FLEX LNG Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 16, 2023

There are 2 speakers on the call.

Operator

Hi, everybody. I'm Christian Karl Lechlev, CEO of Flex LNG. And today, we are presenting our 2nd quarter numbers. I will be joined today by our CFO, Knud Thorold, who will walk you through the financials a bit later in the presentation. Before we begin, I would just also mention we do have our Q and A session at the end of the presentation where you can send in your questions either using the chat function or sending an email to irflexlng.com.

Operator

And if you have the best question for today, we do have some gifts for you. So gift number 1 is Our Flex LNG boiler suit, we just completed the docking of 4 of our ships. So and these are very nice when you do some improvements or maintenance, so you can have it while doing some home improvements. We also have the new Just Flex It Running T Short, which we will be using in Oslo Marathon next month. And lastly, we have a new addition of our Flex LNG sunglasses.

Operator

So I hope you do send in some good questions. It's always the most fun part of these presentations. So before I begin, I will also highlight our disclaimer. We will be providing some forward looking statement in this presentation. We will be using some non GAAP measures as TCE and adjusted numbers.

Operator

And of course, we cannot cover everything in detail during this short presentation. So we would also like you to highlight the fact you can read our earnings release, which we also presented today. So let's kick off with the highlights. So let's begin with the highlights. Revenues for the quarter came in at $86,700,000 in line with our guidance of $85,000,000 to $90,000,000 This resulted in Strong earnings, dollars 39,000,000 translating into $0.73 per share.

Operator

Adjusted net income where we only include The realized gains on derivatives, not the unrealized gains came in at $28,200,000 or $0.53 per share. During the quarter, we carried out dry docking of 3 ships according to time and budget, and that means we have clear the dry docking schedule for the year with 4 ships being drydocked in the first half of the year. These 3 dry dockings in the Q2 was then the main reason why we have lower revenues in Q2 compared to Q1. But with all ships back in operation from the second half of the year, we are reaffirming our revenue guidance of to $95,000,000 in the Q3 and somewhat higher expectation in Q4, dollars 90,000,000 to $100,000,000 depending a bit on how strong the spot market will be for the ship we have on variable higher time charter. So with that, we are reaffirming also the revenue guidance for the year, dollars 370,000,000 and adjusted EBITDA of somewhere between $290,000,000 to $295,000,000 We are also today pleased to announce that Cheniere has, as expected, extended the FX vigilant time charter from end of 2,030 into middle of 2,031.

Operator

As some of you might recall, we did the extension of 3 ships which ended last year where they had this early option to extend that ship by 200 days and then get our option to extend her a further 2 years. So in total today, we have 55 years of minimum firm backlog, which can be extended up to 8 years if charters are utilizing all our extension options. So with a very healthy backlog, a strong financial position with $450,000,000 of cash and no debt maturities prior 2028 after all the refinancing we just carried out. We therefore should come as no that the Board is declaring a dividend of $0.75 per share for the Q2. This brings the dividend the last 12 months to $3.25 per share or a yield of about 10%.

Operator

So as I mentioned, we've been busy doing the dry dockings this year. We docked Flex and Never in March, Singapore. We did our sister ship, Flex Enterprise in Singapore in April. And then we had 2 ships, the sister ships Ranger and Rainbow docking in June, Ranger in Denmark and Rainbow in Singapore. We guided in our Q4 presentation that we Expected these dry dockings to take somewhere between 80 to 90 days, and we ended up at 77 days.

Operator

So slightly ahead of our guidance on time. CapEx also in line with estimate about $20,000,000 of CapEx associated with these for dry dockings. And with that, we don't have any more dry dockings for the remainder of the year. As mentioned, we will have 2 dry dockings Next year, probably 4 in 2025, 3 in 2026 and then we have a holiday in 2027 with 0 drydocking schedule for that year. So this slide is the same slide you saw last quarter.

Operator

We are just reaffirming the guidance of the year, EUR 370,000,000 of expected revenues. We had EUR 92.5 So in Q1, slightly lower here in Q2 because of the 3 dry dockings and also because somewhat softer spot market impacting the ship we have on variable higher time charter. With all ships back in operation, we'd expect revenues to jump in Q3 somewhere between 90% to 95% and then a bit more variability on Q4 as Spot market can really take off, especially when we look at the winter coverage fixtures being done recently. So we expect somewhere between SEK 90,000,000 to SEK 100,000,000 of revenues in Q4, and that in total should be around SEK 370,000,000. So and you also see that then revenues are higher than last year where we recorded about $348,000,000 of revenues.

Operator

And that's despite the fact that we are taking 4 ships during drydocking this year and it's driven by the fact that we have repriced the portfolio of ships and expect the time charter equivalent earnings this year to be around $80,000 which is higher than last year. So looking at the portfolio of backlog. As mentioned, Flex Vigilant extended from end of 2030 to the middle of 2,031. And as you can see, we have substantial backlog with 54 year of minimum contract backlog. We have these two stars.

Operator

That's our 1st fully opened ships, FlexRanger, which was recently docked. She is open in Q2 2027 and the Flex constellation in the middle of 2027. I will come back to this later in the presentation. These are very attractive positions when you are comparing to the the positions when you are comparing to the term rates and new billing prices for ships for delivery at 2027 and onwards. So once we have finalized marketing of these ships, we will move forward to the next open position, which is Flex Aurora and Flex volunteer, which are fixed to Cheniere with redelivery early 2028 if they exercised the options for these ships, which we do expect them to do.

Operator

We do in general think that a lot of these options will be declared given where the term rates are heading. As you can see, we also have then on the bottom here, Flex Artemis, the only ship that's on a variable higher time charter, where the rate It's adjusted according to the conditions of the spot market. And the spot market looks very strong for the second half of the year, and that's why we have a bit bigger range in expected revenues in Q4 compared to Q3. Looking at this slide, we have used this a couple of times, Just looking at where our adjusted earnings per share is, dollars 0.53 for this quarter. Last trend, MOLs, it's been about $3 per share.

Operator

Ordinary dividend has been $3 And then we have paid out A couple of special dividends here given the very strong financial position of the company last 12 months then. We are down from the $3.75 per share of running dividend to $3.25 but still a comfortable level and giving our Investors are 10% running yield. The decision factors we also covered in great details in the past. Q2 is, of course, usually the softest quarter in term of the earnings on the spot ships. But as you can see, most of these colors are green, as I explained the reasons for already.

Operator

So with that, we will jump into the key financial highlights, Knut.

Speaker 1

Thank you, Aesten. Let's have a look at the key financial highlights for the quarter. Revenues came in at 86,700,000 and was impacted by the 57 days of scheduled drydock of the 3 vessels in the 2nd quarter. It's also impacted by seasonal lower earnings of the variable higher contract for the Flex Artemis. On the operating expenses, we see a slight increase this quarter to SEK 17,300,000 and this is explained by timing effects of spares and maintenance.

Speaker 1

Last quarter, we were a bit below budget. And this quarter, we have paid some of those OpExes. So OpEx per day is 14,600, but if you look at the first half of the year, the average OpEx per day is at 14,000. Interest rates continue to increase. So we have an increase of interest expenses to SEK 27,200,000.

Speaker 1

However, this is offset by our gain on derivatives of SEK 17,100,000. Included in that is realized gains of SEK 6,200,000 versus SEK 5,000,000 in the first quarter. And if we look at the comments on this slide, we also then compare with the first half of the year. So we see we have realized gains of SEK 11,200,000 versus a loss of SEK 2,400,000 last year. So despite the rapid increase in interest rates, we see the positive effect of our hedging strategy where the net paid interest is only SEK 10,000,000 higher despite the rapid increase in the interest rate levels.

Speaker 1

Last quarter, we completed the balance sheet optimization program and therefore also booked the write off of debt issuance cost of SEK 10,000,000. So that's no longer applicable this quarter. So for the Q2, we end up with a net income of SEK 39,000,000 or SEK 0.73 per share. And adjusting for the unrealized gains on derivatives, We end up with adjusted net income of SEK 28,200,000 and that results in adjusted earnings per share of SEK 0.53 Looking at the balance sheet, it's still robust and clean. There are 2 main components.

Speaker 1

It's cash of $450,000,000 and our vessels, the 13 vessels with an average age of 3.6 years with a book value of about 2.3 $1,000,000,000 That gives an equity of SEK 870,000,000 or a solid equity ratio of 31%. If we look at cash flow statement for the quarter, we have SEK 47,500,000 in cash From operations and SEK 9,000,000 in change in working capital. We had SEK 16,000,000 in dry dock expenses and then amortized about $26,000,000 We paid out last quarter the €0.75 per share in dividend, resulting in $40,000,000 And we end up then with a solid cash position of $450,000,000 Having a deeper look into our interest rate portfolio, We have made no changes to the derivatives during the quarter. So we maintain a high hedge ratio of 62% to 65% in the coming quarters. It's a mix of SOFA based interest rate swaps and LIBOR based swaps.

Speaker 1

As LIBOR has exceeded to be ceased to be quoted. These LIBOR swaps will transition into SOFR swaps during the Q3. If we look at the components here, we have SEK820,000,000 of swaps And then we also have SEK 201,000,000 of fixed rate leases in the portfolio. So on the interest rate swaps, these are valued today at €58,700,000 on our balance sheet and provides a solid hedge in the coming quarters and also cost visibility. Looking at our funding portfolio in Q1, we concluded the balance sheet optimization program.

Speaker 1

The funding portfolio is then consisting of about 50% of long term leases and 50% of debt, which is split in term loans and a $400,000,000 non amortizing revolving credit facility. The revolver gives us flexibility on for cash management when we have a cash position of $450,000,000 which means that we can repay the RCF at any point in time and therefore also reduce interest rate cost. The maturity profile It's pushed out. 1st maturity is in 2028. And as you see here, it's spread out with the last maturity in 2,035, subject that we exercise a 2 year extension option on that financing.

Speaker 1

This portfolio is provided by a diverse and strong and supporting group of banks. It's split out in various regions. So we have banks from the U. S, from Europe and then also increased our exposure in Asia. So this gives us a rock solid foundation to support the company coming further.

Speaker 1

And with that, I hand it over to Ernst and for an update on the market.

Operator

Okay. Thank you, Knut. So let's have a look at the markets, starting with the volumes. So these are the volumes from January to end of July. In that period, we see that Spot growth is about 3%.

Operator

U. S. Was flat in Q1 due to the shutdown of Freeport. But with Freeport up and running again. The U.

Operator

S. Volumes are increasing and are the main contributor to volume growth. We have So had shutdowns in Norway, and Norway is back exporting. So they are also adding 1,600,000 same as Algeria. On the import side, we continue to see strong growth in Europe, adding 5,000,000 tons in those 7 months.

Operator

We've seen less demand for Japan with nuclear restarts, but China bouncing back. China, after they Loosened up the COVID restrictions, we did see Chinese demand rebounding for March. And in the second quarter, Chinese import growth was about 20%. So then looking at the gas prices, they have been incredibly volatile like last couple of years, driven mostly by supply events as well as, of course, COVID. So looking back the last one and a half year or so, of course, we saw high gas prices coming out after the invasion of Ukraine and also the strong demand in end of 2021.

Operator

We had the Freeport shutdown middle of last year, which started to bring prices up. And then, of course, we had the Nord Stream explosion, which cut off a lot of Russian pipeline gas to Europe and actually sending the price of gas as high as $100 per million BTU. For those who are not too familiar with million BTU, that's 5,800,000 BTU in a barrel of Oil, so that means that we are talking here about gas prices equivalent to about $600 per barrel of oil. And of course, when prices are going to these kind of levels, demand goes down because of the high prices and switching to coal or propane or oil products. So with the spike in price, we've seen a lot of demand subversion in Europe, especially, which are more reliant on the spot market.

Operator

And we saw gas prices basically falling from a high of $100 per million BTU in August last winter to about $10 And we actually then a level where natural gas actually very competitive towards oil. You see the dotted line here, It's LNG being sold at oil price with about 20% discount. And of course, when Prices go down. Again, we can see more demand. And now lately, the last week or so, we have had the situation where Australian workers are contemplating strikes, which could cut off almost 50% Australian volumes of 10% of global volumes.

Operator

So these are really big numbers. When we look at the Freeport explosion, which cut off that plant, We were talking about 3.5% of global volumes. So these are almost 2.5x bigger volumes. And I will come back to the situation in Australia. And with that, of course, we've seen a rally in European gas prices the last week or so.

Operator

And we do expect gas prices to head upwards in line with the future curves here as there will be more demand when we're going into the winter. So Look at let's have a look at the situation in Australia. There are several mega projects in Australia as you can see here on the map. The uncertainty today is around 3 different projects, which are last year exported about 41,000,000 tons, close to 50 percent of all Australian volumes. So that here we are talking about industrial actions where workers contemplating a strike, which will affect the Northwest Shelf plant operated by Woodside, the Gorgon and Wheatstone projects operated by Chevron.

Operator

So these projects are mostly selling all of the volumes to Asian buyers given the short distance to these big markets, which upon China, South Korea taking the vast majorities of these cargoes. So If there is a shutdown, it will really create a supply crunch where Asian buyers will have to compete for Atlantic Basin cargoes, mostly U. S, and drive prices up. Well, we have seen already the fear of this happening are driving up prices. Of course, we don't expect shutdowns at a similar period of time as we have seen when we had the Freeport explosion, which is more a technical issue.

Operator

But that said, we have seen Similar actions happening on the Pollut project in Australia last year, where industrial action closed on exports from June 10th to August 25 last year. So this is still unresolved, but it's something to keep an eye on. Another interesting topic is the supply of Russian gas. So What we are putting in here with Drake meme is the Europe has really said they don't want to have Russian pipeline gas and also with the Nord Stream pipeline exploded, it's not feasible to move those volumes. So the share of Russian pipeline gas in European Union's natural gas demand has been on a sharp fall.

Operator

And of course, this gas have been replaced primarily by LNG. Europe's been incredibly lucky. First, we have had the COVID shutdowns in China. And then we have seen the economic growth of China probably being on the slower side of expectation, which has resulted in Europe being able to source a lot of volumes from the spot market and U. S.

Operator

Cargoes, especially the flexible U. S. Cargoes going to Europe, but not only the U. S. Cargoes.

Operator

Actually, when we look at Russian LNG, it's very welcome in Europe. And actually, Russian LNG into Europe has just kept on growing. As we can see on this graph on the right hand side, Russian LNG to EU, 37% of the cargoes went to EU in 2021. It actually grew to 47% last year. And so far this year, 51% of Russian LNG is going to European countries.

Operator

And why? It's because the European Buyers can't really afford to not take the Russian LNG given the tightness of the LNG market. So looking at the European gas market, which has been in front and center the last couple of years. European gas inventories now are at a very high level. We are very close to the 90% threshold that EU was targeting for November 1 already today.

Operator

But again, there are the winter has not started. And of course, once you were getting into the winter, European consumers will start to utilize the storage level and deplete it as is the seasonal pattern. So IAA had some scenario analysis of how vulnerable Europe is to supply crunches, and we have 4 different scenarios here. So it might be a bit confusing here on the right hand side, but we look at Once the heating season start, which is 1st October, what is the level of inventory levels there? And you will see as you get to November, December, January, February, March.

Operator

This storage level will be declining as we are using from the storage levels. So how much they're declining? It really depends on a couple of factors. It's the biggest factor is whether the winter will be cold or not. And then it will also be about how much gas will Europe be able to source from the LNG market.

Operator

And that's why we have seen the rally in the gas prices last week or so because if in the event Asian buyers are competing for marginal spot cargoes, LNG supply will be more restrictive. And in such a situation where you have a cold winter and restrictive LNG supply, Europe could end up with very low level of gas coming out of the winter this season despite the high storage level today. So looking at the market we are operating in. It's the freight market. The spot market's been acting as usual.

Operator

We have had The spot marking cooling down as you're getting out of the winter. And once we're getting closer to winter, spot Rates are going up and following the seasonal pattern. Today, we are already above $100,000 per day for Modern Tonnage. And if you look at the future curves on the left hand side, which is the dotted blue line, we see that the future curves are pricing ships for the winter in excess of $200,000 per day, in line also with what we have seen in the past. But keep in mind, There's been a lot of the traders and the portfolio players there have been taking ships on longer term charters.

Operator

So the numbers of fixtures in the spot market has gone down. And also the spot fixtures being done today are primarily re lets, where charters are fixing ships to each other, not independent owners. Looking at more term rates, where we are more active, of course, term rates are driven by, of course, supply and demand, but they're also driven by newbuilding prices and interest rates level. So we have seen newbuilding prices picking up about 30% the last 2 years. And of course, when people are doing a tender for new buildings, those people investing this amount of money in a ship, they need a higher breakeven level in order to defend such an investment also when interest rates are picking up.

Operator

So today, Newbuilding prices are at around $265,000,000 with a couple of more ships for available for delivery at 27 before we are starting to have only yard slots open for 2028. So today, the 10 year rates, As you can see here in the light blue line, it's hovering above $100,000 and then at about $115,000 for the 5 year time charter rate. So this is one of the reasons why we are also very optimistic about recontracting our ships. We have 2 ships open in 20 27 competing with these ships and then 2 ships also in 20 28, where we do think that once we are re contracting ships, we will be doing that at higher levels, which we have also done and evidenced in the past. So looking at the order book, We had a lot of contracting of newbuilds last year.

Operator

With these higher prices, we have seen fewer contracting these days. But the order book is big, and it's also reflecting of the fact that We have a lot of new volumes coming to the market, and it's reflecting the fact that still we have a lot of steam propulsion on water with 35% of the fleet consisting of steam ships, and we do see more and more of these ships leaving the shipping market and have to be replaced by more modern fuel efficient tonnage driven by economics, driven by regulation and also to from next year actually carbon taxation in the European Union. If we look at the order book today, Most of the ships are committed to long term charters. Only about 10% of the ships in the order book are uncommitted so far. Looking at the what you could call the cargo market, the LNG supply, We've seen continued FID or projects taking the final investment decision, latest one being NextDecks Rio Grande, which announced going ahead with Rio Grande project.

Operator

And we've also seen 2 other projects in U. S. This year, Venture Global's Pacamino's Phase 2 and Port Arthur also earlier this year. So We have about 100,000,000 tons of project in North America under construction or where they have taken the final investment decision and then SEK 73,000,000 rest of the world. And there are still a lot of projects chasing FID.

Operator

The project we deem probable or highly probable to do so is about 85,000,000 tons in North America, 68,000,000 tons of the rest of the world. So we do see a very strong growth in the market. The nameplate capacity today It's 465,000,000 tons. We do expect LNG supply this year to be about 420,000,000 ton. We are not able to have 100% utilization on these projects.

Operator

And then this if you add all the projects under construction, you are getting to 634, but there are still projects trying to get FID. And if you put in all the highly probable, you are ending up at a very big number, $788,000,000 So that is one of the driver for all this contracting of new LNG ships. So with that, I think we conclude today's presentation. I'm just going to run through the highlights quickly. Revenues for the quarter in line with our guidance, we have strong earnings, dollars 39,000,000 or $28,200,000 if you adjust out unrealized gains on our derivatives, giving our earnings per share of $0.73 or $0.53 respectively.

Operator

We have completed our dry docking program of the 4 ships on time and budget. We just recently had an extension of our Cheniere time charter for Switzerland bringing that ship into 2,031. Revenues for the second half of the year We'll pick up as we have completed the dockings and as we do see a stronger spot market and we are confirming The guidance we already provided in February, dollars 370,000,000 of revenues for the year, adjusted EBITDA of to $295,000,000 driven by higher earnings in Q3 and Q4. So with that, we are happy to declare another dividend of $0.75 bringing the dividend the last 12 months to 3.25 giving, again, as I mentioned, 10% yield. And we can do that easily given our high backlog and strong financial position.

Operator

So With that, I thank you for joining the presentation. We will then gather in some questions and do a Q and A session. Thank you. Okay, Let's start the Q and A session, Krit. And I think we have received quite a lot of question today as well, Even though I think most of the analyst reports coming out this morning was this is boring stuff, no news, everything as expected.

Operator

But We'd rather be boring and profitable than funny and losing a lot of money. So let's see, okay?

Speaker 1

We have a Good group of questions. So thank you for sending them in. Let's start with the contracts. And Wolf Berhm, he questioned if it's a surprise that Cheniere declared the option on the Vigilant that early. And can we expect any other options to be declared by Cheniere Any soon?

Operator

Yes. Wolf is a loyal shareholder. Now it's not a surprise at all actually. If you read the press release we sent out last year when we did this deal with Cheniere for 3 ships, which we extended then, We wrote the fact that the Vigilant had an early option due Q3 this year. It's now Q3 even though we're reporting Q2.

Operator

So it comes at no surprise. And they also have an early option to extend the Endeavor in spring next year where the period is slightly bigger or longer, 500 days. So I would expect that to happen as well. So no surprise as planned.

Speaker 1

And then follow-up on the contracts from Frederik Wessel in Pareto Securities. In the fixed rate contracts, are there any inflation adjustments?

Operator

No. We have them on a fixed rate level. Of course, There are some fact in those contracts. That's why we're making some money. However, we have hedged the risk In terms of inflation, usually there is a pretty strong correlation between interest rates and inflation.

Operator

So if inflation goes up, interest rates tend to go up as we have seen very much so the last couple of years. So we are as Knut has shown, we hedged a lot of our interest rates. So we have covered the inflation risk in that sense. And actually, our cost of interest rate, interest rate per day is higher than OpEx per day. So It's actually a more important risk to cover.

Speaker 1

Yes. Then we have some questions around the contract portfolio. We today 54 year of firm backlog and 80 years including the options. And then we talk about open vessels in 2027 and 'twenty eight. So the question is, what's the likelihood of the options to be declared?

Speaker 1

I would

Operator

say right now given where term rates are for ships, ships have become a lot more expensive. I showed now that Ships have been cost newbuilding prices have gone up 30% in 2 years. But keep in mind, we ordered ships back in 2017, 2018. So They've gone up from 180 to 65. So and rates for newbuilds, 100,000 Rates are lower, although most of the options we have are typically at a higher rate than we have on the firm period.

Operator

So I think the likelihood of options being extended is very high. Whether all the options will be exercised, it's hard to say, but I think most of the options will probably be it called by the charters and all kind of backlog is then most probably longer than the 54 years we have filled.

Speaker 1

Okay. Then moving on to dry dock. We have a question from Hakon Lunde, who works in the Offshore Drilling Industry. And they have a concept in the drilling industry about continuous class, where they do maintenance and class renewal while in operation in order to reduce time at yard and off hire. Is that the concept that Could work in the L and D for and for Flex and when doing dry docks.

Operator

I think it's a bit If you are on our semi submersible drilling rig and you can spend $50,000,000 $100,000,000 doing the special survey on the ship. Of course, we do have continuous maintenance all the time. We do have class inspections regularly. And of course, prior to us going into our dock, we want to minimize the stay at dock. So what we are doing is to prepared everything in advance.

Operator

So once we are doing the discharge, we use the ballast leg to prepare all the maintenance, starting to take down equipment, so they are ready to being maintained. And then I think we evidence that now we guided 80 to 90 days dock stay for those 4 ships we had planned this year. We managed spent only 77 days on those four dockings, average 19 days. And I think if you compare that with most all other LNG owners, we are comparing very favorable on time and also on cost because staying in a dock is costly.

Speaker 1

And he follows up with another question on the new buildings. It's been mentioned that they have some new gadgets, slightly different from our vessels. So while we are in dry dock, do you plan to do any upgrades of the vessels?

Operator

It's not major upgrades. Course, we always do software upgrades. There are maybe some new energy saving devices, so we are putting in some more sensors, but not major upgrades. We have the most Efficient engines, that's a 2 stock. People ordering ships today is still the 2 stock.

Operator

Actually, very few people are ordering the mega ships, which we have 9 out of the 13 in Our fleet is mega ships because they are quite expensive. Usually they have 1 or 2 high pressure compressors running at 300 bar. People today are maybe is often opting for cheaper engines with lower pressure, which result in not as good combustion and more methane slip. There are some other gadgets. You have the air lubrication system.

Operator

But so far, there are some mixed results on these systems. I think if you are to order new ships today, of course, shaft generator is quite popular. It's basically if you have a bicycle and you have a dynamo on the bicycle in order to make light. So rather than running the auxiliary engines, you can use the dynamo. But Of course, if you use the dynamo, you also create friction.

Operator

So it's not like you get free electricity. You have to burn more on the engine, but You can use less of the auxiliary engine. So that's around the board way of saying that we plan no big upgrades because The ships are state of the art, and we order them because we could get state of the art ships at the right time at the right price compared to what it is today.

Speaker 1

Then we have questions on the for finance and basically a recurring question on our cash piles, why we are not repaying debt in order to reduce interest rate cost. It's a recurring question and it's something that we get and it's related to the RCF or the revolving credit facility we have. Basically, we use the RCF for cash management. In between quarters, we repay with available cash to bring down the interest cost, which is actually the question here. And that makes it we have cash available and funds available when we need it.

Speaker 1

And it follows up on the classical principles of raising capital when you can and have it available. So for this RCF, When we don't utilize it, we pay 70 basis points in a commitment fee, and that's a pretty cheap way of having capital available. Following up on the market, a couple of questions there. We have Charles from Marhelm. Short question, is the winter coming?

Operator

Short answer, yes. We are in August. Once we're getting into October, the winter will be coming. So what I think we'll referring to maybe is the graph when I've shown the European storage levels of gas. Of course, they are very high today, reflecting the fact the muted demand over the summer, muted demand over last winter when we had the 3rd line in Jan, a pretty warm or mild winter in Europe.

Operator

What will happen this year? Let's see. This year is different from the last 3 years. The last 3 years, we have had a La Nina. This year, we have a El Nino.

Operator

El Ninur typically means colder winters in North of Europe, wetter winters in South of Europe, usually warmer winters in Asia. So even though inventory levels look high today, you have to also take into account that All the Russian gas that used to be there to support gas consumption in Europe is more or less gone. So this storage It's becoming much more important and the drawdown of the storage levels will probably be much quicker, especially in a cold winter because you don't have the same kind of base load of gas into the market. So the winter will be coming. It will be interesting to see.

Operator

We need to have as much LNG to the market as possible in order to not create this kind of wild price swings we have seen in the past.

Speaker 1

Yes. So that brings us to another question from Sheriff Almagrabi. We have in the presentation talk and is also in the news now about the potential strike in Australia. So what's the impact on the ton mile? And there is a risk of a seaborne volumes will drop and where will then the importers pick up the slack.

Operator

Yes. Of course, This is so much volume. It's unprecedented. The 10% certainly of all volumes going away with some feed port going away, it's 3.5%. So If that is volumes are curtailed, prices will skyrocket.

Operator

There will not be enough LNG in the market for sure. And hopefully, you can only hope it will not be long lasting. We have seen similar situation here where Oil and Gas, Walker have been contemplating striking and actually the government have intervened and said these the consequences are too big. We are the biggest gas exporter to Europe. We have a public arbitrator and just setting the term by Fiat.

Operator

I think Australia should certainly consider something similar. If it happens, of course, you will free up a lot of ships in Australia, which are usually doing that kind of transportation from Australia to Japan, Korea, China, Taiwan. So JK, all those ships will be available, 40 ships. If you multiply maybe 1.3, 1.4, it's a sizable number of ships, maybe 60 ships will be available in market. Probably not will be available immediately because people will be holding them back because They don't know how long the strike will be.

Operator

They're going to fix the ship on a 3 months or 2 months' charter and suddenly the strike is over and they are left out of the ships. So you will equate inefficiencies And you will have ships going to longer routes to U. S, to Asia. And I think actually shipping market will also be tight because the uncertainty about when will volumes come back. Of course, when Freeport shut down, They had like a timeline when the volumes would be starting up and people could re let their ships.

Operator

When you have a strike, there's more uncertainty. And certainty, people will holding their ships. So I think LNG's product market will be immensely tight and then shipping market will also benefit. But there will not be a good situation. And actually, I hope it not happen because we need LNG to stay at the cheaper level if we're going to attract new consumers.

Speaker 1

And on top of that, we have the problems with the Panama Canal. So how is that affecting Flex and the LNG industry in general?

Operator

We have had the worst throughout in Panama since the canal opened in 1914. Water levels are very low. Remember, this is our big canal. And when you're putting ships through it, you need you are losing water from the canal into the sea. We have to refill these water balances from reservoirs.

Operator

And these reservoirs are at the low level. And They typically won't transit. You are losing 50,000,000 gallons of water, which is 190,000,000 liters. So Panama have had to reduce the number of tons to keep the water level. So this has created a super tight market in the Panama Canal.

Operator

Waiting times Today, if you don't have a slot, it's almost 20 days, and that's August. Last November, we saw them going up to 26 days, but that's winter The winter season is always more busy. You have the high season for container ships going for the shopping season. You have more export of LNG and LPG and typically more routes to Asia. So Panama clogging It's a problem that's not going away.

Operator

Even though the drought is going away, Panama is jammed. And the reason is Panama Canal was built for container traffic, increased container traffic, the Neo Panamax container ships. And this was decided before the shale revolution in America. But certainly U. S.

Operator

Became the biggest LNG exporter and the biggest LPG exporter and The Cajal has not been scaled to suddenly also take all that traffic. So that will be an inefficiency. We see it more on the LPG side in Avansgas where we are routing ships away from Panama because it's too much waiting time and it's too difficult to fix a ship when you don't know the schedule.

Speaker 1

So then there is a bit of a crystal ball question. What's your view on the LNG Commodity prices in the short and the long view.

Operator

Right now, of course, it's I believe forward rates are not always a good predictor of prices, but I think it's pretty accurate in the near term. Product prices will stay tight for the medium term or the short term. There will be a lot of demand for the winter market, so prices will go up. There's not coming a lot of new LNG to the market near term, which means the market will stay tight. Europe will not get access to Russian pipeline gas.

Operator

So there will be tight market. From 2025 onwards, there are coming a lot more liquefaction plants. And hopefully, that can bring down prices because otherwise we are pricing out consumers. And actually, we would like to get prices down to $10 less because then we can finally do something with coal because LNG should be utilized not only to replace Russian pipeline gas, but also coal. And if you are to do that, which is immensely important in terms of pollution, greenhouse gas emissions, Then you need to get the price which is affordable for developing countries and not only European consumers.

Speaker 1

So that rounds up the questions, but we'll include one more. It's Lucie Hain from Tradewinds. What's your guidance for your time to complete the Oslo marathon?

Operator

Guidance, giving guidance on that As well now. To that, I haven't been too so accurate on the guidance for our financials. Number 1, we are attending Oslo Marathon, the whole Flex team in actually exactly 1 month, but we are not running the full marathon. We are running the half marathon. We don't want to have too much tear and wear on these guys.

Operator

Let's see. My goal is I challenge my guys to beat me. Hopefully, I can beat 1 or 2 of them. Last time I since I've all ran my last half marathon, I've been doing 24 of these quarterly presentation. So that hasn't helped my weight.

Operator

That weight has gone up. So probably 15 minutes longer time than last time, so below 150 then.

Speaker 1

Good. That rounds up the questions. Thanks And

Operator

Lucie, if you are there, if you are going to GasTech early September for the big gas conference, I know you like to run marathons. So then of course, I will bring you I had one of these just flexi T shirts, so you can run that use that next time you run marathon, not the half marathon like the lazy guys like Knut and May, but the full marathon.

Speaker 1

Okay. Then we need to round off with the winner of the flex kit for the questions.

Operator

Yes. I guess with Hakon Lunde, we ended up at. I wonder if this is Hakon Lunde, which I knew from my childhood. Let's see. Okay.

Operator

We will reach out to him and give him the T shirt. So he also can run half marathon or full marathon, of course, the flex glasses and the boiler suits. But if he walks for drilling, I'm pretty sure he already have a boiler suit. Okay.

Speaker 1

Congratulations and thanks. Thank you for all of the questions.

Operator

Okay. Thank you guys. And we'll see you in November. Thank you.

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Key Takeaways

  • Flex LNG reported Q2 revenue of $86.7 million—within guidance of $85–90 million—net income of $39 million ($0.73/share) and adjusted net income of $28.2 million ($0.53/share), and reaffirmed Q3 revenue guidance of $90–95 million, Q4 of $90–100 million, and full-year revenue of $370 million with adjusted EBITDA of $290–295 million.
  • The company completed drydocking of four vessels in H1 2023 on time and on budget—three in Q2 averaging 77 days versus the guided 80–90 days—and has no further drydock requirements for the remainder of the year.
  • Flex LNG extended the Cheniere time charter for FX Vigilant into mid-2031, boosting its minimum firm backlog to 55 years (up to 80 years including options) and setting up future vessel redeliveries for recontracting at higher term rates.
  • With a robust balance sheet boasting $450 million in cash, no debt maturities until 2028, and a 31% equity ratio, the board declared a Q2 dividend of $0.75/share—yielding 10% and totaling $3.25/share over the past 12 months.
  • Market conditions remain tight ahead of winter, as spot shipping rates climb above $100,000/day for modern tonnage and forward curves exceed $200,000/day, while LNG supply risks from potential Australian industrial action and Panama Canal constraints underpin freight and commodity pricing strength.
AI Generated. May Contain Errors.
Earnings Conference Call
FLEX LNG Q2 2023
00:00 / 00:00