |
(in millions of $) | Outstanding balance on loan |
| | Net amount available to draw |
|
Unsecured borrowings: | | | |
3.25% convertible bonds due 2018 | 63.2 |
| | — |
|
NOK900 million bonds due 2019 | 92.5 |
| | — |
|
NOK500 million bonds due 2020 | 61.0 |
| | — |
|
5.75% convertible bonds due 2021 | 225.0 |
| | — |
|
Total unsecured borrowings | 441.7 |
| | — |
|
Loan facilities secured with mortgages on vessels and rigs | 1,081.2 |
| | 29.0 |
|
Total borrowings of Company and consolidated subsidiaries | 1,522.9 |
| | 29.0 |
|
Equity accounted subsidiaries: Loan facilities secured with mortgages on vessels and rigs | 785.8 |
| | — |
|
Total borrowings | 2,308.7 |
| | 29.0 |
|
Due to the discontinuance of LIBOR after June 30, 2023, and notwithstanding the automatic conversion mechanisms to alternative rates, we have entered intoamendment agreements to existing loan agreements for the transition from LIBOR to SOFR. We have elected to apply the optional expedient pursuant to ASC 848 for contracts within the scope of ASC 470. This meant that we accounted for amendments to loan agreements which related solely to the replacement of LIBOR as a benchmark rate to SOFR as if the modification was not substantial and thus a continuation of the existing contract.
In May 2013, SFL Hercules entered into a $375.0 million six-year term loan and revolving credit facility with a syndicate of banks to partly finance the acquisition of the harsh environment semi-submersible drilling rig Hercules. The facility was repaid early in full in May 2023. Similarly in October 2013, SFL Linus Ltd. (“SFL Linus”), our subsidiary, entered into a $475.0 million five-year term loan and revolving credit facility with a syndicate of banks to partly finance the acquisition of the jack-up rig Linus and in April 2023, the facility was repaid early in full.
In June 2014, seven subsidiaries entered into a $45.0 million secured term loan and revolving credit facility with a bank. The proceeds of the facility were used to partly fund the acquisition of seven 4,100 TEU container vessels. As of December 31, 2017, there2023, the amount outstanding under this facility was $29$32.5 million, netand the available to draw under secured revolving credit facilities. The availability of such amountsamount under the secured revolving credit facilities, is subject to compliance withpart of the facility was $0.0 million. The facility bears interest at SOFR plus a margin and had an original term of five years. In June 2019 and further more in June 2021, the terms of the loan covenants under the relevant agreements at the time of drawdown. Although we were in compliance with such loan covenants as of December 31, 2017, we cannot guarantee that we will be in compliance in the future,amended and restated, and the amounts may therefore not be availablefacility now matures in June 2025. The facility is secured against the subsidiaries' assets and a guarantee from us. The facility contains a minimum value covenant and also covenants that require us to draw, reducing our available liquidity.maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In March 2008,September 2014, two subsidiaries entered into a $49$20.0 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding chemical tankers. In June 2011, the facility was amended, whereby part5,800 TEU container vessels. As of the facility is available on a revolving basis. In November 2015, the term loan part of the facility was prepaid and canceled, and the commitment under the revolving part of the facility was reduced to $20 million in total. At December 31, 2017,2023, the amount outstanding amount under this facility was $nil, and the available amount under the revolving part of the facility was $20$12.0 million. The facility bears interest of LIBORat SOFR plus a margin and has a term of approximately ten years. The facility contains a minimum value covenant and is secured by the subsidiaries' assets. The lenders have limited recourse to Ship Finance International Limited as the holding company only guarantees 30% of the outstanding debt. The facility contains covenants that require us to maintain certain minimum levels of free cash and adjusted book equity ratios.
In February 2010, a subsidiary entered into a $43 million secured term loan facility with a bank. The proceeds of the facility were used to partially finance the Suezmax tanker Glorycrown. At December 31, 2017, the amount outstanding under the facility was $20.6 million. The facility bears interest of LIBOR plus a margin and originally had a term of approximately five years. In November 2014, the terms of the loan were amended and restated, and the facility now matures in November 2019. The facility is secured by the subsidiary's assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In March 2010, a subsidiary entered into a $43 million secured term loan facility with a bank. The proceeds of the facility were used to partially finance the Suezmax tanker Everbright. At December 31, 2017, the amount outstanding under this facility was $20.6 million. The facility bears interest of LIBOR plus a margin and originally had a term of five years. In March 2015,September 2019, the terms of the loan were amended and restated, and the facility now matures in March 2020.2024. The facility is secured byagainst the subsidiary'ssubsidiaries' assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In November 2010, two subsidiaries entered into a $54 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two Supramax dry bulk carriers. At December 31, 2017, the amount outstanding under this facility was $26.3 million. The facility bears interest at LIBOR plus a margin and has a term of approximately eight years from delivery of the vessels. The facility is secured by the subsidiaries' assets and a limited guarantee from Ship Finance International Limited.us. The facility contains a minimum value covenant, which is only applicable if there is an early termination of any of the charters attached to the vessels. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In March 2011, three subsidiaries entered into a $75 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of three Supramax dry bulk carriers. At December 31, 2017, the amount outstanding under this facility was $39.0 million. The facility bears interest at LIBOR plus a margin and has a term of approximately eight years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under the charters attached to the vessels or one year prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In May 2011, eight subsidiaries entered into a $171 million secured loan facility with a syndicate of banks. The facility is supported by China Export & Credit Insurance Corporation, or SINOSURE, which has provided an insurance policy in favor of the banks for part of the outstanding loan. The facility is secured by one 1,700 TEU container vessel and seven Handysize dry bulk carriers. At December 31, 2017, the amount outstanding under this facility was $98.0 million. The facility bears interest at LIBOR plus a margin and has a term of approximately ten years from delivery of each vessel. The facility is secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited.
In October 2012, we issued NOK600 million senior unsecured bonds. The bonds bore interest at the three month Norwegian Interbank Offered Rate, or NIBOR, plus a margin and were redeemable in full in October 2017. The bonds, in their entirety, were also redeemable at the Company's option from April 19, 2017, upon giving bondholders at least 30 business days' notice and paying 100.50% of par value plus accrued interest. Since their issue, the Company purchased bonds with principal amounts totaling NOK454.0 million, net and the remaining outstanding amount of NOK146.0 million was fully redeemed in July 2017, following the exercise of the call option by the Company. Thus, there was no principal amount outstanding as at December 31, 2017 in respect of this bond.
In November 2012, two subsidiaries entered into a $53 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two car carriers. The facility bore interest at LIBOR plus a margin and had a term of five years from drawdown. In October 2017, the total amount outstanding under this facility was prepaid and the facility was canceled. At December 31, 2017, the outstanding amount under this facility was $nil. The facility was secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited.
On January 30, 2013, we issued a senior unsecured convertible bond loan totaling $350.0 million. Interest on the bonds is fixed at 3.25% per annum and is payable in cash quarterly in arrears on February 1, May 1, August 1 and November 1 of each year. The conversion price at the time of issue was $21.945 per share, representing a 33% premium to the share price at the time. Since then, dividend distributions had reduced the conversion price to $13.2418 per share as of the maturity date in February 2018. Since issuance, the Company has purchased and canceled bonds with principal amounts totaling $165.8 million and the net amount outstanding at September 30, 2017 was $184.2 million. In October 2017, the Company entered into separate privately negotiated transactions with certain holders of the bond loan for the early conversion of a portion of the outstanding bonds into common shares. Under such transaction agreements, approximately $121.0 million in aggregate principal amount of the bonds was converted into 9,418,798 common shares of the Company at prevailing market prices. At December 31, 2017, the amount outstanding was $63.2 million. The bonds matured on February 1, 2018 and on this date, the remaining outstanding principal amount of $63.2 million was paid in cash, and the premium settled in common shares with the issue of 651,365 new shares.
In conjunction with the initial bond issue in 2013, the Company loaned up to 6,060,606 of our common shares to an affiliate of one of the underwriters of the issue, in order to assist investors in the bonds to hedge their position. The shares that were then lent by a subsidiary of the Company were borrowed from Hemen, our largest shareholder. On January 24, 2018, we, our subsidiary, Hemen and DNB Bank ASA agreed to amend the share lending agreement in order to, among other things, substitute DNB Bank ASA for our subsidiary and to extend the termination date of the agreement.
In March 2014, we issued NOK900 million senior unsecured bonds. The bonds bear interest at NIBOR plus a margin and are redeemable in full in March 2019. Subsequent to the issue of the bonds, we have made net purchases of bonds with principal amounts totaling NOK142 million, which are being held as treasury bonds. At December 31, 2017, the amount outstanding was NOK758.0 million, equivalent to $92.5 million. The bonds may, in their entirety, be redeemed at our option from September 19, 2018, upon giving bondholders at least 30 business days' notice and paying 100.50% of par value plus accrued interest. The bond agreement contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In June 2014, seven subsidiaries entered into a $45 million secured term loan and revolving credit facility with a bank. The proceeds of the facility were used to partly fund the acquisition of seven 4,100 TEU container vessels. At December 31, 2017, the amount outstanding under this facility was $36.0 million, and the available amount under the revolving part of the facility was $9.0 million. The facility bears interest at LIBOR plus a margin and has a term of five years. The facility is secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is an early termination of any of the charters attached to the vessels, or six months prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In August 2014, six subsidiaries entered into a $101 million secured term loan facility, secured against six offshore support vessels. At December 31, 2017, the amount outstanding under this facility is $44.1 million. The facility bears interest at LIBOR plus a margin and has a term of approximately five years. In October 2017, certain amendments were made to the agreement, including an extension of the final maturity date until January 2023. The facility contains a minimum value covenant, which is applicable from January 2021, and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios. The facility also contains covenants that require Solship (formerly Deep Sea) to maintain certain minimum levels of liquidity and working capital. One of the vessels was sold in February 2016 and the facility is now secured against the remaining five vessels and a limited guarantee from Ship Finance International Limited.
In September 2014, two subsidiaries entered into a $20 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two 5,800 TEU container vessels. At December 31, 2017, the amount outstanding under this facility was $20.0 million. The facility bears interest at LIBOR plus a margin and has a term of five years. The facility is secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is an early termination of any of the charters attached to the vessels. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In September 2014, two subsidiaries entered into a $128 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding 8,700 TEU container vessels, which were delivered in 2014. At December 31, 2017, the amount outstanding under this facility was $100.9 million. The facility bears interest at LIBOR plus a margin and has a term of seven years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or from the fifth anniversary of the drawdown under the facility, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In November 2014, two subsidiaries entered into a $128 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding 8,700 TEU container vessels, which were delivered in January 2015. At December 31, 2017, the amount outstanding under this facility was $104.1 million. The facility bears interest at LIBOR plus a margin and has a term of seven years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or six months prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In December 2014, two subsidiaries entered into a $39 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two Kamsarmax dry bulk carriers. At December 31, 2017, the amount outstanding under this facility was $29.1 million. The facility bears interest at LIBOR plus a margin and has a term of approximately eight years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or 12 months prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In June 2015, 17 wholly-owned subsidiaries entered into a $250 million secured revolving credit facility with a syndicate of banks, secured against 17 tankers chartered to Frontline Shipping and a guarantee from Ship Finance International Limited. Eight of the tankers were sold and delivered to their new owners before December 31, 2017, and the facility was secured against the remaining nine tankers at December 31, 2017. At December 31, 2017, the amount outstanding under this facility was $149.0 million, and the amount available to draw was $nil. The facility bears interest at LIBOR plus a margin and has a term of three years. The facility contains minimum value covenants and also covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In July 2015, eight subsidiaries entered into a $166 million secured term loan facility with a syndicate of banks. The proceeds of the facility were used to partly fund the acquisition of eight Capesize dry bulk carriers. At December 31, 2017, the amount outstanding under this facility was $131.7 million. The facility bears interest at LIBOR plus a margin and has a term of approximately seven years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains minimum value covenants and also covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In November 2015, three subsidiaries entered into a $210 million secured term loan facility with a syndicate of banks, to partly fund the acquisition of three newbuilding container vessels. One of the vessels was delivered in November 2015, and the remaining two were delivered in 2016. At December 31, 2017, the amount outstanding under this facility was $187.0 million. The facility bears interest at LIBOR plus a margin and has a term of five years from the delivery of each vessel. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or six months prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In October 2016, we issued $225 million senior unsecured convertible bonds, all of which were outstanding at December 31, 2017. Interest on the bonds is fixed at 5.75% per annum. The bonds are convertible into our common shares and mature on October 15, 2021. The conversion rate at the time of issuance was 56.2596 common shares for each $1,000 bond, equivalent to a conversion price of approximately $17.7747 per share. The conversion rate will be adjusted for dividends in excess of $0.225 per common share per quarter. Dividend distributions made since the issuance of the bonds have increased the conversion rate to 60.5739, equivalent to a conversion price of approximately $16.5098 per share as at this report date. In conjunction with the bond issue, we have loaned up to 8,000,000 of our common shares to an affiliate of one of the underwriters of the issue, in order to assist investors in the bonds to hedge their positions. The shares that were lent by the Company were initially borrowed from Hemen, our largest shareholder. In November 2016, the Company issued 8,000,000 new shares to replace the shares borrowed from Hemen.
In June 2017, the Company issued a senior unsecured bond loan totaling NOK500 million in the Norwegian credit market. The bonds bear quarterly interest at NIBOR plus a margin and have a term of approximately three years. The net amount outstanding at December 31, 2017, was NOK500 million, equivalent to $61.0 million. The bond agreement contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In August 2017, two of our wholly-owned subsidiaries of the Company entered into a $76.0 million secured term loan facility with a bank, secured against two product tanker vessels. The two vessels, which were delivered in August 2017. The Company hasWe have provided a limited corporate part guarantee for this facility, which bears interest at LIBORSOFR plus a margin and has a term of seven years. AtAs of December 31, 2017,2023, the net amount outstanding was $74.7$43.5 million. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or 12 months prior to the maturity date of the facility, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
On April 23, 2018, we issued a senior unsecured convertible bond totaling $150.0 million. Additional bonds were issued on May 4, 2018 at a principal amount of $14.0 million. During 2018, 2019, 2020, 2021 and 2023 we made net purchases of bonds with principal amounts totaling $12.3 million, $3.4 million, $8.4 million, $2.0 million and $53.0 million respectively. Interest on the bonds was fixed at 4.875% per annum and was payable in cash quarterly in arrears on February 1, May 1, August 1 and November 1. The bonds were convertible into our common shares and matured on May 1, 2023. At this date we redeemed the full outstanding amount of $84.9 million.
On September 13, 2018, we issued a senior unsecured bond totaling NOK600 million in the Norwegian credit market. The bonds bore quarterly interest at NIBOR plus a margin and were redeemable in full on September 13, 2023. In May 2013,July 2019, we conducted a tap issue of NOK100 million under these existing senior unsecured bonds. The bonds were issued at 101.625% of par, and the new outstanding amount after the tap issue was NOK700 million. During 2023, we made net purchases of bonds with principal amounts totaling NOK293 million. The full outstanding amount of NOK407 million was redeemed at the maturity date.
In December 2018, two of our equity-accounted subsidiary SFL Herculeswholly-owned subsidiaries entered into a $375$17.5 million secured term loan and revolving credit facility with a syndicatebank. The proceeds of banks, secured against the ultra deepwater drilling rig West Hercules. At December 31, 2017, the amount outstanding underfacility were used to partly fund two Supramax dry bulk carriers. In November 2023, the facility was $251.3 million, and the available amount under the revolving part of the facility was $nil.repaid early in full. The facility bearsbore interest at LIBORSOFR plus a margin originallyand had a term of sixapproximately five years and is secured against the assets of SFL Hercules. The lenders have limited recourse to Ship Finance International Limited as the holding company only guaranteed $70.0 millionfrom delivery of the debtvessels. The facility was secured by the subsidiaries' assets and a corporate part guarantee from us. The facility contained a minimum value covenant, which was only applicable if there was an early termination of any of the charters attached to the vessels. The facility also contained covenants that required us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In February 2019, three of our wholly-owned subsidiaries entered into a $24.9 million senior secured term loan facility with a bank. The proceeds of the facility were used to partly fund three Supramax dry bulk carriers. In December 2023, the facility was repaid early in full. The facility bore interest at SOFR plus a margin and had a term of approximately five years from delivery of the vessels. The facility was secured by the subsidiaries' assets and a corporate part guarantee from us. The facility contained a minimum value covenant, which was only applicable if there was an early termination of any of the charters attached to the vessels. The facility also contained covenants that required us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In June 2019, we issued a senior unsecured bond loan totaling NOK700 million in the Norwegian credit market. The bonds bear quarterly interest at NIBOR plus a margin and are redeemable in full in June 2024. During 2020, we purchased bonds with principal amounts totaling NOK5 million equivalent to $0.5 million. No bonds were purchased between 2021 and 2023. The net amount outstanding as of December 31, 2017.2023 was NOK695 million, equivalent to $68.4 million. The facilitybond agreement contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios. The facility also originally contained a minimum value covenant and covenants that required Seadrill to maintain certain minimum levels
In June 2019, five of liquidity, current ratios, interest cover ratios and adjusted equity ratios and a maximum leverage ratio.
In October 2013, our equity-accounted subsidiary SFL Deepwatersubsidiaries entered into a $390$33.1 million secured term loan and revolving credit facility with a syndicate of banks, secured against the ultra deepwater drilling rig West Taurus. At December 31, 2017, the amount outstanding under the newbanks. We provided a corporate guarantee for this facility, was $225.8 million, and the available amount under the revolving part of the facility was $nil. The facility bearswhich bore interest at LIBOR plus a margin originallyand had a term of approximately four years. Although the facility is unsecured, we are acting as guarantor. In March 2020, $4.25 million of this facility was repaid following the sale of these five yearsoffshore support vessels in February, March and is secured againstMay 2020. The facility matured in January 2023 and was fully repaid.
In January 2020, we issued a senior unsecured bond loan totaling NOK600 million in the assets of SFL Deepwater.Norwegian credit market. The lenders have limited recoursebonds bear quarterly interest at NIBOR plus a margin and are redeemable in January 2025. During 2020, we purchased bonds with principal amounts totaling NOK60 million equivalent to Ship Finance International Limited as$6.0 million. No bonds were purchased in 2021 and 2022. In December 2022, the holding company only guaranteed $75.0Company resold NOK50 million equivalent to $5.0 million of the debt atbonds which had been repurchased in 2020. The net amount outstanding as of December 31, 2017.2023 was NOK590 million, equivalent to $58.1 million. The facilitybond agreement contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In March 2020, two of our subsidiaries entered into a $40.0 million senior secured term loan facility with a bank. The facility also originallywas secured against two Suezmax tankers. We had provided a corporate guarantee for this facility, which bore interest at LIBOR plus a margin and had a term of approximately two years. In March 2022, the terms of the loan were amended to bear interest at SOFR plus a margin and the loan was extended by a year. The facility was fully repaid in March 2023. The facility contained a minimum value covenant and covenants that required Seadrillus to maintain certain minimum levels of liquidity, current ratios, interest cover ratiosfree cash, working capital and adjusted book equity ratios and a maximum leverage ratio.ratios.
In October 2013,March 2020, four of our equity-accounted subsidiary SFL Linuswholly-owned subsidiaries entered into a $475$175.0 million secured term loan and revolving credit facility with a syndicate of banks.banks, secured against four 8,700 TEU container vessels. We have provided a corporate part guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately five years. The proceedsnet amount outstanding as of the facility were used to finance the acquisition of the newbuilding harsh environment jack-up drilling rig West Linus, which was delivered in February 2014. At December 31, 2017, the amount outstanding under the facility2023, was $308.8 million, and the available amount under the revolving part of the facility was $nil.$108.7 million. The facility bearscontains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In May 2020, one of our wholly-owned subsidiaries entered into a $50.0 million senior secured term loan facility with a bank, which bore interest at LIBOR plus a margin originallyand had a term of approximately five years. The facility was secured against a 308,000 dwt VLCC. In August 2023, the facility was repaid early in full. The facility contained a minimum value covenant and covenants that required us to maintain certain book equity ratios.
In November 2020, one of our wholly-owned subsidiaries entered into a $50.0 million senior secured term loan facility with a bank, secured against a container vessel. We have provided a corporate guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately four years. The net amount outstanding as of December 31, 2023, was $35.0 million. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.
In February 2021, one of our wholly-owned subsidiaries entered into a $51.0 million term loan facility with a bank, secured against a container vessel. We have provided a corporate part guarantee for this facility, which bears interest at SOFR plus a margin and with a term of approximately four years. The net amount outstanding as of December 31, 2023, was $39.0 million. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In April 2021, one of our wholly-owned subsidiaries entered into a $51.0 million term loan facility with a bank, secured against a container vessel. We have provided a corporate guarantee for this facility, which bears interest at SOFR plus a margin and with a term of approximately four years. The net amount outstanding as of December 31, 2023, was $40.1 million. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In May 2021, we issued a senior unsecured sustainability-linked bond totaling $150.0 million in the Nordic credit market. The bonds bear quarterly interest at a fixed rate of 7.25% per annum and are redeemable in full on May 12, 2026. The net amount outstanding as of December 31, 2023 was $150.0 million. By the maturity date of the bond, we aim to have committed an amount at least equal to the size of the issue on upgrades of existing vessels and/or vessel acquisitions.
In September 2021, two of our wholly-owned subsidiaries owning the two newly acquired 6,800 TEU container vessels entered into sale and leaseback transactions for these vessels, through a Japanese operating lease with call option financing structure. The sales price for each vessel was $65.0 million, totaling $130.0 million. The vessels were leased back for a term of six years, with options to purchase each vessel at the end of the fifth and issixth year. These two transactions did not qualify as sales under the U.S. GAAP sale and leaseback guidance and have thus been recorded as financing arrangements. The net combined amount outstanding as of December 31, 2023 was $98.9 million.
In December 2021, one of our wholly-owned subsidiaries entered into a $35.0 million senior term loan facility with a bank, secured against a container vessel. We have provided a corporate part guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately seven years. The net amount outstanding as of December 31, 2023, was $30.9 million. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In December 2021, three of our wholly-owned subsidiaries entered into a $107.3 million term loan facility with a bank, secured against three Suezmax tankers. One of the vessels was delivered in 2021, and $35.8 million of the facility was drawn down. Two vessels were delivered in 2022 and the remaining $71.5 million of the facility was drawn down. We have provided a corporate part guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately five years. The net amount outstanding as of December 31, 2023, was $95.7 million. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In March 2022, four of our wholly-owned subsidiaries entered into a $100.0 million term loan facility with a bank, secured against four product tankers. We have provided a corporate part guarantee for this facility, which bears interest at SOFR plus a margin and with a term of approximately five years. The net amount outstanding as of December 31, 2023, was $82.3 million. The facility contains a minimum value covenant and covenants that required us to maintain certain minimum levels of free cash, working capital and debt ratios.
In April 2022, two of our wholly-owned subsidiaries owning two 6,500 CEU car carriers, Composer and Conductor, entered into sale and leaseback transactions for these vessels, through a Japanese operating lease with call option financing structure. The sales prices for the vessels were $23.5 million and $25.3 million, respectively. The vessels were leased back for a term of approximately three years, with options to purchase each vessel at the end of the third year. These two transactions did not qualify as sales under the U.S. GAAP sale and leaseback guidance and have thus been recorded as financing arrangements. The net amounts outstanding as of December 31, 2023 were $16.3 million and $18.0 million, respectively.
In September 2022, two of our wholly-owned subsidiaries entered into a $23.0 million term loan facility with a bank, secured against two dry bulk carriers. We have provided a corporate guarantee for this facility, which bears interest at SOFR plus a margin and with a term of approximately one year. During August 2023, the terms of loan were amended and the loan was extended by a further one year. The net amount outstanding as of December 31, 2023, was $17.2 million. The facility contains a minimum value covenant and covenants that required us to maintain certain minimum levels of free cash, working capital and debt ratios.
In September 2022, eight of our wholly-owned subsidiaries entered into a $115.0 million term loan facility with a bank, secured against eight dry bulk carriers. We have provided a corporate part guarantee for this facility, which bears interest at SOFR plus a margin and with a term of approximately three years. The net amount outstanding as of December 31, 2023, was $90.0 million. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In September 2022, we and six of our wholly-owned subsidiaries entered into a $290.0 million term loan facility with a bank. The facility served as a temporary source of finance for vessel acquisitions, with a term of approximately six months. Our six wholly-owned subsidiaries provided a corporate part guarantee for this facility, which bore interest at SOFR plus a margin. The facility was partly repaid in 2022 and the remaining amount was fully repaid in February 2023. It also contained a minimum value covenant and covenants that required us to maintain certain minimum levels of free cash, working capital and debt ratios.
In October and December 2022, two of our wholly-owned subsidiaries owning two 14,000 TEU container vessels entered into sale and leaseback transactions for these vessels, through a Japanese operating lease with call option financing structure. The sales price for each vessel was $120.0 million, totaling $240.0 million. The vessels were leased back for a term of approximately seven years, with options to purchase each vessel at the end of the seventh year. These two transactions did not qualify as sales under the U.S. GAAP sale and leaseback guidance and have thus been recorded as financing arrangements. The net combined amount outstanding as of December 31, 2023 was $218.1 million.
In January 2023, four of our wholly-owned subsidiaries entered into a $144.6 million term loan facility with a syndicate of banks, secured against four Suezmax tankers. We have provided a corporate guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately three years. The net amount outstanding as of December 31, 2023, was $136.9 million. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In February 2023, we issued a senior unsecured sustainability-linked bond totaling $150.0 million in the Nordic credit market. The bond was issued at a price of 99.58%. The difference between the face value and market value of the bond of $0.6 million will be amortized as an interest expense over the life of the bond. The bonds bear quarterly interest at a fixed rate of 8.875% of the nominal value per annum and are redeemable in full on February 1, 2027. The net amount outstanding as of December 31, 2023, was $150.0 million. By the maturity date of the bond, the Company aims to have committed an amount at least equal to the size of the issue on upgrades of existing vessels and/or vessel acquisitions.
In March 2023, one of our wholly-owned subsidiaries entered into a $23.3 million term loan facility with a bank, secured against the subsidiary's assets. The lenders have limited recourse to Ship Finance International Limited aspre-delivery contract for a dual-fuel 7,000 CEU newbuilding car carrier. During the holding company only guaranteed $90.0year ended December 31, 2023, $18.6 million of the debtavailable facility was drawn down. We have provided a corporate guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately one year. The net amount outstanding as of December 31, 2017.2023, was $18.6 million. The facility contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equitydebt ratios.
In March 2023, one of our wholly-owned subsidiaries entered into a $23.3 million term loan facility with a bank, secured against the pre-delivery contract for a dual-fuel 7,000 CEU newbuilding car carrier. During the year ended December 31, 2023, $13.9 million of the available facility was drawn down. We have provided a corporate guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately one year. The net amount outstanding as of December 31, 2023, was $13.9 million. The facility also originally containedcontains covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In April 2023, one of our wholly-owned subsidiaries entered into a bilateral $150.0 million senior secured term loan facility, secured against a jack-up drilling rig. We have provided a full corporate guarantee for this facility, which bears interest at a fixed rate and has a term of approximately three years. The net amount outstanding as of December 31, 2023, was $148.9 million. The facility contains a minimum value covenant and covenants that required Seadrillrequire us to maintain certain minimum levels of liquidity, current ratios, interest cover ratiosfree cash, working capital and adjusted equity ratios and a maximum leverage ratio.debt ratios.
In April 2023, one of our wholly-owned subsidiaries owning a 4,900 CEU car carrier entered into a sale and leaseback transaction for this vessel, through a Japanese operating lease with call option financing structure. The sales price for the vessel was $45.0 million. The vessel was leased back for a term of approximately five years, with the option to purchase the vessel at the end of the fifth year. The transaction did not qualify as a sale under the U.S. GAAP sale and leaseback guidance and have thus been recorded as a financing arrangement. The net amount outstanding as of December 31, 2023 was $41.7 million.
In May 2023, one of our wholly-owned subsidiaries owning a 2,500 TEU container vessel entered into a sale and leaseback transaction for this vessel, through a Japanese operating lease with call option financing structure. The sales price for the vessel was $38.5 million. The vessel was leased back for a term of approximately nine years, with the option to purchase the vessel after approximately six or seven years. The transaction did not qualify as a sale under the U.S. GAAP sale and leaseback guidance and has been recorded as a financing arrangement. The net amount outstanding as of December 31, 2023 was $37.3 million.
In May 2023, one of our wholly-owned subsidiaries entered into a $150.0 million senior secured term loan facility with a syndicate of banks, secured against a harsh environment semi-submersible drilling rig. We have provided a full corporate guarantee for this facility, which bears interest at SOFR plus a margin and has a term of approximately three years. The net amount outstanding as of December 31, 2023, was $150.0 million. The facility contains covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In May 2023, we entered into a $8.4 million senior unsecured term loan facility with a bank, for general corporate purposes. The facility bears interest at SOFR plus a margin and has a term of approximately three years. The net amount outstanding as of December 31, 2023, was $8.4 million. The facility contains covenants that require us to maintain certain minimum levels of free cash, working capital and debt ratios.
In March 2023, two of our wholly-owned subsidiaries owning two newbuild 7,000 CEU car carriers entered into sale and leaseback transactions for these vessels, through Japanese operating leases with a call option financing structure. The sale and leaseback transactions were completed in September and November 2023. The sales prices for each vessel was $72.2 million, totaling $144.4 million. The vessels were leased back for a term of approximately 12 years, with the Company's option to purchase the vessels after approximately 10 years. These two transactions did not qualify as sales under the U.S. GAAP sale and leaseback guidance and have thus been recorded as financing arrangements. The net combined amount outstanding as of December 31, 2023 was $143.1 million.
In December 2021, one of our wholly-owned subsidiaries entered into a general share lending agreement and as of December 31, 2023, 11.8 million of the Company's shares were in the custody of the bank. This facility provides a $60.0 million cash loan collateral to us in connection with Seadrill’s Restructuring Plan, certain amendments were agreed with the banks under the above three facilities in our equity account subsidiaries, including an extension of the final maturity dateshares lent. The facility is repayable on demand, by four years and the minimum value clause not being applicable for the remaining life of the respective facilities. In addition, the minimum guarantee amounts were fixed at $75 million for SFL Deepwater, $70 million for SFL Hercules and $90 million for SFL Linus, but will increase by any net cash amounts received by the Company from the relevant subsidiaries. Further, the financial covenants on Seadrill have been suspended until the Restructuring Plan is approved by the court or terminated, and will be replaced by financial covenants on a newly established subsidiary of Seadrill, who will also act as guarantor for the obligations under the leases for the three drilling units, on a subordinated basiseither party to the senior secured lendersagreement. We drew down $60.0 million in Seadrill and new secured notes.December 2023. The above amendments tofacility bears interest at the loan facilities are subject to Court approvalU.S. Federal Funds Rate (EFFR) plus a margin. The net amount outstanding as of the Restructuring Plan.
We were in compliance with all loan covenants as at December 31, 2017. Solship and Seadrill were also in compliance with all applicable loan covenants in the facilities discussed above as at2023, was $60.0 million.
As of December 31, 2017. If Seadrill’s Restructuring Plan is terminated or not approved by the court, or Solship were to breach the loan covenants applicable to them, there is a risk that the Company will not be in compliance with the applicable loan covenants under the relevant agreement and the outstanding amounts under the long-term debt facilities may become due and payable. At December 31, 2017, the three-month U.S. dollar LIBOR was 1.694% and2023, the three-month Norwegian kroner NIBOR was 0.81%4.73% , the SOFR was 5.38% and the EFFR was 5.33%.
Loan Covenants
Certain of our financing agreements discussed above, have, among other things, the following financial covenants, as amended or waived, which are tested quarterly, the most stringent of which require us (on a consolidated basis) to maintain:
•a book equity ratio of minimum 0.20 to 1.0;
•a positive working capital; and
•minimum liquidity of at least $25.0 million, including undrawn credit lines with a remaining term of at least six months.
Our financing agreements discussed above have, among other things, restrictive covenants which, to the extent triggered, would restrict our ability to:
i.declare, make or pay any dividend, charge, fee or other distribution (whether in cash or in kind) on or in respect of its share capital (or any class of its share capital);
ii.pay any interest or repay any principal amount (or capitalized interest) on any debt to any of its shareholders;
iii.redeem, repurchase or repay any of its share capital or resolve to do so; or
iv.enter into any transaction or arrangement having a similar effect as described in (i) through (iii) above.
Our secured credit facilities may be secured by, among other things:
•a first priority mortgage over the relevant collateralized vessels;
•a first priority assignment of earnings, insurances and charters from the mortgaged vessels for the specific facility;
•a pledge of earnings generated by the mortgaged vessels for the specific facility; and
•a pledge of the equity interests of each vessel owning subsidiary under the specific facility.
A violation of any of the financial covenants contained in our financing agreements described above may constitute an event of default under the relevant financing agreement, which, unless cured within the grace period set forth under the financing agreement, if applicable, or waived or modified by our lenders, provides our lenders, by notice to the borrowers, with the right to, among other things, cancel the commitments immediately, declare that all or part of the loan, together with accrued interest, and all other amounts accrued or outstanding under the agreement, be immediately due and payable, enforce any or all security under the security documents, and/or exercise any or all of the rights, remedies, powers or discretions granted to the facility agent or finance parties under the finance documents or by any applicable law or regulation or otherwise as a consequence of such event of default.
Furthermore, certain of our financing agreements contain a cross-default provision that may be triggered by a default under one of our other financing agreements. A cross-default provision means that a default on one loan would result in a default on certain of our other loans. Because of the presence of cross-default provisions in certain of our financing agreements, the refusal of any one lender under our financing agreements to grant or extend a waiver could result in certain of our indebtedness being accelerated, even if our other lenders under our financing agreements have waived covenant defaults under the respective agreements. If our secured indebtedness is accelerated in full or in part, it would be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels and other assets securing our financing agreements if our lenders foreclose their liens, which would adversely affect our ability to conduct our business.
Moreover, in connection with any waivers of or amendments to our financing agreements that we have obtained, or may obtain in the future, our lenders may impose additional operating and financial restrictions on us or modify the terms of our existing financing agreements. These restrictions may further restrict our ability to, among other things, pay dividends, make capital expenditures or incur additional indebtedness, including through the issuance of guarantees. In addition, our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness.
Minimum Value Covenants
Most of our loan facilities are secured with mortgages on vessels and rigs. Atvessels. As of December 31, 2017,2023, we had borrowings totaling $1.1$0.5 billionwith minimum value covenants which are tested on a regular basis, including $0.8 billion borrowings in wholly-owned subsidiaries accounted for under the equity method.basis. These borrowings were secured against 2421 vessels and rigsone rig which had combined charter-free market values totaling approximately $1.7$1.2 billion. A reduction of 10% in charter-free market values in 20172023 would not result in any material prepayments or reduction in availability on revolving credit facilities, after scheduled loan repayments and prepayments in the year. In connection with Seadrill’s Restructuring Plan, the minimum value covenants relating to the borrowings in our three wholly owned subsidiaries accounted for under the equity method will no longer be applicable, subject to court approval of the Restructuring Plan.
In addition, atas of December 31, 2017,2023, we had borrowings totaling $0.6$0.4 billion with conditional minimum value covenants which are only tested if there is a default under the charter under which the relevant vessels are employed.vessel is employed is terminated or about to expire. These borrowings were secured against 2519 vessels which had combined charter-free market values totaling approximately $0.8$0.9 billion.
As of December 31, 2023, we were in compliance with all of the financial covenants contained in our financing agreements.
Debt and Lease Liabilities in Associated Companies
River Box was previously a wholly-owned subsidiary of ours. It holds investments in direct financing leases, through its subsidiaries, related to the 19,200 and 19,400 TEU containerships, MSC Anna, MSC Viviana, MSC Erica and MSC Reef which were chartered-in on a bareboat basis, each for a period of 15 years from delivery by the shipyard. The four vessels are also chartered-out for the same 15-year period on a bareboat basis to MSC, an unrelated party. On December 31, 2020, we sold 50.1% of the shares of River Box to a subsidiary of Hemen, a related party. Following the sale of River Box, the investments in the four container vessels accounted for as direct financing leases of $540.9 million and its related finance lease liabilities of $464.7 million had been derecognized from our consolidated financial statements. As of December 31, 2023, our share of the direct financing leases and finance lease liabilities within River Box were $234.6 million and $197.1 million respectively.
There were no outstanding bank loans in associated companies as of December 31, 2023 and December 31, 2022.
Finance Lease Liabilities
In 2018, we acquired four 14,000 TEU container vessels and three 10,600 TEU container vessels, which were subsequently refinanced with an Asian based financial institution by entering into separate sale and leaseback financing arrangements. The vessels are leased back for terms ranging from six to 11 years, with options to purchase the vessel after six years. Due to the terms of the sale and leaseback arrangements, each option is expected to be exercised on the sixth anniversary. These sale and leaseback transactions were accounted for as vessels under finance leases. As of December 31, 2023, the outstanding finance lease liability balance for these leases was $419.3 million.
Derivatives
Due to the discontinuance of LIBOR after June 30, 2023, and notwithstanding the automatic conversion mechanisms to alternative rates, we have entered intoamendment agreements to existing swap agreements for the transition from LIBOR to SOFR. We have elected to apply the optional expedient pursuant to ASC 848 for contracts which are designated as cash flow hedges within the scope of ASC 815. This meant that we were not required to de-designate hedging relationships as a result of changes to loan and swap agreements which related solely to the replacement of LIBOR as a benchmark rate to SOFR.
We use financial instruments to reduce the risk associated with fluctuations in interest rates. AtAs of December 31, 2017, the Company2023, we and itsour consolidated subsidiaries had entered into interest rate swap contracts with a combined notional principal amount of $846 million,$0.4 billion whereby variable LIBORSOFR interest rates excluding additional marginsplus applicable credit adjustment spreads are swapped for fixed interest rates. The fixed interest rates, including the impact of credit adjustment spreads are between 0.80%0.19% per annum and 4.15%1.88% per annum. We had also entered into interest rate/currency swap contracts, related to our bondsNOK700 million bond (due 2024) and our NOK600 million bond (due 2025) denominated in Norwegian kroner, with notional principal amounts of NOK500NOK420 million ($6448.3 million), NOK280 million ($32.2 million) and NOK900NOK600 million ($15167.5 million), respectively, whereby variable NIBOR interest rates including additional marginmargins are swapped for fixed interestvariable SOFR rates of 6.91% per annum and 6.03% per annum, respectively, and both the payment of interest andincluding additional margins. The eventual settlement of the bonds will have an effective exchange rate of NOK7.81NOK8.69 = $1, NOK8.70 = $1 and NOK5.96NOK8.88 = $1 respectively. In addition, one equity-accounted subsidiary had entered into interest rate swaps with a combined notional principal amount of $152.4 million at rates excluding margin of between 1.77% and 2.01% per annum. The overall effect of our swaps is to fix the interest rate on approximately $1.2$0.4 billion of our floating rate debt, including equity accounted subsidiaries, atdebt. As of December 31, 2017, at a2023, the weighted average interest rate for our floating rate debt denominated in U.S. dollars and Norwegian kroner which takes into consideration the effect of 4.31%our interest rate and cross currency swaps is 6.49% per annum including margin.
The effect of the above swap contracts is to substantially reduce our exposure to interest rate and exchange rate fluctuations, further analysis of which is presented in Item“Item 11 "Quantitative- Quantitative and Qualitative Disclosures about Market Risk"Risk”.
At the date of this report, we were not party to any other interest rate or currency derivative contracts.
Equity
In 2017,On April 23, 2018, we issued a 4.875% senior unsecured convertible bond totaling $150.0 million. Additional bonds were issued on May 4, 2018 at a principal amount of $14.0 million. The bonds were convertible into common shares and matured on May 1, 2023. At this date, we redeemed the full outstanding amount under the 4.875% senior unsecured convertible bonds due 2023. The conversion right was not worth more than par value of the instrument at the maturity date and the remaining outstanding principal of $84.9 million was settled in cash. Also in connection with the issuance of this convertible bond in April 2018, we issued a total of 7,5003,765,842 new common shares, par value $0.01 per share, from up to 7,000,000 issuable under a share lending arrangement. The shares issued had been loaned to affiliates of $0.01 each following the exerciseunderwriters of the bond issue in order to assist investors in the bonds to hedge their position. During the year ended December 31, 2023, 3,765,142 of the loaned shares were transferred into the custody of another counterparty under a general share options (2016: 36,575lending agreement. It was determined that the transaction qualified for equity classification, and as of the date of inception and as of December 31, 2023, the fair value was determined to be nil. The remaining 700 shares are held with the Company's transfer agent.
On April 12, 2022, the Board of Directors authorized a renewal of our dividend reinvestment plan, or DRIP, to facilitate investments by individual and institutional shareholders who wish to invest dividend payments received on shares owned, or other cash amounts, in the Company’s common shares on a regular or one time basis, or otherwise. On April 15, 2022, the Company filed a registration statement on Form F-3ASR (Registration No. 333-264330) to register the sale of up to 10,000,000 common shares pursuant to the DRIP. If certain waiver provisions in the DRIP are requested and granted pursuant to the terms of the plan, we may grant additional share sales to investors, from time to time, up to the amount registered under the plan.
In May 2020, the Company entered into an equity distribution agreement with BTIG under which the Company may, from time to time, offer and sell new common shares having aggregate sales proceeds of $1.00up to $100.0 million through the 2020 ATM Program. The Company had sold 11.4 million of its common shares and received net proceeds of $90.2 million, under the 2020 ATM Program. In April 2022, the Company entered into an amended and restated equity distribution agreement with BTIG, under which the Company may, from time to time, offer and sell new common shares up to $100.0 million, through the 2022 ATM Program with BTIG. Under this agreement, the prior 2020 ATM Program established in May 2020 was terminated and replaced with the renewed 2022 ATM Program. On April 28, 2023, in connection with the 2022 ATM Program, the Company filed a new registration statement on Form F-3ASR (Registration No. 333-271504) and an accompanying prospectus supplement with the SEC to register the offer and sale of up to $100.0 million common shares pursuant to the 2022 ATM Program. No common shares have been sold under the 2022 ATM Program.
No new common shares were issued and sold under the DRIP and ATM arrangements during the year ended December 31, 2023.
On May 8, 2023, the Board of Directors authorized the Share Repurchase Program of up to satisfy options exercised)an aggregate of $100.0 million of our common shares until June 30, 2024 ("Share Repurchase Program"). During the year ended December 31, 2023, we repurchased a total of 1,095,095 shares, at an average price of approximately $9.27 per share, with principal amounts totaling $10.2 million. We have $89,847,972 remaining under the authorized Share Repurchase Program.
In November 2016, the Board of Directors renewed a share option schemeour Share Option Scheme, originally approved in November 2006, permitting2006. The Option Scheme permits the directorsBoard of Directors, at its discretion, to grant options in the Company's shares to our employees, officers and directors of the Company or itsour subsidiaries. The fair value cost of options granted is recognized in the statement of operations, with a corresponding amount credited to additional paid in capital (see consolidated financial statements Note 22: Share option plan).capital. The additional paid-in capital arising from share options granted was $0.4$1.6 million in 2017 (2016: $0.4 million).2023.
A reorganizationIn February 2023, we awarded a total of 440,000 options to officers, employees and directors, pursuant to our Share Option Scheme. The options have a five-year term and a three-year vesting period and the first options will be exercisable from February 2024 onwards. The initial strike price was $10.34 per share.
In February 2024, we awarded a total of 440,000 options to officers, employees and directors, pursuant to our Share Option Scheme. The options have a five-year term and a three-year vesting period and the first options will be exercisable from February 2025 onwards. The initial strike price was $12.02 per share.
During the year ended December 31, 2023, 68,000 share capital was approved atoptions expired. At the Annual General Meetingdate of expiry the Company held in September 2016, in accordance with the Bermuda Companies Act. Following the reorganization, the Company's authorizedoptions had a weighted average exercise price of $9.47 per share capital was adjusted to 150,000,000 shares of par value $0.01 each, prior to which it had been 125,000,000 shares of par value $1.00 each. As there were 93,504,575 shares issued and fully paid at the time of the reorganization, to reflect the decrease in the paran intrinsic value of each share from $1.00 to $0.01, $92.6 million was transferred from share capital to contributed surplus. The shares of par value $0.01 each rank pari passu in all respects with each other.$0.0 million.
In November 2016, in conjunction with the Company's issue of senior unsecured convertible bonds totaling $225 million (see below), we issued 8,000,000 new shares of par value $0.01 each. The shares were issued at par value and have been loaned to an affiliate of one of the underwriters of the bond issue, in order to assist investors in the bonds to hedge their position.
In October 2017,January 2024, we issued a total of 9,418,79843,708 new common shares pursuant to Share Option Scheme following separate privately negotiated transactions with certain holdersthe exercise of 100,000 share options. The weighted average exercise price of the 3.25% senior unsecured convertible bonds due 2018 foroptions exercised was $6.62 per share and the conversion of a principal amount of $121.0 million from the outstanding balancetotal intrinsic value of the convertible bonds.options exercised was $0.5 million.
During 2023, we issuedpaid four dividends totaling $0.97 per common share, or a senior unsecured convertible bond loan totaling $350 million (see "Borrowings" above). As required by ASC 470-20 "Debt with conversion and other options", we calculatedtotal of $123.0 million. No dividends were paid from contributed surplus.
On February 14, 2024, the equity componentBoard of the convertible bond,Directors declared a dividend of $0.26 per share which was valued at $20.7 million and recordedwill be paid in cash on or around March 28, 2024 to shareholders of record as "Additional paid-in capital" (see Note 19: Long-term Debt). In October 2016, we purchased and canceled bonds with principal amounts totaling $165.8 million. The equity component of the converted bonds in 2017 was valued at $16.4 million (2016: $8.5 million for the purchased and canceled bonds) and this amount has been deducted from "Additional paid-in capital".March 15, 2024.
In October 2016, we issued a senior unsecured convertible bond totaling $225 million (see "Borrowings above). As required by ASC 470-20 "Debt with conversion and other options", we calculated the equity component of the convertible bond, which was valued at $5 million and recorded as "Additional paid-in capital" (see Note 19: Long-term Debt).
Following the above transactions, as of December 31, 2017,2023, our issued and fully paid share capital balance was $1.1$1.4 million, our additional paid-in capital was $404$618.2 million and our contributed surplus balance was $681$424.6 million.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We do not undertake any significant expenditure on research and development, and have no significant interests in patents or licenses.
D. TREND INFORMATION
According to industry sources, vessel prices have generally declined since their peak in 2008, and newbuilding prices remain low by historical standards. Prices for second-hand vessels remained at low levels for most of 2017, with prices for modern second-hand oil tankers and container vessels decreasing. Dry bulk carrier prices increased during the year, but still remained at low levels relative to historical prices.
The oil tanker market started a cyclical upturn in the second half of 2014, with spot charter rates in December 2015 reaching their highest levels since 2008. However, this trend was reversed in 2016, when the 6.5% increase in fleet capacity was not matched by a corresponding increase in demand. In 2017, crude tanker demand was at 5% and crude fleet growth at 5.8%.
Overall, 2017 was a challenging year for the tanker market in all sectors, despite firm growth in tonnage demand. VLCC spot earnings declined by 57% compared to 2016 to average $17,794 per day in 2017, the lowest level in many years, highlighting the extent to which oversupply of tonnage has led to a general weakening of market conditions. Crude tanker tonnage demand is currently projected to grow by 4.9% in 2018. A general shift towards longer haul crude trade, partly as a result of expanding Asian imports and rising output from Atlantic Basin producers, most significantly in the United States, is expected to support firm tonnage demand growth. The OPEC-led supply cut is anticipated to remain in place until the end of 2018, which is expected to limit growth in Middle Eastern exports, although uncertainty remains regarding levels of compliance and the strategy for exiting the agreement. The crude tanker fleet is projected to expand by 3.5% in 2018, a slight slowdown relative to the firm growth of 5.8% seen in 2017. However, according to industry sources, the extent of supply growth over recent years suggests that it will still take some time for the market to rebalance and for conditions to improve. Product tanker tonnage demand is expected to increase by 3.8% in 2018, with increasing intra-Asian products trade and rising products exports from the United States currently anticipated to be the most significant supporting factors. Product tanker fleet growth is currently expected to slow to 1.5% in 2018, following firm growth of 4.0% in 2017. This anticipated easing in the pace of fleet expansion has the potential to start to lead towards an improved product tanker market balance.
Our tanker vessels on charter to Frontline Shipping are subject to long term charters that provide for both a fixed base charter-hire and profit sharing payments that apply once Frontline Shipping earns average daily rates from our vessels in the market that exceed the fixed base charter rates, calculated and payable on a quarterly basis. If rates for vessels chartered in the spot market
increase, our profit sharing revenues, if any, will likewise increase for those vessels operated by Frontline Shipping in the spot market. We also have two Suezmax tankers currently employed in the spot market, which will benefit directly from any strengthening in spot charter rates.
According to industry sources, the dry bulk carrier market conditions in 2017 were much improved compared with a weak 2016, where charter rates and asset values hit all-time lows. In 2017, overall, earnings across all dry bulk carrier sectors averaged $10,986 per day representing a six-year high. The dry bulk carrier sector also saw a record amount of second-hand sales in 2017, with 672 vessels of a record 48 million dwt sold in the second-hand market. Global seaborne dry bulk trade is estimated to have grown by 4% in terms of tonnes and 5% in terms of tonne-miles in 2017. China’s seaborne iron ore imports grew by 5%, while growth in global seaborne coal and minor bulk trades also picked up pace in 2017. Looking ahead, Chinese demand for high-grade imported iron ore is expected to support 3% growth in global seaborne iron ore trade in 2018, while coal trade growth is projected to ease and seaborne minor bulk trade is expected to also grow. Overall, global seaborne dry bulk trade growth is projected to ease slightly to around 3% in terms of tonnes in 2018, and 4% in terms of tonne-miles. On the supply side, 2017 saw a total of 454 dry bulk carriers of a combined 38 million dwt delivered into the fleet, while 215 vessels of a total 15 million dwt were sold for scrap, resulting in moderate fleet growth of 2.9%. Looking ahead to 2018, reduced contracting activity in recent years is expected to see the pace of deliveries ease significantly, with fleet growth projected to ease to around 2% as a result. Despite a number of risks, with demand growth expected to outpace fleet growth for a second consecutive year, 2018 looks likely to be a year of further improvement for the dry bulk carrier sector.
According to industry sources, the containership charter market generally saw improvement during 2017, supported by more positive market fundamentals, following strong initial gains early in the year. Charter rates ended at increased levels in 2017 across the size ranges, with most sectors seeing significant gains over the course of the year. Additional rebalancing of sector fundamentals is projected to support further improvement in charter market conditions. The second-hand container vessel market saw record levels of activity in 2017, the first year in which over 1 million TEU of capacity was reported sold. Second-hand container vessel prices generally increased in 2017 across all size ranges, with prices rising away from the historically low levels seen in the first half of 2017. Growth in global seaborne container trade picked up further in 2017, rising to 5.2%, with volumes reaching an estimated 191 million TEU in the full year. This followed growth of 4.1% in 2016, with the more positive demand environment in 2017 supported by robust growth in peak -leg Transpacific trade, as well as continued strong expansion in intra-Asian box trade. North-South container trade also grew at a firm pace, surpassing initial expectations. Risks to the demand outlook remain, including from the closure of some Chinese factories in autumn 2017, although so far it appears that the impact on volumes has been less significant than many had initially feared. Against a backdrop of more positive global economic conditions, growth in seaborne container trade is currently projected to remain firm in the short-term, at around 5% p.a. in both 2018 and 2019, with demand in a number of developing regions in particular expected to improve further.
The dramatic reduction in the oil price since 2014 has reduced demand for offshore drilling units, and day rates and utilizations have declined considerably in the four years to 2017 as many offshore exploration activities became inviable at low prices of between $50 and $55 per barrel. As a result, some owners/operators of drilling units have experienced financial difficulties in the past year, including breaching bank covenants and restructuring. According to some industry sources there is an increasing sense that, 2017 may have marked the point at which the offshore market cycle “bottomed out”. However, while there are early signs of an upturn in several key indicators, there remain significant structural challenges to be overcome if offshore markets are to move towards balance.
Crude oil prices have trended upwards, from $55 per barrel in September 2017 to exceed $70 per barrel in January 2018.This rise arose partly from the OPEC agreement in November to extend output cuts, as well as oil production outages in Venezuela and the UK. However, against the backdrop of a global equity sell-off, even stronger than anticipated figures for US shale oil production released in February 2018 caused prices to slide to $63 per barrel within a matter of days, indicating that market recovery may not be a process without set-backs.
According to industry sources, 75 newbuilding orders across all offshore sectors were placed in 2017 in the offshore market, down by 90% on the pre-downturn year of 2013 and by 25% on 2016. A positive sign was that this included low-volume but high-value mobile offshore production units which were 10 of the newbuilding orders placed. Yards continue to look for orders in adjacent sectors, including renewables. Restructuring in the offshore sector continue, with further phases likely, and with the potential to help consolidation. There has been an upturn in sale and purchase volumes, partially due to distressed sales and partially as asset players position themselves, however significant challenges remain.
Three of our drilling units are employed under leases with the Seadrill Charterers, currently fully guaranteed by Seadrill. With the severe downturn in the demand for drilling units and Seadrill’s ongoing Restructuring Plan, there is still a risk that the Restructuring Plan will not be approved by the courts, and the leases may be renegotiated at lower levels, or terminated. A significant portion of our net income and operating cash flows are generated from our leases with the Seadrill Charterers, and a further renegotiation or termination of these leases may have a material adverse effect on our revenues, profitability and liquidity.
According to industry sources, the OSV market remains one of the most severely affected by the offshore downturn with more than 1,100 OSVs in lay-up, and many more idle or under-utilized in February 2018. At the same time, there were 341 further OSVs on order. This compares to an overall fleet size of approximately 4,622 vessels.
Interest rates have been at historically at low levels since 2009, although interest rates have recently increased. We have effectively hedged a substantial portion of our interest exposure on our floating rate debt through swap agreements with banks, although interest rate rises will affect our future cost of debt. Several of our charter contracts also include interest adjustment clauses, whereby the charter rate is adjusted to reflect the actual interest paid on a deemed outstanding loan relating to the asset, effectively transferring the interest rate exposure to our counterparty under the charter contract.
The above overviews of the various sectors in which we operate are based on current market conditions. However, market developments cannot always be predicted and may differ from our current expectations.
E. OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2017, we were not party to any arrangements which may be considered to be off balance sheet arrangements.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Contractual Commitments
AtAs of December 31, 2017,2023, we had the following contractual obligations and commitments:
|
| | | | | | | | | | | | | | |
| Payment due by period |
| Less than 1 year |
| | 1–3 years |
| | 3–5 years |
| | After 5 years |
| | Total |
|
| (in millions of $) |
3.25% unsecured convertible bonds due 2018 | 63.2 |
| | — |
| | — |
| | — |
| | 63.2 |
|
NOK900 million senior unsecured bonds due 2019 | — |
| | 92.5 |
| | — |
| | — |
| | 92.5 |
|
NOK500 million senior unsecured bonds due 2020 | — |
| | 61.0 |
| | — |
| | — |
| | 61.0 |
|
5.75% unsecured convertible bonds due 2021 | — |
| | — |
| | 225.0 |
| | — |
| | 225.0 |
|
Floating rate long-term debt | 250.6 |
| | 314.8 |
| | 432.9 |
| | 82.9 |
| | 1,081.2 |
|
Floating rate long-term debt in unconsolidated subsidiaries (1) | 97.1 |
| | 114.8 |
| | 236.6 |
| | 337.3 |
| | 785.8 |
|
Total debt repayments | 410.9 |
| | 583.1 |
| | 894.5 |
| | 420.2 |
| | 2,308.7 |
|
Total interest payments (2) | 125.5 |
| | 215.0 |
| | 138.7 |
| | 41.7 |
| | 520.9 |
|
Capital lease obligations | 9.0 |
| | 17.4 |
| | 20.1 |
| | 193.1 |
| | 239.6 |
|
Interest on capital lease obligations | 17.3 |
| | 32.8 |
| | 30.0 |
| | 88.7 |
| | 168.8 |
|
Total contractual cash obligations | 562.7 |
| | 848.3 |
| | 1,083.3 |
| | 743.7 |
| | 3,238.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Payment due by period |
| Less than 1 year | | 1–3 years | | 3–5 years | | After 5 years | | Total |
| (in millions of $) |
| | | | | | | | | |
| | | | | | | | | |
NOK700 million senior unsecured bonds 2024 | 68.4 | | | — | | | — | | | — | | | 68.4 | |
NOK700 million senior unsecured bonds 2025 | — | | | 58.1 | | | — | | | — | | | 58.1 | |
7.25% senior unsecured sustainability-linked bonds due 2026 | — | | | 150.0 | | | — | | | — | | | 150.0 | |
U.S. dollar denominated fixed rate debt due 2026 | 1.5 | | | 147.4 | | | — | | | — | | | 148.9 | |
8.875% senior unsecured sustainability-linked bonds due 2027 | — | | | — | | | 150.0 | | | — | | | 150.0 | |
Floating rate long-term debt | 298.8 | | | 587.8 | | | 107.6 | | | 20.6 | | | 1,014.8 | |
| | | | | | | | | |
Lease debt financing (2) | 64.2 | | | 144.2 | | | 159.9 | | | 205.2 | | | 573.5 | |
Total debt repayments | 432.9 | | | 1,087.5 | | | 417.5 | | | 225.8 | | | 2,163.7 | |
Total interest payments (1) | 98.0 | | | 100.8 | | | 12.2 | | | 0.6 | | | 211.6 | |
Interest on lease debt financing (2) | 19.8 | | | 28.7 | | | 20.0 | | | 41.5 | | | 110.0 | |
Finance lease obligations | 419.3 | | | — | | | — | | | — | | | 419.3 | |
Finance lease obligations in associated companies (3) | 14.1 | | | 14.3 | | | 31.5 | | | 137.2 | | | 197.1 | |
Interest on finance lease liabilities | 14.5 | | | — | | | — | | | — | | | 14.5 | |
Interest on finance lease liabilities in associated companies (3) | 12.6 | | | 11.7 | | | 20.4 | | | 29.7 | | | 74.4 | |
| | | | | | | | | |
| | | | | | | | | |
Commitments under shipbuilding contracts (4) | 77.5 | | | — | | | — | | | — | | | 77.5 | |
Total contractual cash obligations | 1,088.7 | | | 1,243.0 | | | 501.6 | | | 434.8 | | | 3,268.1 | |
| |
(1) | The floating rate long-term debt facilities in the unconsolidated subsidiaries relate to the three drilling units on charter to the Seadrill Charterers. In connection with Seadrill’s Restructuring Plan, the loan facilities have been extended by four years, subject to court approval(1)Interest payments are based on the existing borrowings of the Restructuring Plan. The numbers in the above table assume that the Restructuring Plan is approved by the court. |
| |
(2) | Interest payments are based on the existing borrowings of both fully consolidated and equity-accounted subsidiaries. It is assumed that no further refinancing of existing loans takes place and that there is no repayment on revolving credit facilities. Interest rate swaps have not been included in the calculation. The interest has been calculated using the five year U.S. dollar swap of 2.8276%, the five year NOK swap of 1.9750% and the exchange rate of NOK7.7347 = $1 as of March 21, 2018, plus agreed margins. Interest on fixed rate loans is calculated using the contracted interest rates. |
G. SAFE HARBOR
Forward-looking information discussed in this Item 5 includes assumptions, expectations, projections, intentions and beliefs about future events. These statements are intended as "forward-looking statements." We caution that assumptions, expectations, projections, intentions and beliefs about future events may and often do vary from actual resultsthe calculation. The interest has been calculated using the five-year U.S. dollar swap of 3.92%, the five-year NOK swap of 4.69% and the differences canexchange rate of NOK10.53 = $1.00 as of March 12, 2024, plus agreed margins. Interest on fixed rate loans is calculated using the contracted interest rates.
(2)Interest on lease debt financing relate to interest paid on the sale and leaseback transactions through a Japanese operating lease with call option financing structures for the financing of five container vessels and five car carriers. The transactions did not qualify as a sale and have been recorded as financing arrangements.
(3)This represents 49.9% of the finance lease liabilities and interest on finance lease liabilities within River Box in relation to four container vessels on charter to MSC.
(4)As of December 31, 2023, we had commitments under shipbuilding contracts to construct two newbuilding dual-fuel 7,000 CEU car carriers designed to use liquefied natural gas ("LNG"), totaling to $77.5 million. One of these vessels was delivered from the shipyard in January 2024 with the second vessel expected to be material.delivered during the first half of 2024.
There were no other material contractual commitments as of December 31, 2023.
In addition, the drilling rig, Linus is due to undertake its second SPS, which is currently scheduled to take place during the second quarter of 2024, weather permitting. We expect the cost to be approximately $30.0 million in respect of the SPS and other upgrades.
Our contractual obligations and commitments shown above relate to servicing our debt, funding the equity portion of investments in vessels and funding our working capital requirements. Our funding and treasury activities are conducted within corporate policies to maximize investment returns while maintaining appropriate liquidity for both our short and long-term needs.
Our short-term contractual obligations and commitments relate to servicing our debt and funding working capital requirements. Sources of short-term liquidity include cash balances, short-term investments, available amounts under revolving credit facilities and receipts from our charters. We believe that our cash flow from the charters will be sufficient to fund our anticipated debt service and working capital requirements for the short and medium term.
Our long-term liquidity requirements include funding the equity portion of investments in new vessels and repayment of long-term debt balances. We expect that we will require additional borrowings or issuances of equity in the long term to meet our capital requirements.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
We do not undertake any significant expenditure on research and development, and have no significant interests in patents or licenses.
D. TREND INFORMATION
Vessel prices have fluctuated significantly over the past decade. In 2023, a significant number of newbuilding orders were placed, with an increase in orders compared to 2022. A total of 1,837 ships of 112.7 million dwt were reported contracted in 2023. The increased number of newbuilding orders follows an active 2022, as elevated newbuild prices, fewer available yard berths and continued uncertainty around fueling technology continue to impact contracting activity.
According to industry sources, the tanker market saw firmer levels during 2023, with historically firm average tanker earnings at approximately $40,000 per day in December 2023 or $40,800 per day on average for the full year of 2023. The earnings are similar to 2022 and the highest since 2004. According to industry sources, the elevated tanker market follows an increase in Atlantic exports and an increase in Asian imports due to geopolitical tensions increasing ton-miles with deviations on longer voyages. The tanker market is expected to remain strong despite an increase in newbuild tanker ordering, with an expected 1% fleet growth during 2024. In 2023 crude tanker demand is forecasted to have increased by approximately 5.9% and the crude fleet grew by approximately 3.7%. Product tanker demand increased by approximately 7.5% while the product tanker fleet grew by 2.1%.
Overall, all tanker sectors experienced significant volatility in 2023. Global oil supply is estimated to have grown by an estimated 1.6%, while global oil demand is estimated to have risen by 2.3% in 2023. As of now, the fleet of trading crude tankers is expected to grow by 0.2% during 2024, while crude tanker demand is expected to grow by 3.8% in the same period. Product tanker demand is expected to grow by 6.2% with the product tanker fleet only expected to increase by 1.6% during 2024, providing support for the tanker sector. A series of potential impacts and factors may impact the demand growth. Since the beginning of the first quarter of 2020, the COVID-19 outbreak has had significant negative impacts on oil markets, with lower oil prices as a result of the continued low global oil demand. The outlook remains positive with tanker demand projected to increase following continued Asian demand increase while fleet growth is projected to be less than 1.0% during 2024.
During 2023, the dry bulk fleet is estimated to have increased by 3.0% in total dwt. This compares to a demand increase of 4.4% in terms of tonne miles, following a year with softening rates compared to 2022. Looking ahead, industry sources are estimating that dry bulk global trade will expand by 1.6% during 2024, in terms of tonne-miles. This amounts to an estimated total of 5.5 billion tonnes for the full year. Industry sources indicate that the 4.4% increase in seaborne dry bulk trade (in tonne miles) during 2023 came as a result of stronger global economic conditions with firm Chinese dry bulk demand. The dry bulk newbuilding orderbook stands at 8.7% of the total fleet in terms of capacity. According to industry sources, the market is expected to be strong during 2024, while demand growth is expected to be 1.6% alongside fleet growth of 2.3% as the market is supported by slower speeds and an increased trade haul due to diversions on longer routes given recent geopolitical events. Furthermore, new environmental regulations will support the supply side, however with continued uncertainty.
Our dry bulk vessels on charter to Golden Ocean are subject to long term charters that provide for both a fixed base charter hire and profit sharing payments that apply once Golden Ocean earns average daily rates from our vessels in the market that exceed the fixed base charter rates, calculated and payable on a quarterly basis. If rates for vessels chartered in the spot market increase, our profit sharing revenues, if any, will likewise increase for those vessels operated by Golden Ocean in the spot market. We also have five 57,000 dwt and two 82,000 dwt dry bulk vessels currently employed in the spot market, which will benefit directly from any strengthening in spot charter rates.
The containership charter market corrected during the 2023 after significant pressure on global box trade following a shift in consumer spending, macroeconomic headwinds and impacts from inflation in addition to the easing of logistical disruptions and port congestions. However, according to industry sources, container shipping markets have seen a strengthening market as operators are rerouting vessels away from the Red Sea and Gulf of Aden resulting in an elevation in freight rates along with chartering rates.
At the end of 2021, the Shanghai Containerized Freight Index ("SCFI") surpassed 5,000 points, up from approximately 2,800 points at the start of 2021. At the end of January 2023, the SCFI index stood at 1,030 down 80% from the peak of 5,110 in January 2022, back in line with 2020 levels. At the end of January 2024, following the recent market strengthening the SCFI increased to approximately 2,200 points. According to industry sources, global seaborne container trade is estimated to have increased by 7% year over year during the fourth quarter of 2023, however with full year volumes only marginally up with an approximated increase of 0.3% or 1.6% in TEU-miles. Fleet capacity continued to increase in 2023, and, for the third year in a row, the fleet grew by more than 2 million TEU. According to industry sources, at the end of 2025, the total container vessel fleet will be 20% larger than it was at the start of 2023. Subject to developments in the Red Sea, market sources are anticipating continued pressure for container shipping in the coming years.
The offshore drilling market has experienced significant volatility over the past decade and the oil price (Brent crude spot) has fluctuated between $20 in 2020 and above $100 dollars per barrel in 2022. The market for offshore drilling rigs has been challenging for several years as a result of lower oil prices since 2014 as many offshore exploration activities became inviable at low prices of below $50. As a result, some owners and operators of drilling rigs have experienced financial difficulties for several years, including breaching bank covenants and ending up in financial restructurings.
Recently, increased global demand for oil and gas combined with diminishing global supply as result of natural production depletion of existing oil and gas fields combined with underinvestment in new oil and gas production, has resulted in higher oil prices. A general increase in capital expenditures by oil and gas companies has recently resulted in more exploration and development activity increasing demand for offshore oil and gas drilling rigs. In addition, lower supply of offshore drilling rigs as older rigs have been retired and demolished, has improved the market outlook for these units. As a result, the utilization of offshore drilling rigs has improved since 2020 from 83% to 93% in 2023.
The above overviews of the various sectors in which we operate are based on current market conditions. However, market developments cannot always be predicted and may differ from our current expectations. Please also see "Cautionary Statement Regarding Forward-Looking Statements"“Item 5.A. Operating Results—Market Overview” for additional information with respect to trends observed in this report.the applicable markets, including the disclaimers therein.
E. CRITICAL ACCOUNTING ESTIMATES
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. For a detailed discussion of the accounting policies we apply that are considered to involve a higher degree of judgment in their application refer to Critical Accounting Policies and Estimates showing under “Item 5.A. Operating Results.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information regarding our directors and officers including the Chief Executive Officer and the Chief Financial Officer of our wholly ownedwholly-owned subsidiary Ship FinanceSFL Management AS, who are responsible for overseeing our management.
Under our constituent documents, we are required to have at least one independent director on our Board of Directors whose consent will be required to file for bankruptcy, liquidate or dissolve, merge or sell all or substantially all of our assets.
Certain biographical information about each of our directors and officers is set forth below.
B. COMPENSATION
C. BOARD PRACTICES
In accordance with our Bye-laws, the number of directors shall be such number not less than two as we may by Ordinary Resolution determine from time to time, and each director shall hold office until the next annual general meeting following his election or until his successor is elected. We currently have fivesix directors.
We currently have a Compensation Committee, which is responsible for establishing and reviewing the executive officers' and managements'managements’ compensation and benefits. Paul LeandGary Vogel and Harald ThorsteinJames O'Shaughnessy are members of the Compensation Committee.
There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.service as a director.
D. EMPLOYEES
E. SHARE OWNERSHIP
The beneficial interests of our Directors and officers in our common shares as of March 26, 2018,14, 2024, are as follows:
* Less than one percent.
A. MAJOR SHAREHOLDERS
B. RELATED PARTY TRANSACTIONS
The Company, which was formed in 2003 as a wholly-owned subsidiary of Frontline, was partially spun-off in 2004 and its shares commenced trading on the NYSE in June 2004. The majoritySome of our business continues to be transacted through contractual relationships between us and the following related parties, being companies in which Hemen and companies associated with Hemen have, or had, a significant direct or indirect interest:
We pay Golden Ocean Management a management fee of $7,000 per day per vessel for the eight vessels chartered to a subsidiary of Golden Ocean. We also have eight container vessels and 14 dry bulk carriers operating on time-charters, for which part of the operating management is sub-contracted to Golden Ocean Management. In the year ended December 31, 2017,2023, total management fees paid to Golden Ocean Management amounted to approximately $21.2$20.4 million (2016: $21.3(December 31, 2022: $20.5 million; 2015: $9.0December 31, 2021: $20.8 million).
C. INTERESTS OF EXPERTS AND COUNSEL
Not Applicable.
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 18.
We and our ship-owning subsidiaries are routinely party, as plaintiff or defendant, to claims and lawsuits in various jurisdictions for demurrage, damages, off-hire and other claims and commercial disputes arising from the operation of their vessels, in the ordinary course of business or in connection with acquisition activities. Our rig-owning subsidiaries could also party to claims and commercial disputes in the ordinary course of business. We believe that resolution of such claims will not have a material adverse effect on our operations or financial conditions.
Our Board of Directors adopted a policy in May 2004 in connection with our public listing, whereby we seek to pay a regular quarterly dividend, the amount of which is based on our contracted revenues and growth prospects. Our goal is to increase our quarterly dividend as we grow the business, but the timing and amount of dividends, if any, is at the sole discretion of our Board of Directors and will depend upon our operating results, financial condition, cash requirements, restrictions in terms of financing arrangements and other relevant factors, including Seadrill’s Restructuring plan.factors.
B. SIGNIFICANT CHANGES
None.
Not applicable except for Item 9.A.4. and Item 9.C.