SFL Q2 2026 Earnings Call - Spot Tanker Windfalls and Strategic Car Carrier Expansion

Espen Gjøsund, Vice President of Investor Relations, SFL: Welcome to SFL second quarter 2026 conference call. My name is Espen Gjøsund, and I am Vice President of Investor Relations in SFL. Our CEO, Ole Hjertaker, will start the call with an overview of the second quarter highlights. Then our Chief Operating Officer, Trym Sjølie, will comment on vessel performance matters, followed by our CFO, Aksel Olesen, will take us through the financials. The conference call will be concluded by opening up for questions, and I will explain the procedure to do so prior to the Q&A session. Before we begin our presentation, I would like to note that this conference call will contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements. Please note that forward-looking statements are not guarantees of future performance.

These statements are based on our current plans and expectations and are inherently subject to risks and uncertainties that could cause future activities and results of operations to be materially different from those reported in the forward-looking statements. Important factors that could cause actual results to differ include, but not limited to, conditions in the shipping, offshore, and credit markets. You should therefore not place undue reliance on these forward-looking statements. Please refer to our filings within the Securities and Exchange Commission for a more detailed discussion of risks and uncertainties, which may have a direct bearing on operating results and our financial condition. Then I will leave the word over to our CEO, Ole Hjertaker, with highlights for the second quarter.

Ole Hjertaker, CEO, SFL: Thank you, Espen. We are pleased to celebrate our 90th consecutive dividend and $3 billion in accumulated dividend payouts today. Over the years, we have firmly positioned SFL as a maritime infrastructure company with a diversified high-quality fleet, and we keep adding new business. For the second quarter, we reported revenues of $201 million and an EBITDA equivalent cash flow of $130 million, which is 20% higher than the first quarter. Over the past 12 months, EBITDA amounts to $461 million, reflecting the continued strength and stability in our operations. Net income in the quarter was $34 million, or $0.25 per share, and the dividend declared is $0.22 per share. In aggregate, we have now returned more than $32 per share in dividends since 2004, not missing a single quarter on the way.

We have a robust charter backlog of $3.8 billion with a very strong counterparty profile, where two-thirds of the backlog is to customers with investment credit rating. During the quarter, we agreed to charter our older car carriers, SFL Conductor and SFL Composer, on new three-year charters back to back with the current Volkswagen charters. We are not at liberty to disclose the name of our charterer, but it is linked to a leading global liner company based in Asia. Despite being 20 years old, the vessels are maintained to a high standard, which makes them attractive in the chartering market also for premium customers. The new charter adds $83 million to our charter backlog. We have also recently ordered four dual-fuel 7,000 CEU capacity car carriers with delivery into 2029. The aggregate yard cost is approximately $360 million, with a majority payable closer to delivery.

Two of the vessels have already been chartered out on 5 plus 5-year charters from delivery to a major Asia based car manufacturer. The first fixed 5-year period adds $150 million in backlog, which could increase to $300 million if the optional period is declared. The other two new buildings are open for charter, and we are in some discussions already. In the past, we have been reluctant to order vessels without charters attached, but we believe the dynamics in the car carrier market remain attractive, with most shipyards sold out well into 2030. We therefore expect to find charters for these as well in due course. During the second and third quarter, we raised an aggregate of $100 million in equity in the market utilizing our at the market or ATM and dividend reinvestment plan or DRIP programs.

A total of 8.8 million shares has been issued, and we actually managed to raise the capital at a premium to the volume weighted average price or VWAP in this period. With good liquidity and a rising share price, we saw this as an opportunity to add investment capacity with limited dilution compared to an ordinary share offering, which normally carries significant discounts and fees. We have already deployed some of the capital into new projects, but for the avoidance of doubt, we have no plans to issue additional shares in the foreseeable future. This last quarter, we have also had significant benefits of having two modern Suezmax crude oil tankers employed in a booming spot market. These vessels were previously on a long-term charter at around $30,000 per day until December last year.

This year, the market has been on fire, and in the first quarter we earned an average rate of $54,000 per day and then up to $133,000 per day in the second quarter, which is more than $100,000 per day per vessel higher than the charter rate last year. So far into the third quarter, we have covered 63% of the vessel days at an average charter rate of around $93,000 per day. But please note that the charter hire for vessels in the spot market is accounted for on a load to discharge basis pursuant to the US GAAP, where we only recognize revenues when there is cargo on board the vessels.

Aksel Olesen, Chief Financial Officer, SFL: The final reported number will depend on trading towards the end of the quarter, including ballast days. While we are enjoying phenomenal cash flow from these vessels right now, we will look for new long-term charter opportunities for these vessels in due course. The two dry bulk vessels in the spot market also had increased revenues in the second quarter, but this is a very different market with less volatility compared to the large crude oil tankers. The difference in revenue is only marginal from an aggregate perspective. With that, I will now hand the call over to our Chief Operating Officer, Trym Sjølie.

Trym Sjølie, Chief Operating Officer, SFL: Thank you, Ole. We have a diversified fleet of assets chartered out to first-class customers on mostly long-term charters, and the majority of our customer base is large industrial end users. Following the car carrier new building orders placed during the quarter, our portfolio now comprises 61 maritime assets, including vessels, rigs, and contracted new buildings. The fleet is made up of 30 container ships, 16 tankers, 11 car carriers, two dry bulk vessels, and two drilling rigs. Our backlog from owned and managed shipping assets stands at approximately $3.8 billion, up from $3.7 billion at the end of the first quarter, reflecting the new car carrier charters and new building commitments added in the period. The backlog is well diversified across segments. Container vessels account for close to 70% of contracted revenue, car carriers around 15%, our energy assets around 10%, and tankers the balance.

On duration, the weighted average remaining charter term is 7.1 years on the container fleet, 5.9 years on the car carriers, and 3.5 years on the tankers. This gives us long visibility on the core of the portfolio. Around two-thirds, or 65%, of our contracted revenue is with investment-grade counterparties, which gives us a high degree of confidence in the earnings visibility of this portfolio, even in a volatile market environment. I would like to spend a moment on the car carrier segment, where we have added meaningful scale and visibility during the quarter. First, we agreed three-year time charter contracts for two of our existing PCTC vessels with new charters, adding firm backlog of approximately $83 million. Second, we have ordered four 7,000 CEU LNG dual-fuel PCTC new buildings with deliveries scheduled for 2029.

As Ole just explained, two of these vessels have already secured long-term charters with the leading Asian car manufacturers, and we are working on employment for the remaining two. Taken together, these transactions added around $233 million of firm backlog in the quarter. Our total car carrier charter backlog now stands at $578 million, with a weighted average firm charter duration of 5.9 years. This reflects our longstanding strategy in the car carrier segment, pairing modern fuel-efficient tonnage with strong industrial counterparties on long-term contracts. Our existing charters with Volkswagen and K Line extend well into the next decade, and the new orders and charters further strengthen both the earnings profile and environmental credentials of this fleet.

Our charter backlog is mainly derived from time charter contracts, and with the exception of four container ships on variable leases, the rest of the fleet is on time charter or operating in the short term or spot market. Gross charter hire from our fleet, including profit share, was around $199 million in the second quarter, and we had a total of approximately 4,620 operating days across the fleet. Utilization was strong across all the shipping segments. Container vessels ran at 99.3%, car carriers at 100%, tankers at 99.8%, and dry bulk at 99.4%. The energy segment ran at 50%. This reflects the Linus drilling rig operating through the quarter while Hercules remains warm stacked ahead of its upcoming contract. OPEX for the shipping fleet came in at about $37 million in the quarter, of which $2.2 million is dry docking cost.

Two of our large container vessels completed their special survey dry dockings and upgrade works during the quarter. For reference, a typical cost for a 10-year special survey dry docking on a big container vessel like this is around $2.5 million. I will now give the word over to our CFO, Aksel Olesen, who will take us through the financial highlights of the quarter.

Aksel Olesen, Chief Financial Officer, SFL: Thank you, Trym. Turning now to the cash flow slide. I find this valuable because it gives investors a clear view of the underlying operating performance, separate from the effects of non-cash and non-recurring items in the GAAP results. Before I begin, I would like to flag the required disclosure. This cash flow presentation is a non-GAAP measure prepared as a management tool to assess underlying performance. It is not prepared in accordance with US GAAP, and it should not be considered in isolation or as a substitute for any GAAP measure. A full reconciliation of the most direct comparable GAAP figures is included in our earnings release filed this morning. The presentation also excludes certain non-cash charges and items we consider non-recurring, which can at times obscure the underlying run rate of the business. With that context, let me take you through the performance of the fleet.

In total, we generated approximately $199 million in gross charter hire during the quarter, a significant increase compared to the previous quarter. Of that total, approximately $83 million was from our container fleet, which remained our largest contributor by charter hire. Turning to car carriers. The fleet generated approximately $27 million in gross charter hire during the quarter, a slight improvement from the first quarter. In tankers, the fleet generated approximately $62 million in gross charter hire, up from approximately $46 million in the prior quarter, a significant quarter-over-quarter improvement driven by our two Suezmax vessels trading in spot markets. Under US GAAP, revenues for spot traded vessels are recorded on a load to discharge basis, whereby revenue is allocated only to days when cargo is on board.

During the second quarter, our Suezmax tankers achieved an average daily spot time charter equivalent, or TCE per vessel, for approximately $133,000 compared to $54,000 in the first quarter. Our two Handymax product vessels trading in short-term market achieved average daily spot TCE per vessel of approximately $16,100 compared to $10,700 in the first quarter. As a result, in the second quarter, we recorded revenue of approximately $3 million compared to $2 million in the prior quarter. Moving to energy. Revenue from our energy assets was approximately $24 million for the quarter. This was driven by the Linus drilling rig, which remains on a long-term contract with ConocoPhillips running through May 2029, providing substantial contracted cash flow visibility. The Hercules is currently preparing its upcoming contract in Canada and is expected to begin contributing revenue in the first half of 2027.

On the cost side, net operating and G&A expenses for the quarter came in at approximately $69 million, broadly in line with the prior quarter. Putting it all together, adjusted EBITDA for the quarter was approximately $130 million compared to approximately $108 million in the first quarter. Turning now to results under US GAAP. For the quarter, we reported total operating revenues of approximately $201 million, compared to approximately $174.5 million in Q1. Operating expenses were approximately $69 million, in line with the previous quarter. I would like to clearly identify the non-recurring and those non-cash items that affected the GAAP net results this quarter so that investors can appropriately adjust their models. Mark-to-market gain on hedging derivatives of $3 million. Mark-to-market gain on equity investments of $1 million.

After accounting for these items, we report a GAAP net profit of approximately $34 million for the quarter or $0.25 per share. This compares to the net profit of $26 million or $0.20 per share in Q1. Turning to the balance sheet. At quarter end, we held cash and cash equivalents of approximately $113 million, with an additional $160 million available under undrawn credit facilities, giving us a total available liquidity in excess of $270 million. In April, we completed our $75 million tap issue of our 2030 U.S. dollar senior unsecured bonds at 103.5, implying a yield of approximately 6.8%, an outcome we believe reflects the bond market’s confidence in SFL’s credit profile, and used part of the proceeds together with cash on the balance sheet to redeem SFL’s $150 million bond due in May 2026 at maturity.

Furthermore, we raised $63 million in new equity through ATM and reprograms, with a further $37 million raised subsequently at the quarter end. On newbuildings, the company has approximately $1.2 billion of remaining capital expenditures across five container vessels and four PCTC newbuildings, seven of which have long-term charters in place. Finally, our book equity ratio as of quarter end stood at approximately 29%. Before I hand the call back to Espen, let me close with a few summary points. The board has declared our 90th consecutive quarterly cash dividend of $0.22 per share. At current prices, that represents an annualized dividend yield of approximately 7%. Our charter backlog now stands at approximately $3.8 billion. Approximately two-thirds of that backlog is with customers carrying investment-grade credit ratings. That combination, scale, duration, and counterparty quality provides exceptional cash flow visibility and gives us the confidence to continue investing in growth.

With strong balance sheets, ample liquidity, and disciplined capital allocation, we remain well positioned to pursue accretive investment opportunities. The maritime asset market continues to evolve, and we believe SFL is uniquely positioned through a long-term charter model, diversified fleet, and access to capital to continue generating value for shareholders. Thank you all for joining us this morning. I will now hand the call back to Espen in order to open line for questions.

Espen Gjøsund, Vice President of Investor Relations, SFL: Thank you, Aksel. We will now open for a Q&A session. For those of you who are following this presentation through Zoom, please use the raise hand function under reactions in the toolbar to ask a question. When your name’s called out, please unmute your speaker to ask your question. Thank you. We will have our first question from Shariff. Please unmute your speaker to ask your question.

Shariff, Analyst: Hey, thanks, and good afternoon. Thanks for taking my questions. Starting with the car carrier market, could you just shed a little bit of light on what it is about that market that’s giving you confidence to order new builds on spec, especially because demand has been so strong across the shipping space?

Trym Sjølie, Chief Operating Officer, SFL: Yes, maybe I can answer that, Ole. The big story on the car carrier market is the growth of the China volumes. It’s been growing consistently over many years, while the investment in car carrier vessels, although strong in the past few years, there have been many years with low investment volume. That means there will be a lot of older vessels that will have to be phased out at some point. When we look at the balance or the demand for ships going forward, we see there’s sort of a gap between supply and demand growing from 2029, 2030, and onwards, even with the strong ordering activity there has been lately.

Shariff, Analyst: Got it. I just want to pivot over to the rigs for a second. Given persistent disruptions in the Middle East, I’m wondering if that’s changed the conversation you’re having with charterers around the term of work for the Hercules, and maybe also if you could just remind us how long the extension options for the Hercules run.

Ole Hjertaker, CEO, SFL: Yes. The Hercules is in Norway at the moment. It is being prepared for Canada operations. It will move in February. We are doing some upgrades on the rig, including removal or replacing some obsolete equipment, et cetera, so that rig will be ready to go and can work for a long time once it is active. The program is 400 days fixed with various options that could stretch it for roughly a similar additional period in total if all options are being exercised. We do see an underlying strengthening in the oil exploration and production market. Remember that this is a slow process where all companies typically work on longer schedules, so it is not like they turn around quickly and do a lot of extra activity.

We see now in several markets that they are refocusing, looking at how they should invest more, including oil exploration and build out of existing fields. So we remain positive on the long-term prospects for the drilling sector. Also, if you look at that specific unit, it is a high-end, harsh environment drilling unit. To build a new one would probably cost you north of $1 billion. The charter rates we see does not, at current level, justify building a new one. So there is a significant uplift potential in the market before we expect to see much new supply coming in. So our, of course, objective is to have that rig out working and keep it working, but we cannot make any promises on how the market will develop and what kind of charter rate we will have in the long run.

We really look forward to having the rig out producing cash flows again.

Shariff, Analyst: That is very helpful. Thank you both.

Ole Hjertaker, CEO, SFL: Thank you.

Espen Gjøsund, Vice President of Investor Relations, SFL: Thank you. We will take our next question from Mr. Climent Molins. Please unmute your speaker to ask your question.

Climent Molins, Analyst: Hi. Thank you for taking my questions. I wanted to start by following up on the car carrier newbuilds. You went for LNG dual-fuel propulsion on those assets. Could you talk a bit about the reasoning for that? Is this something your customers generally ask for, or do you expect the economics from dual-fuel fuels to justify the higher price tag?

Trym Sjølie, Chief Operating Officer, SFL: It is clear that on, first off, nobody is building car carriers with conventional fuel only today. The option you really have is whether to do LNG, methanol, or ammonia dual-fuel vessels. What is maybe unique in the car carrier space is that the customers, i.e., the car manufacturers and their car buyers ultimately, demand or expect green transportation. We happen to believe that LNG is the best fuel at the moment based on availability and technical usability. The ships that we have already that are running on LNG dual-fuel, they are actually running exclusively on LNG. Typically, in the case of Volkswagen and K Line, which then transport on behalf of the Volkswagen and Toyota manufacturers mainly, they are running all their dual-fuel vessels on the dual-fuel, which is kind of the point.

We are very confident that this is the right way to go. There are other fuel types available, but for us here, we believe in LNG for the moment, and that is the best intermediate solution for reducing emissions over time.

Ole Hjertaker, CEO, SFL: Then maybe adding in on that, what we have seen, and this is more a general observation in the market, when you have transportation of a product that is, I would say, close to finished, and in close proximity to the end user, if you can call it that, like vehicles and also finished goods on certain goods that are transported on container ships, you see a distinct willingness to pay for the, call it the greener fuels, the fuels with less emissions despite the higher cost. If you look at more raw materials, be it dry bulk or on the tanker side, we see the opposite. There, it is more focused on is there an arbitrage? Do we save money on buying the alternative fuel? If not, there is very limited willingness to pay up even from larger oil companies, industrial manufacturers.

They typically don’t focus so much on that on the raw material side. But we have now a number of car carriers, both on the water and to be constructed. We have five large container ships with LNG dual-fuel, and we have two chemical carriers. So we have now a significant portion of the fleet with alternative fuels and we think that is the way to go. Having a balanced fleet, modern, future proof.

Climent Molins, Analyst: That was a comprehensive answer, so thanks for the call. I also wanted to ask a bit about your overall backlog. How many of your contracts have purchase options on behalf of the charter? And should we expect any to be exercised soon?

Ole Hjertaker, CEO, SFL: Well, we have, for instance, some tankers that are soon through with their initial five-year charter period, where there are extension options that are coming up later in the year and into next year. As an example, we have seven tankers, three Suezmax and four LR2s. All those options are, compared to the current spot market, well in the money. The charter market is much higher than the charter rates that we have agreed in the optional period. Remember, the optional periods were based and were started or structured when the price level and the values of these assets and our acquisition cost was much, much lower than the prevailing market. That is our charter’s options to potentially exercise that and keep those vessels longer.

But what we have structured, which could be potentially very interesting for us with some of these charters, we have structured a profit split type functionality where we can agree to sell the vessels in the market instead of extending the charter period. Then with a profit share mechanism where a charterer will get a part of that profit and we will get a part of that profit. In the tanker market, as you’ve seen with our spot traded Suezmax tankers, it’s really on fire, both on the charter rate side, but also on the asset value side. So, depending on our charterer’s choice of option, it really can really go two ways. Either we continue with the vessels on the long-term charters producing good cash flows for us, or we could get a windfall of a profit if they would like to go that way.

For us, it’s really two good options. But one of the options would be to get a lot of cash in our hands and book a big gain if we get there. If not, we will keep the vessels longer and hopefully have a very good trading life long term.

Climent Molins, Analyst: Makes sense. That’s everything for me. I’ll turn it over. Thank you for taking my questions.

Espen Gjøsund, Vice President of Investor Relations, SFL: Okay. As there are no further questions from the audience, I would like to thank everyone for participating in this conference call. If you have any follow-up questions for the management, there are contact details in the press release, or you can get in touch with us through the contact pages on our webpage, sflcorp.com. Thank you everyone for tuning in.