FLEX LNG Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 16, 2023

There are 2 speakers on the call.

Operator

Both according to schedule and budget. During Q2, we will do another 2 dockings. So in total, 3 dry dockings for Q2 and this result in revenues for this quarter being guided at $85,000,000 to $90,000,000 Once we have completed the dry docking program in June, our quarterly revenues will pick up in Q3 and Q4 with quarterly revenues of around CHF 90,000,000 to CHF 100,000,000 for these two quarters. So we are also reaffirming our revenue guidance of SEK 370,000,000 for the year, which should translate into an expected EBITDA of around $290,000,000 to $295,000,000 So with a very strong financial position and minimum 57 years of contractual backlog, our Board has decided to once again pay out our quarterly ordinary dividend of $0.75 per share. During the last 12 months, we have thus paid out $3.75 per share in dividends and this has given our investors an attractive yield of around 11%.

Operator

So that's the highlight. Let's continue. So as I mentioned, we are reaffirming our revenue guidance of $370,000,000 for the full year 2023. As you can see here in the graph, Q1 revenues this year was significantly stronger than last year as we had limit spot exposure to 1 ship on variable higher time charter and actually spot market was pretty firm during Q1. For Q2, as I mentioned, we have 3 ships which will be doing dry docking during this quarter.

Operator

And Q2 is also usually the softer spot market and this will affect the one ship we have on variable TC. Once we are done with June getting into Q3 and Q4, all the Stirling ships will be in operations. And usually, we will see the seasonal uptick in charter rates during Q3 and Q4, which is also evident from the forward prices, and those revenues will grow to closer to $100,000,000 for those quarters. So as I mentioned, dry docking, we have been doing our first dry docking, the 2 first ships, Flex Enterprise and Endeavor was delivered early 2018 and now we're now due for the 5 year special survey. Flex Enterprise carried out this in March, while our sister ships, Flexendeavor, carried out a 5 year special docking in April, both in Singapore.

Operator

In our last presentation, we guided that in total, these 4 dry dockings would take out 80 to 90 days of operations of 20 to 22.5 days. On average, we have managed to do this within 18 days. So we are slightly below time and we are also on the low side of the budget. CapEx in total for each ship, dollars 4,500,000 versus guided €4,500,000 to €5,000,000 So in Q2, as I mentioned, Ranger and Rainbow will also be docked, and these are to be completed within June, and the ships will then be in operation for the full Q3 and Q4. So as I mentioned, high contract coverage, 57 years of minimum contractual backlog.

Operator

This slide is the same as we had in our Q4 presentation. During last year, we did extend the contractual backlog on several ships, as you can see here with Rainbow being an extended 10 years, Endeavour, Vigilant, Amber, Enterprise and Ranger. All these ships were extended for longer durations and the first fully open ships we have today is FlexRanger early parts of 2027 and FlexConstellation, middle 2027 if the charter is electing to extend her for the 3 years, which they have an option to do. So I think in terms of these durations, we have a good coverage now in near term when export growth is to be expected to be muted and then we have open ships from 20 27 once a lot of new LNG is coming on stream and where we are also competing against new buildings at very high prices as I will come back to in the market section of the presentation. And once again, our dividend decision factors.

Operator

As you can see here, for this quarter, we are paying out the €0.75 of ordinary dividend per share. We have paid out 2 special dividends the last year, dollars 0.50 for Q2, dollars 0.25 for Q4. So in total the last 12 months we have paid out $3.75 of dividend, which gives a yield of 11%, 12% depending on where the share price is. So we think this should give our investors an attractive yield. All the parameters here are green.

Operator

We have good earnings. Market outlook is good. We have this big contractual coverage. Liquidity at SEK475,000,000 is super strong and then we don't really have any debt maturities before 2028 as the earliest. Other considerations right now, I think most people are a bit focused on the aggressive Fed, ramping up interest rate on the short term side, where we do have a very inverted yield curve.

Operator

And Krot will discuss a bit what kind of opportunities this has given us in the swap market. So with that, SKLUTS, I hand it over to you. Tecken.

Speaker 1

Thank you, Usdan. And as already mentioned, revenues for the quarter came in at 92 NOK500 1,000,000 that gives us a time charter earnings average for the fleet of close to NOK80,200. OpEx, another strong quarter where we maintained OpEx control, where we have OpEx per day of SEK 13,400. If we look more into the details, on the revenues, we have SEK 5,500,000 lower than last quarter, and that is driven by lower seasonal earnings on the variable hire contract and the off hire days related to dry docking of the Flex Enterprise. Then we have some more non cash item on the income statement.

Speaker 1

The net loss on derivatives is SEK2.8 million. As you can see in the notes on the side, it's SEK7.8 million in unrealized mark to market loss from the derivatives. And then we have realized gains of SEK5 1,000,000 from the swap portfolio, which is sort of our carry cost. With the completion of the balance sheet optimization program, we have exit cost of our debt. It's SEK8.8 million of write off of debt issuance cost and then a termination fee of SEK1.4 million.

Speaker 1

That gives us a net income for the quarter of SEK 16,500,000 or earnings per share of SEK0.31 adjusted for the non cash items, we have adjusted net income of SEK 35,200,000 and then resulting in adjusted earnings per share of SEK0.66 per share. So let's have a look at the details on the adjustments that we have made to arrive at the adjusted net income. If we look at the quarter on quarter differences on the net income, operating income is $6,000,000 lower driven by the off hire in connection with the dry docking of Flex enterprise and the seasonal lower revenues under the variable higher contract for the Flex Artemis. Quarter on quarter, the depreciation cost is SEK8.5 million, which is basically driven by the completion of the refinancing under the balance sheet optimization program. And then derivatives where we had a mark to market loss were here on a quarter on quarter basis, SEK7.7 million.

Speaker 1

With the smaller order effects, we arrive at a net income of SEK 16,500,000. And when we then reconcile to adjusted net income, we add back the non cash items, which are the debt issuance cost write off in total together with the termination fee of SEK10.2 million. And then we have the unrealized market loss on the derivatives of SEK7.9 million and then a smaller FX effect on our NOK portfolio. So in total, we adjust them back and arrive at an adjusted net income of NOK 35,200,000,000. The balance sheet remains robust and clean with an all time high cash position of 4 SEK75 1,000,000 and we have an equity of SEK871 1,000,000.

Speaker 1

That gives us an equity ratio of 31%. If we look at cash movements for the quarter, we increased the cash balance by SEK143 1,000,000, which is mainly driven by the completion of the balance sheet optimization program, where we have a net proceed of SEK 196,000,000 and then net of the dividends paid last quarter of SEK 54,000,000, we end up with the all time high of SEK475. During the quarter, we have has been active with our hedging portfolio. We have utilized the market when the interest rates have been high to lock in the market value on some of our swaps. Here we have a for those who recall, we had a 2.5 year $181,000,000 swap at where we are paying fixed 0.9%.

Speaker 1

When the market rate was high at here at 4.8, we locked in that market value by doing a so called mirror swap where we will receive 4.8% fixed and pay the 0.9% to the bank. And that locks in SEK 15,000,000 of market value, which will be distributed back to us over the remaining period of that swap. We have also increased our hedging portfolio. When the short term interest rate dropped, in total, we increased with $260,000,000 and then we also added SEK 50,000,000 of 10 year swaps. That gives us a total swap portfolio of SEK820 1,000,000 and as you see, at very attractive rates.

Speaker 1

And in combination with the fixed rate elements of our leases of in total here, NOK205 1,000,000, we have a net hedge ratio of 62% and then remaining there around 60% to 65% for the coming quarters. So this is net of the $400,000,000 RCF capacity we have. So by increasing the RCF capacity, we have also effectively increased our hedge ratio. So if we look at our financings, we completed refinancing exercise last quarter with in total 6 vessels. That gives us now a debt funding portfolio where about 50% are long term leases and then SEK441,000,000 of amortized term loans and then we have the RCF of SEK400 1,000,000 which is bullet for the full tenure of the loans.

Speaker 1

And by that, we have pushed out the debt maturity profile. So as already mentioned by Aesten, first maturity is in 2028. And if we utilize an extension option at no cost for 2 of our leases, the latest one are then to be refinanced in 2,035. So with that, I hand it back to Orest

Operator

then. Okay. Okay. Let's have a look at the market. LNG export change in the first 4 months of the year, the period January to end of April, we saw about 5% growth in the market.

Operator

And for the first time in a long time, actually the biggest driver was not America because of the outage on the Freeport export terminal in U. S. So the growth came from Qatar and Australia, the 2 big other players in the LNG export market and then actually Norway as well where we had the Hammerfest plant running now for the full quarter. Other countries contributed by about 2,500,000 tons. On the import side, we do see the same trend we saw last year where Europe is really gobbling up spot cargoes in order to replace the lost volumes from Russian pipeline gas.

Operator

So and in Asia, it's been a bit slow start for China, growth was flat during January February. And then we did see that growth in the Chinese market to fire up from March and onwards as they have been lessening the or basically scapping the COVID policies they've had in place for some time now. If we look at the gas prices, it's been a very volatile ride. Last during the summer of COVID, European gas prices was as low as $1 per 1,000,000 BTU, translating into, let's call it, dollars 6 per barrel of oil. After the Russian invasion North Ukraine, really, we saw a big rally in global LNG prices where Europe bought up a lot of spot cargoes, and we saw a peak of European gas prices at about $100 So we had a run from $1 to $100 on the gas prices, this equates to about $600 per 1,000,000 for a barrel of oil.

Operator

But now we have had a big slump in gas prices, we have had a mild winter here in Europe and we have also seen the high prices have really incentivized people to cut down consumption and prices have now balanced down to around $10,000,000 $11 per 1,000,000 BTU where actually LNG becomes competitive towards oil. Basically, we are now being traded at, let's call it, $60 per barrel of oil equivalent. And that is also feeding up demand from Asia where we've seen more interest now to buy LNG in the spot market as prices have come down. Henry Hub is basically flat lined. It's also been quite volatile, but now the prices have really come down in America, which means that it's still with $10 $11 for the spot prices.

Operator

It's immensely profitable to sell these cargoes into the global market from the U. S. Market. So in terms of America, we do here, the growth in exports, we had in during COVID, of course, we had a lot of voluntary cancellations. We had some cancellation during the big freeze in February 2021.

Operator

And now last summer, when you had the explosion at the Freeport terminal in U. S, we have had significant downtime on the plant. It now bounced back. And but in total, 128 cargoes assumed by S&P Global that has been canceled or 9,500,000 tons, but now exports are ramping up again. And we do see and expect that U.

Operator

S. Will become the biggest exporter of LNG in 2023 with pretty healthy growth, 14% according to EIA for the year. The other big player in the LNG market is, of course, China. So China became the biggest importer in 20 '21, surpassing Japan at about 80,000,000 tons equivalent of imports, which is basically the production of U. S.

Operator

Last year. So far, we are this is something we follow closely to see how the reopening of China is affecting demand. And I guess it's a big $1,000,000 question for most investors these days. We saw a flat growth January February, as I mentioned, but then we saw LNG demand picking up March April, which have on average 17% growth for those 2 months. So it's a bit too early to conclude, but there are some positive sentiments towards Chinese imports and especially when prices are at these kind of levels.

Operator

EIA and energy aspect expect Chinese LNG demand to grow 10%, 15% this year, which will then result in China going from about 64,000,000 tons of exports last year to about 70,000,000 tons. But this is still 10,000,000 tons below the imports of 2021. So we do expect to see continued growth of the Chinese market and the Chinese buyers are signing up to a lot of SPAs. China has contracted LNG volumes of around 70,000,000 tonnes, but they are big buyers of new volumes as well. So the story about Chinese LNG import growth is far from over.

Operator

As I mentioned, European gas market has had a lot of focus with the situation in Ukraine and with the Russian pipeline gas flows tapering off. We have, in Europe this year, been incredibly lucky. It's been a very mild winter. And this, together with the high prices, have resulted in a lot less gas demand in Europe, which have then resulted in storage levels keeping us at pretty good level. We have seen storage level is above historical range.

Operator

The injection season now is a bit slow, so we are getting into the customary range for development of the gas storage level. So the big question this year is how strong will the import demand be from Asia? How fierce will the competition be in terms of prices. Will Europe then be able to get these inventories levels up to satisfactory level before winter. And as I mentioned, again, the drivers here in the market is the competition between Asian and European gas demand.

Operator

Let's see. Spot rates or the freight market, we are not really that exposed to the freight spot freight market any longer. 12 of our 13 ships are on long term charters with a fixed rate. We have one ship which has been on a variable higher TC or which is on a variable higher TC, FLEX Artemis. Q1, pretty good levels there.

Operator

You can see on the light blue line on the left hand side that the market during Q1 was pretty good, but has followed a seasonal norm where usually rates come down to Earth during the spring. So right now, we are basically on average level for the last couple of years. And then this dotted line is where the future market is. So as I mentioned, when we have been guiding our revenues for Q3 and Q4, we do expect to do that reality will follow this path where rates are expected to be in the $200,000 plus at the end of the year. Another thing to note, we have mentioned this also in the past, is the fact that a lot of the big players there, they have chartered in ships on longer term contracts, and there's really few independent owners left in the spot market, which means that most of the fixtures, which there are fewer of, but the ones being concluded is mostly of relays where people with our players traders, portfolio players with the gap in the program are subletting our ships for shorter duration voyages while independent owners have very limited involvement in the spot market these days.

Operator

So another reason why we are upbeat about the long term outlook is newbuilding prices, which have just keep on moving upwards, we are at around $260,000,000 for newbuilding prices for LNG carrier today. You are quite lucky if you manage to get still a ship for 2027. The window is now closing in on 2028 deliveries. So these ships that have this price tag for delivery of 2027, 'twenty eight, those are the one we are competing with. And in order to get a reasonable return on your capital when making such a big investment, you need higher rates.

Operator

And that's where rates have gone. 5 year time charter rate has stabilized at a very attractive level of around $135,000 But actually to be fair, most people who are ordering ships at 260,000,000, they are not looking for 5 year time charters. They are looking for time charters of 10 years plus. So that's the other one we are competing with and that makes us upbeat about being able to extend our ships for longer duration at higher rates eventually when they come open as we have demonstrated our ability to do also in the past. So if we look at the order book, it's huge and it's been keep on growing.

Operator

We have seen some slower activity now on ordering given the lack of available slots and given where prices have been going. But a positive sign is at least that there's not a lot of speculative orders, most of the ships, about 90% of the ships under construction are committed to long term contracts. And as I mentioned here, you can see that the order book for 2028 now is already filling up. So if we look at the product markets, the installed capacity of LNG export at the end of March was about 465,000,000 tonnes. I we are not utilizing the full capacity.

Operator

We do expect total export for 2023 to be around 415,000,000 to 420,000,000 tons. So there are some downtime on installed capacity. There is also a lot of capacity being constructed, especially in North America and then, of course, in Qatar, where they have a huge expansion. So if you look at the projects being under construction and coming onstream near term, this volume goes up to 621,000,000 and we do expect more projects still to be sanctioned so we are looking at the market of, let's call it, around 770,000,000 tonnes in 2030. And this growth of liquefaction capacity together with the phase out of older steam tonnage is what is attracting demand for modern ships like we have in our portfolio.

Operator

So that's it. I think we can then conclude by going through the highlights just shortly. Mention revenues in line with our guidance, SEK 92,500,000. We had average time charter equivalent earnings of about $80,000 also in line with our guidance. This resulted in adjusted net income of SEK 35,200,000 or SEK 0.66 per share.

Operator

We have completed the balance sheet optimization program. It's been a process now going on for about 1 half year where we refinanced all the 13 ships and boosting our cash balance, as I mentioned, at $475,000,000 of cash at hand at quarter end of $9 per share. We have started our dry docking schedule. Everything is going well. Both 2 forced ships have been completed according to schedule and budget.

Operator

And we are now planning for the 2 last dry dockings for the year, we're expecting to take place in June. We are reaffirming our revenue guidance for the year, SEK 370,000,000. Revenues next quarter will be a bit softer because of these dry dockings, but all ships will be in operation again full capacity from Q3 where revenues are expected to pick up again. So with good financial position and our big charter backlog, we are pleased to once again pay out $0.75 per share in dividend or $3.75 per share the last 12 months, which I hope gave our investors an attractive yield investing in Flex. So with that, I think we take a short break before we come back with our Q and A session where, as I mentioned, you can win our Flex on the Beach summer kit.

Operator

Thank you. Okay, Knut. I think before we start with questions, maybe we can show the gift we have this time, at this time, we have our summer team, as I mentioned, flex on the beach, beach towel. Together, of course, you need some protection with the flex on the beach, sunscreen, our cap, of course. We have to include the Isle of Dividends T shirt this time as well.

Operator

And lastly, our sunglasses. So let's see who will win this nice summer package. And I think we have a lot of questions today, Knut.

Speaker 1

Yes. Thanks a lot for the questions coming in. There's a lot of questions, and we'll try to take them in order and sequence. But maybe we can start off a question forwarded from the investor, Jenny Harrington. She was on CNBC and put up a couple of questions, and they've been forwarded.

Speaker 1

So and that starts off with how does the low natural gas prices in the U. S. Impact, Flex LNG?

Operator

Yes. It's a complex question. It's more answered than just one. Is short term and long term. Of course, in the long term, if prices for natural gas stays very low in U.

Operator

S, of course, this will incentivize new drilling activity, which is, of course, crucial in order to hold production up. This has not been a problem so far. We set new records all the time on U. S. Gas production and one of the reason is that wells are becoming more gaseous as we are drilling.

Operator

But you need to have a sustainable return on equity, on our capital in these projects. So we don't really like that prices are this low. Of course, short term wise, that means that exporting cargoes out of U. S. Is very profitable because the price difference between U.

Operator

S. Gas prices and international gas prices are bigger, which means that those people exporting cargoes are making more money on LNG, and this is also the case actually on LPG. So it's a bit like this story about Goldilocks. You don't want it to be too hot. You don't want it to be too cold.

Operator

So you need to find some kind of sweet spots. I think luckily, of course, most a lot of the wells, you're not really drilling for gas. Some wells you're also drilling for oil and the gas is just associated gas. So you also have to see it in connection with oil prices, which have been pretty firm. So as long as oil price is pretty firm, you will be drilling for oil and usually then you will find associated gas.

Operator

But where you are looking for dry gas, you need probably to have higher prices in the U. S. Than what you have had today. But keep in mind, gas prices in U. S.

Operator

Has also been quite volatile where there have been periods of time where people have been raking in also on selling gas domestically in the U. S.

Speaker 1

And then it's a question on shipping and shipping has historically been a volatile sector or there are different segments into it. But mentions that historically, investors have been burned on shipping companies. What's the difference with Flex? Yes. Does the charter agreements make it different than other shipping companies?

Operator

Yes, of course. Shipping has always been volatile. So it's a derivative of the global GDP and usually trade historically at least have been growing quicker than GDP. But this was also a problem on the downside when GDP growth slows, less shipping activity. I think what makes Flex difference from most commodity shipping segments is, of course, the fact that we have taken out a lot of this commercial risk by fixing our ships on long term charters where we have very high level of earnings visibility.

Operator

And this you can also see in our earnings and revenues. If you look at the revenue graph we're showing for the guidance for this year, there's very small changes in the revenues from 1 quarter to the next because of this stability we have through long term charters. And also actually revenues are quite stable over the years, not only the quarters. So I think we are different in that regard because we have a bit different commercial strategy than most commodity shipping companies. And that brings us into the dividend and how secure it is.

Operator

With the U. S. Treasury yielding 5%. Is Flex an alternative for people looking for higher yield? Yes.

Operator

Savers have had a bad time since global financial crisis because or actually, they have had it pretty bad the last 4 years or so because interest rate has been going down and the yield you are getting on your savings become less and less, more or less every year. Now the last year or so, it's been picking up, but real interest rates still been pretty low because of the high level of inflation. Yes, 5% is the short term interest rate today. I don't but markets don't really think that yields will stay at this elevated level short term, while 1 year treasury yields is 4.8% today, 2 year is 4% and then if you go all the way to 10 years, you're back to 3.5%. So I think if you are investing for income investing, what you're getting in a safe asset today, let's see.

Operator

We have a debt ceiling coming up, but is a fairly safe investment 10 year government bonds in U. S. That gives you 3.5%. We are giving a much better return. As I mentioned, about 11% yield here the last 12 months based on the dividend.

Operator

Of course, this dividend is also safe in the fact that we have no ships open this year. The earliest possible ship is next year where we have just 95% coverage if you assume options will not be exercised, we think it's more probable than not. And actually then the first open ship is 2027. So that gives us a very visible cash flow of income, which as we have also said in the presentation, earnings belong to the shareholder, and we are motivated to pay that out as dividend. And that should give you a much better yield than what you are getting on government bonds these days.

Speaker 1

So then let's turn to the questions on the market. What's your outlook for your LNG transport out of U. S. For 2023, 2024?

Operator

I think last quarter Q4 report, we had a graph on projected supply situation for 2023, we are assuming 16,000,000 tonnes of gold growing global exports going from $400,000,000 to $416,000,000 This might be a bit low when we see the EIA numbers, but half of that is U. S. So kind of the free port coming back on stream is most of this effect. But then and then the remaining growth is from rest of wall. 2024 will be a year where we will have very muted export growth.

Operator

But then from 2025 and onwards, there will be more exports. So that's why we feel it's been a good strategy for us to fix or ship in this window where global growth in exports will be low before this growth takes off again from 'twenty five, 'twenty six, 'twenty seven onwards when our ships are coming open.

Speaker 1

And when we look at the import regions, last year and this year, there's been a lot of imports to Europe. Is Europe and EU an important market for Flex?

Operator

Yes, it's not really we will decide whether cargoes will be flowing. We charter out those ships on time charter. So charter will then have the opportunity to trade the ship worldwide, including Europe, and they actually instruct us where the ship will be going. So we don't really have an impact on that. They are deciding where they find the best price for the cargoes.

Operator

But of course, with all the Russian gas coming through pipelines, which has been shut down, this means that Europe has a large deficit of gas. And basically, what they have been doing now for the last year was always to replace some of that Russian pipeline gas with LNG. Of course, there are not enough LNG to fill the whole gap, and that's why Europe needs to be a bit patient there until new LNG is coming on stream. And until that, you will have a pretty tight market where we has seen prices at a level which has been demand destructing. Right now, prices come down to more fairly normal levels, but expectation is for higher prices when we're coming into the peak winter seasons.

Operator

And now with LNG pricing being more moderated. Have you seen Asia return to the imports? Yes. We've shown it in a couple of graphs there that we see some more growth from Asia. We do see this also in the routing of our ships.

Operator

We see more ships going to Asia than have been the case recently. And of course, certainly then when LNG in our, let's call it, 20%, 25% is going to oil and coal prices are pretty elevated as well. That is stimulating demand. And I think it's stimulating demand at a good time also because inflation has been high in Europe because of the high gas prices with the energy prices coming down now that will put less pressure on the inflation. And of course, with China reflating their economy having actually cheaper energy prices will probably help in the recovery of the Chinese economy as well.

Speaker 1

And then we have a question from Mike Otten, which goes more on the fleet and the steam tankers. Is a topic you've covered over the years. But it's been mentioned that this will be uncompetitive and scrapped. And that has not materialized that.

Operator

There's been some scrapping, but it's been very low. And of course, the reason for that is that the shipping market has been tight. There has been to solve in periods, there has been a total lack of ships available in the market. So when we have such high rates, people are trading their ships longer because still even our steamship, which has a lot of disadvantages compared to modern ships, they can still make a decent return. And I think as long as that is the case, people have been trading them.

Operator

And also keep in mind, a lot of new regulation came in force from 2023 and onwards. So eventually as this regulation is tightened in terms of the CIA requirements, also the European carbon taxation, which is becoming increasingly more expensive to comply with. That will reduce the fleet of steam ships going forward. So it's taken maybe a bit more time than some people expected, but this is mostly due to the very favorable freight economics, which then results in those ships leaving a bit longer than maybe some people anticipated.

Speaker 1

Then we have questions on the open vessels in 2027. So if we start off with more timing of securing a contract then, Is it more realistic that these charters will be signed in 12, 24 or 36 months? Yes.

Operator

I think we evidenced it last year. When I went to our fleet list, we showed several of our ships. We extended quite a lot of ships last year, most recently in November, we extended ships, which were not coming open before 'twenty six for longer durations all the way possibly to 2,033. So we do see people now looking for ships for 'twenty seven, even start people looking for ships for 'twenty eight. There are tenders.

Operator

There are discussions in the market. So I think we are well positioned to participate in those discussions. And as I mentioned here, we are competing against very expensive ships that need a high charter rate and probably a duration in order to defend that investment. So I think I wouldn't rule out that we will be able to also this year adds more backlog to the fleet. Let's say we have 13 ships in operation.

Operator

So every year, we are losing 13 years of backlog. Play, we will be able to add more than 13 years of backlog so that actually we are not eating off that backlog, but rather expanding our backlog. That, I would say, would be the aim, and I don't rule out that happening within 12 months rather than

Speaker 1

the 24 or 36 months. And a question from Minh considering the age and technology gap between 2027 newbuilding and the 2 strokes in the flex fleet, will the vessels achieve the same market rates as the new building?

Operator

Yes, I think so because kind of the change in technology that has happened has, of course, happened abruptly. We had from steam to 4stoke medium speed diesel electric ships and then eventually to the direct drive slow speed 2stoke ships. As you can see from the pictures here, we have both on the front page and on the docking slide, these ships are in prime condition. When they come out of yard, looks brand new. And the propulsion system is actually the same you have in the newbuilds.

Operator

It's a slow speed 2 stroke engine. There might be some more gadget on our new ship for delivery of 27, 28. Maybe they have air lubrication system, but so far, the effect of the air lubrication systems have been not everybody is as happy with it as the poster promised some ships might have a shaft generator, but that doesn't really affect much on the consumption is really more effects on the OpEx cost or the maintenance cost. So there's not really any change in fuel cost in that sense. So 3 of our ships have full relique systems, 4 of them have partial relique systems.

Operator

So I think these are comparable to the new modern ships that are being built now to $260,000,000 And also actually, there is some benefit, the fact that most of our ships are sister ships. They have been trading on most important export terminals, and they're already cleared. So every time you go to a new terminal, you need to do a ship shore compatibility study. We have done for a lot of them, so all our ships more or less are kind of already vetted that are improved for most terminals around the world. So maybe there might be a small discount given the fact they are not as brand new, but the technology is basically the same.

Speaker 1

And then we have moving on to the more on the balance sheet and the financing. And Scott McFadden has been looking at our long term debt and total liabilities. Has been rising over the past quarters. He would like us to discuss our attitude towards the total debt levels And if we have any plans to reduce that?

Operator

Maybe you should answer it

Speaker 1

then. Yes. So we've completed this balance sheet optimization program basically refinancing the full 13 vessel fleet. That has been the background for that was the transition for Flex both on the backlog of contracts has been building up and increasing over time. That gives us access to new capital or to new debt at better terms.

Speaker 1

So we have increased our repayment profiles, reduced our credit margins, improved the maturity profile. So that's the argument for us for refinancing the full fleet. And then we have not really pushed for higher leverage, where we have released $400,000,000 nearly $400,000,000 of cash and that has been structured as a bullet RCF. So if we have excess cash, we can reduce the RCF and thereby also implicit the debt level as long as we don't need the cash. But it gives us the flexibility to act and support the business going forward.

Speaker 1

Yes.

Operator

So Bulleit means it's non amortizing for those is not into the fine industry. And it means really we have like a big €400,000,000 credit line available at basically 3 days notice. We pay only around 0.7% interest rate per annum in commitment fee to keep it around, and it gives us a lot of financial flexibility. We don't utilize this at all time. We utilize it at quarter ends to show that we have this cash available, but it's low cost of having.

Operator

And also another factor there is that we have had the best financing market, I would say, since 2007. I was doing ship financing back then. Last time, we had something similar good financing market, I would say, was 2014. I will see if I'll then and I did about $2,000,000,000 of financing that year. I think, actually 2022 has been a better financing market for us.

Operator

So Knut's been doing then, yes, basically $2,000,000,000 of financing. Thing. And then we have secured that financing for a very long period of time from 2028 to 2,035. So that financed in locked in on very good terms, terms which I don't think is replicable today given where funding costs from banks have gone up since the collapse of Silicon Valley Bank Credit Suisse First Republic. So I think we are well

Speaker 1

in good shape. You should finance get financing when it's shipped and lock it in. And that's exactly what we've done. And on the graph we have on the or the slide we have on the balance sheet, you see there that the book values on our balance sheet is based on nearly all time low vessel values when they were acquired. So if you look at the leverage levels on the book values, they are rather conservative compared to the market values and also considering the contract backlog that we have.

Operator

Yes. And where your contracted ships were cheap, we're trying to as good as we can lock them in on long term charters when rates are high and then finance them when liquidity is plentiful and cheap. So I think we've done a pretty good job so far.

Speaker 1

And that comes back to the recurring question about how to spend it. What's the plan for growth? How do you plan to spend the large pile of cash? Is it reduction of debt, acquisitions, buyback, fleet growth?

Operator

I think we of course, the biggest item here is dividends. We paid out $200,000,000 of dividend the last 12 months, so the last 4 quarters. So that is, of course, the main source of spending money. We think newbuildings are pricy these days, if we ordered, I'm not sure whether we get a 27 slot, maybe it would be 28. We have 2 ships coming open in 'twenty seven, 2 ships early 'twenty eight.

Operator

We do think it's better business for us to fix those ships on longer term contracts rather than building new ships and try to compete with those ships with our existing fleet. So we try to be disciplined, and we structured the financing, as Knut mentioned, on a very flexible manner where the cost of having that debt is low. And then we will see. This is a long term LNG is a long term business. So we just try to be disciplined when, call it, new billing prices are high.

Operator

And then we have access to capital very cheaply where we can opportunities if we see opportunities. If not, we will just keep on doing what we're doing, fixing ships and paying dividends. And I hope that is appreciated by most investors.

Speaker 1

I think we'll round off then. Here's a contender for the bath towels. Do you ever get tired of winning?

Operator

Well, You don't have to answer, but

Speaker 1

I think we rounded off and now it's time to disclose Yes.

Operator

Let's rather talk about the win because that's going to be Minh Huang, who had a good question about technology on newbuildings today versus the ships we have in our fleet. I think that's a good question, it's something we talked about in the past, but it's been a while since we touched on the topic. So congratulations to you. You will have the full summer kit. And then before we adjourn, I just think I want to say thank you to all our seafarers, to all the people in the docks we have done a fantastic job on Flex Endeavor and the Flex Enterprise dockings, which has been perfect in terms of budget and timing and when the ships are back with our charters, we are happy to trade them again.

Operator

We have 2 more to go this year. Next year, we will only have 2 dry dockings. So with that, I also would like to thank or I would like to extend to our Norwegian viewers that I hope you all have a happy Constitution Day, they have tomorrow, May 17, is the biggest day in Norway, where there's a lot of celebrations. So with that, thank you, everybody, and we will be back in August with our Q2 presentation. We will also be in New York on June 20 onwards for presentations.

Operator

So for those who are interested, maybe you can join the Marine Morne Conference, and we will do some presentation there as well. Okay. Thank you.

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Earnings Conference Call
FLEX LNG Q1 2023
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