Executive Summary / Key Takeaways

• SFL Corporation is transforming into a resilient maritime infrastructure company, leveraging a diversified fleet and long-term charters with investment-grade counterparties to generate stable cash flows, despite recent market volatility.
• The company is aggressively investing in fleet renewal and technological upgrades, including LNG dual-fuel vessels and efficiency enhancements, to meet stricter environmental regulations and boost operational performance, securing new long-term contracts.
• Recent financial performance reflects a strategic recalibration, with a Q2 2025 dividend adjustment influenced by the idle Hercules drilling rig and asset divestitures, aiming to align distributions with sustainable cash flow generation and free up capital for accretive investments.
• SFL faces competitive pressures from specialized peers and broader market uncertainties, including U.S. trade tariffs, but mitigates these through its diversified portfolio, strong counterparty relationships, and a focus on operational excellence.
• The re-employment of the Hercules rig, resolution of its legal dispute, and successful redeployment of capital from recent vessel sales are critical catalysts for future cash flow and potential dividend upside.

A Maritime Infrastructure Powerhouse Forging Ahead

SFL Corporation Ltd., established in 2003, has undergone a significant strategic evolution, transforming from a company primarily focused on financial, bareboat-type deals in its early years (2004-2014) into a robust maritime infrastructure provider. This strategic pivot, initiated around 2014, shifted SFL towards an operating model centered on long-term charters with strong industrial counterparties such as Maersk, Volkswagen Group (VWAGY), and Vitol. This foundational change has been instrumental in establishing SFL's unique profile, offering diversified exposure across oil transportation, dry bulk shipments, oil products transportation, container transportation, car transportation, and drilling rigs. The company's overarching strategy is to secure predictable, long-term cash flows, which has historically supported consistent shareholder distributions, totaling nearly $2.9 billion over 86 consecutive quarters.

The maritime industry currently faces a complex interplay of global trade dynamics, evolving regulatory landscapes, and technological advancements. Stricter environmental demands from organizations like the IMO and EU are compelling shipping companies to invest heavily in decarbonization and efficiency. Concurrently, a historically low order book across most shipping segments, coupled with reduced shipbuilding capacity and workforce challenges in key shipbuilding nations like Japan and Korea, suggests a tightening supply side. Newbuilds now command delivery timelines stretching to 2029, creating an "interesting spot from a supply perspective" for asset owners like SFL. This environment underscores SFL's strategic focus on modern, high-end assets and long-term charters, positioning it to capitalize on sustained demand while mitigating short-term market volatility.

Technological Edge and Fleet Modernization

SFL's commitment to technological differentiation is a cornerstone of its competitive strategy. The company is actively investing in fleet renewal and advanced technologies to enhance operational efficiency and meet stringent environmental regulations. A key differentiator is its growing fleet of LNG dual-fuel vessels, with 11 such vessels currently in operation or under construction, including five newbuildings. This commitment to alternative fuels positions SFL at the forefront of sustainable shipping, offering charterers reduced emissions and potentially lower operating costs in the long run.

Beyond alternative fuels, SFL implements comprehensive efficiency upgrades across its existing fleet. These initiatives include cargo capacity increases, energy-saving devices, propeller enhancements, and hull modifications. For instance, upgrades on certain container vessels are calculated to achieve approximately a 20% efficiency improvement, significantly reducing the effective fuel cost per box for charterers. These enhancements not only improve the operational performance and fuel consumption profile of the fleet but also strengthen SFL's competitive moat by offering tangible benefits to its clients. The company's R&D initiatives are focused on continuous improvement, with ongoing capital expenditures of approximately $25 million dedicated to efficiency upgrades on large container vessels and the Hercules rig. These upgrades, particularly for container ships, are often 100% covered by rate increases on charters, demonstrating the value proposition to clients and SFL's ability to monetize its technological investments.

Diversified Operations and Recent Performance

SFL's operational diversification across various asset classes provides a robust revenue base, though recent performance has been impacted by strategic adjustments and market factors. For the six months ended June 30, 2025, total operating revenues decreased by 9.70% compared to the same period in 2024. This decline was primarily driven by a 49.5% decrease in drilling contract revenues due to the Hercules rig being warm stacked, and a significant 73.8% reduction in profit sharing income, particularly from the cessation of the Golden Ocean (GOGL) Capesize profit share arrangement. Conversely, time charter revenues saw a 3% increase, propelled by the delivery of new chemical, product, and car carriers, while voyage charter and pool revenues surged by 62% with the addition of the SFL Aruba chemical tanker.

The second quarter of 2025 saw gross charter hire of approximately $194 million, with container vessels contributing around $82 million, tankers $41 million, dry bulk vessels $19 million, and drilling rigs $26 million. However, Q2 2025 results were notably impacted by higher dry docking activity, with approximately $16 million in expenses compared to a normalized average of $5 million per quarter. These costs are expected to taper down significantly in Q3 and Q4 2025. Vessel and rig operating expenses increased by $15.50 million in H1 2025, largely due to these dry dockings and new vessel acquisitions. Depreciation also rose by $6.80 million, reflecting the expanded and upgraded fleet.

Strategic Initiatives and Capital Allocation

SFL's strategic initiatives are centered on fleet renewal, capital optimization, and strengthening its long-term charter backlog. In Q2 2025, the company announced new five-year charters for three 9,500 TEU container vessels with Maersk, adding $225 million to its backlog from 2026 onwards. These vessels will also undergo cargo and fuel efficiency upgrades, with costs largely compensated by the charterer. The company's fleet reduction in Q2 2025, involving the disposal of 20 older vessels, including end-of-lease sales and fleet renewal, reduced the average fleet age by about two years. This divestment strategy, which included the sale of eight Capesize bulkers to Golden Ocean, aims to free up capital for new, accretive investments.

Capital allocation is guided by maximizing long-term distribution capacity per share. In January 2025, SFL issued $150 million in senior unsecured sustainability-linked bonds, earmarked for new investments and general corporate purposes. The company also repurchased 1.25 million shares for $10 million in H1 2025 under its $100 million Share Repurchase Program, demonstrating a commitment to shareholder returns when share prices are attractive. Remaining capital expenditures include approximately $25 million for efficiency upgrades and $850 million for five container newbuildings expected for delivery in 2028, which are anticipated to be funded through pre- and post-delivery financing.

Competitive Positioning and Market Dynamics

SFL operates in a competitive landscape alongside major players like Frontline Ltd. (FRO), Teekay Corporation (TK), and Scorpio Tankers Inc. (STNG). SFL's primary competitive advantage lies in its diversified fleet and long-term chartering strategy. This diversification provides a more balanced risk profile compared to Frontline's oil-focused tanker operations or Scorpio Tankers' product-focused strategy, mitigating exposure to single-segment volatility. SFL's long-term charters offer greater revenue predictability and stability, contrasting with the higher spot market exposure of some competitors. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, SFL's strong performance in securing long-term contracts with investment-grade counterparties suggests a robust market position.

SFL's operational execution, particularly its global network and technical management capabilities, allows it to offer integrated solutions across various shipping segments. This differentiates it from more specialized competitors. However, SFL may face challenges in matching the specialized efficiency or rapid growth rates seen in some of its peers within their core segments. For instance, Frontline often demonstrates stronger revenue growth in volatile oil markets, and Scorpio Tankers is known for its cost-efficient operations and modern, fuel-efficient product tanker fleet. SFL's TTM Gross Profit Margin of 29.02% and Net Profit Margin of 4.03% indicate steady profitability, but comparisons with competitors like Frontline (P/E Ratio of 10.70), Teekay (P/E Ratio of 5.88), and Scorpio Tankers (P/E Ratio of 4.32) suggest that SFL's valuation metrics reflect a different risk-reward profile, potentially due to its diversified, long-term charter model.

The company's customer and supplier dynamics are strong, with two-thirds of its $4.2 billion charter backlog tied to investment-grade counterparties. This provides significant cash flow visibility and resilience. However, SFL acknowledges risks from U.S. and international trade policies, including tariffs. The Trump administration's proposed fees on Chinese-built and foreign-built car carriers docking at U.S. ports could affect approximately 27 of SFL's vessels, potentially incurring about $26 million in port fees based on 2024 trading patterns. SFL expects these fees to be passed on to charterers, leveraging its strong counterparty relationships.

Outlook, Guidance, and Risks

SFL's outlook is shaped by its strategic focus on long-term stability and disciplined capital allocation. The company's Board adjusted the Q2 2025 dividend to $0.20 per share, a prudent decision reflecting the prolonged idleness of the Hercules drilling rig and recent asset divestitures. Management explicitly stated that the dividend adjustment was to ensure distributions were not "effectively subsidized" by the rig being out of service, aiming for a long-term sustainable level based on net cash flow from operational assets. The Hercules rig, warm stacked at an estimated cost of $60,000-$80,000 per day, continues to be a drag on near-term financials, though management remains optimistic about securing new employment, potentially in 2026, particularly in the North Sea and West Africa. The company is also undertaking upgrades to the rig to enhance its market attractiveness. The legal dispute with Seadrill (SDRL) regarding the Hercules rig's redelivery condition resulted in a favorable Oslo District Court ruling for SFL, awarding approximately $48 million in compensation. While this is subject to appeal, it represents a potential future cash inflow not yet recognized on the balance sheet.

Dry docking costs, which were elevated in H1 2025, are expected to normalize to approximately $3.5 million in Q3 and $1-2 million in Q4 2025. Despite a large industry-wide container ship newbuild backlog, SFL does not anticipate a major impact on its profitability in 2026-2027, as its container fleet is largely chartered out until 2029-2030, and demand for quality assets remains strong. Key risks include ongoing market volatility, geopolitical instability, and the potential for delays in securing new contracts for the Hercules rig.

Conclusion

SFL Corporation stands as a compelling investment in the maritime infrastructure space, distinguished by its diversified fleet, a robust strategy of long-term charters with investment-grade clients, and a proactive approach to fleet modernization through technological innovation. While the recent dividend adjustment and the idle Hercules rig present near-term challenges, these actions underscore a prudent management philosophy focused on long-term financial health and sustainable shareholder returns. The company's strategic divestment of older assets and continuous investment in fuel-efficient technologies, including LNG dual-fuel vessels and comprehensive efficiency upgrades, strengthens its competitive position and aligns with evolving environmental mandates.

Looking ahead, the successful re-employment of the Hercules rig and the effective redeployment of capital from recent vessel sales are critical catalysts for enhancing future cash flow and potentially increasing shareholder distributions. SFL's established competitive advantages in diversification and stable cash flow generation, coupled with its ability to adapt to market shifts and leverage strong counterparty relationships, position it favorably within a dynamic global shipping landscape. Investors should closely monitor the operational status of the Hercules and the company's progress in securing new, accretive investments as key indicators of its continued growth and value creation.