FLEX LNG Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2024

There are 2 speakers on the call.

Operator

Hi, everybody, and welcome to Flex LNG's 4th Quarter and Full Year 2023 Presentation. I'm Oosten Karleklev, CEO of Flex LNG Management, and I will be joined later today by our CFO, Knut Trohalt, who will run you Through the numbers, as usual, we will conclude with a Q and A session where we have a gift as a customer for the best question. This time we have some nice beanies from Amundsen in various colors and also a nice neck warmer to fit together with the beanie. You can ask a question either by using the chat function in the webcast or you can So still send some e mails to irflexlng.com and we will cover those question in the end when we're doing the Q and A session. Just a reminder before we begin the presentation about our disclaimer.

Operator

We will provide some forward looking statements. There are some non GAAP measures and of course there are limited how many details we can cover in the presentation. So let's kick off. Revenues for the day for the quarter came in at 97,200,000 This was in line with the guidance provided in Q4 for Q4 of around SEK 97,000,000 to SEK 99,000,000. Net income and adjusted net income came in at $19,400,000 and $37,800,000 respectively.

Operator

Just a reminder, We have a rather big portfolio of interest rate derivatives where we have hedged ourself against the higher interest rates we are today experiencing. And in the adjusted numbers, we only include the realized gain and loss on derivatives while we take the change unrealized change in value are included in the net income numbers. But as Knut will tell you shortly, we have made rather big gains on derivatives during the last 3 years to a total of SEK 116,000,000 positive. So this translates into our earnings per share and adjusted earnings per share of SEK 0.36 and $0.70 respectively. As we are now in February and heading out of the peak heating season, Not surprisingly, rates are softening following the seasonal pattern where typically they find Freight rates find the bottom at around March before starting to fire up again for the summer season.

Operator

And I will cover more of the freight market in detail later in the presentation. As we have recently announced, we have got or received an extension of one of our ships, Flex Resolute. She has now been on our time charter for about 2 years. This time charter is for 3 years where the charter, our supermajor has option to extend by 2 plus 2 years and they have now declared the 1st option taking this vessel firm until at least Q1 of 2027. Then as we announced on January 8, we have redelivery of Flex Constellation either end of Q1 or in Q2.

Operator

This ship has been on a 3 year time charter with a trading house and we will get that back and we plan to carry out the dry docking this ship before then market for spot medium term or longer term time charters depending a bit on the market conditions. For next quarter Q1, which we are already way into, we expect Rates to soften a bit depending a bit on where the spot market is trading as we have one ship on a variable time charter, Flex Artemis. So we expect time charter equivalent earnings of somewhere around $75,000 to $80,000 per day. Guiding also in terms of revenues and adjusted EBITDA around €90,000,000 of revenues and €70,000,000 of adjusted EBITDA, quite similar to the results achieved in Q1 last year. We have 2 dockings scheduled for this year.

Operator

Last year, As some of you might recall, we were carrying out dry docking the 1st dry docking 5 year special survey of 4 ships altogether. This year we only have 2 ships. It's the Constellation which we will dock end of Q1 or Q2 depending when we Gatot back and then Courageous is scheduled for drydocking in the Q2. So with strong results, have very healthy backlog, which I will cover shortly. We are pleased to once again pay out a dividend of $0.75 per share for the Q4.

Operator

So this gives in total a dividend for the full year 2023 of $3.125 per share. And that should give a yield of around 11%. Stock market here in Oslo is down today. Our stock recovered a bit down 5.5 percent driven a bit by the sentiment around Equinor's Capital Markets Day where they cut the dividend and Equinor is down 5%, 6% today and dragging down the energy sector. So hopefully we can provide you some info and give you comfort on the results of Flex LNG despite the kind of sell off in the energy market here in Oslo today.

Operator

So let's review our guidance. So last year, we provided a fairly detailed guidance for the full year given the fact we had 100 percent coverage for the year. So we guided on 3 key measures, Time charter equivalent, which is the average rate we obtained on our ships. We guided at approximately $80,000 for the full year, delivered slightly better in Q4 as that's the peak season 81,100. And average for the year, we ended up at 79,000 $500,000,000 So very much in line with the guidance provided.

Operator

Revenues, we guided approximately $370,000,000 And I'm pleased to say we beat that by $1,371,000,000 And then we guided the last measure was adjusted EBITDA of $290,000,000 to $295,000,000 We delivered $290,000,000 And the reason why we did meet that midpoint is We had some technical off hire days last year. We have had extremely few technical off hire days during the Yes, more than 5 years we've been trading these ships, but we had some last year and affected slightly on the adjusted EBITDA. Looking forward to Q1, as I said, it will be more or less similar to the numbers we delivered Q1 last year depends a bit on the timing of the Constellation docking and also how the spot market is performing but revenues of $190,000 adjusted EBITDA of $170,000 and then a range here on the TC achieved of $75,000 to $80,000 per day. So during the last couple of years, we took delivery of the 1st ship, Flexendeavor, 9th January 2018 and then the Caesar ship 11 January, 2018. And then we've been building up the numbers of ships on the water.

Operator

Last ship we took delivery of was in I believe it was May 30 to May 31, 2021, the Flex Vigilant. So from Q3 2021, we had all our fleet on the water generating earnings. And then we started off with most of our ships in the spot market. That really paid off in 2021 when the market was roaring, a bit more challenging during COVID. And then from 2021, 2022 onwards, we mostly locked in rather long charters on all of ships and stabilized both the revenues and then the adjusted EBITDA since basically all our costs are fixed.

Operator

And as you can see variability in adjusted EBITDA is very small. We had a bit of a dip in Q2 last year, but that was mainly driven by the fact that we carried out dockings of 3 ships in Q2 last year. This year, as I mentioned, we only have docking of 2 ships. Looking at the fleet profile. So this backlog I mentioned is backed by high contract coverage.

Operator

We have very limited Open ships near term. This year, we are already 94% coverage on contracts. We have one ship, as I mentioned, the Flex Constellation coming back from our 3 year time charter, opening up end of Q1 early Q2. And As I mentioned, we plan to dock her. That typically takes around 20 days and then she will be available at a good period of time, I think, once we are out of the bottom of the market typically.

Operator

So We also have 1 ship linked to the spot market by the fact she has a variable time charter. It's the FLEX Artemis which is on a 5 year charter but where the charter has option to extend that contract by a full 5 years. As mentioned, FlexResolute recently extended to 2027. Well, there is a similar option for the sister ship Flex Courageous. So, let's see if we also add some more backlog here during the year.

Operator

And then as you see, we have very limited open availability here near term. We will have a bit softer market in terms of volume hitting the market compared to ships for 2024, 2025. And then there's a lot of new LNG coming to the market 'twenty six, 'twenty seven, 'twenty eight and onwards. And actually, that's a period now where contracting of ships are tailing off because of the very high ship prices. So we think we are well positioned, minimum 50 years of charter backlog.

Operator

We think we will add some more charter backlog this year by a declaration of further options, which could bring the total up to a total of 71 years. And all these charters are blue chip counterparties. Looking at dividends. So we have a stable business backed by a lot of first class backlog and we are generating substantial cash flow. And as I've covered in the past, we are a very shareholder oriented company where we do think that all these earnings belongs to shareholders and we are paying this out regularly on a quarterly basis.

Operator

This quarter, we are paying out $0.75 slightly higher than the adjusted earnings Given the fact that we have our various sound financial position with SEK 411,000,000 of cash, no upcoming maturities, a lot of backlog and very limited CapEx liabilities since we have no ships under construction and CapEx liabilities are limited to dry dockings. And this year, we have the dry docking of 2 ships which should be in the range of 10,000,000 all together in CapEx for those 2 ships. So a very sound stable business. And last slide before giving it over to Knutis. With this business, we have generated substantial returns.

Operator

We listed this company almost 5 years ago now, June 2019 in New York at $11 We paid out almost the same amount, dollars 9 in dividends. If you reinvested the dividends you would do even better. And then on top of that we have had a share price appreciation. Right now the stock is down today. So it's the 2 80% is a bit less, but still a very good return.

Operator

And, you know, for those who are fan of Warren Buffett, he knows that the market in the short run, it's a voting machine. In the long run, it's a waiting machine and, you know, gravity tends to favor the good businesses. And as he says in this book, Snowball. Time is the friend of the wonderful business, the enemy of the mediocre. So we certainly delivered on that philosophy.

Operator

We are paying out the free cash flow. And in the Russell 2,000 consisting of stocks in New York, we are in the top 2% of companies in terms of dividend payout with 11%. I haven't calculated, but probably 12% today with the stock price. So I think it's a good time to be invested in Flex and I will come back and give a bit more on the market. First now, we will head over to Knut.

Operator

I hope you give him a warm welcome. Knut is 46 years today, so it's his birthday. So come here, Knut and I hope you can get yourself a beanie afterwards as well as a gift. Here in Norway typically if you're single you go with green beanie, if you're not you have a red, if you're undecided you have a white one. So curious to see which kind of P and A you're going to elect to have.

Operator

Last year, there was an LNG carrier which was scrapped at age of 46 years, your same age, the Gandria. But Knut, he is still operating in the LNG business.

Speaker 1

Thank you, Austin. I think we can hand over to the summary of the operational figures for the Q4 and for the full year. If you look at operating days, in the Q2, we had 77 days of fire related to the dry docking. And then we had in the 1st 3 quarters 19 days of technical off hire. In the Q4, we had 100% technical uptime and that results in a technical uptime and commercial availability for the year of 99.6%.

Speaker 1

That's a strong testament to our onshore technical and operations team and also for our crew members on board keeping their propeller running. If we look at the time charter equivalent per day In the Q4, we had 81,100 and then for the full year, 79,500, which is at par with our guiding. OpEx for the Q4 is somewhat higher. That was guided on the Q3 presentation and that was mainly related to scheduled maintenance of our auxiliary engines. But however, as we guided on the total OpEx for the year, we end up at 14,400 versus the guidance of 14,500.

Speaker 1

For 2024, we guide an OpEx of SEK 14,900,000 and that is mainly an increase in crew wages and some technical. That results in revenues of SEK 97,000,000 for the quarter and SEK 371,000,000 for the full year, which is also as guided, an EBITDA of SEK76,000,000 for the quarter and SEK290,000,000 for the full year. That results in adjusted net income of SEK 38,000,000 for the quarter or SEK137,000,000 for the year. And in the adjusted numbers, we adjust out unrealized gains and losses from our derivative portfolio. And then as you may recall from closing of our balance sheet optimization program in the Q1, We also strip out the noncash write off of debt issuance cost.

Speaker 1

So then looking into the more details, and we've been through the revenues and the OpEx. Then the main differences are on the derivative portfolio. The paid interest is on par quarter by quarter. And then the difference is on the this quarter, a loss on the derivative portfolio of an unrealized loss of SEK 18,700,000 and then a realized gain of SEK 7,100,000 which is offsetting our interest costs. That gives us a net income of SEK 19,400,000 for the quarter.

Speaker 1

And if we then adjust out the non cash items, we have adjusted net income of SEK 37,800,000 or adjusted earnings per share of ZAR0.70 The balance sheet remains pretty much the same. We have the scheduled depreciation of our vessels and then $411,000,000 of cash on the asset side. So we keep it very simple and that results in book equity of €848,000,000 or book equity ratio of 31%. And then as a reminder, these book values reflect that these vessels were ordered at a low point in the cycle and therefore does not reflect the market value today. On the funding side, our debt portfolio, we did a complete refinancing of our fleet with the balance sheet optimization program that was concluded in the Q1 this year or last year.

Speaker 1

And that gives us a flexible blending of both long term leases up to 12 years for some of them. And then the traditional bank portfolio where we have structured $400,000,000 of our debt as a non amortizing up to 6 year revolving credit facility. And when we have SEK410,000,000 SEK 411,000,000 SEK 411,000,000 of cash available that gives us a flexible tool to for cash management So we can repay the RCFs in between quarters and then we reduce the interest rate cost and we pay 70 basis points in commitment fee. If we look at the debt maturity profile, our first maturity is in 28 and that's related to our bank financing. So we have a lot of headroom ahead of us and this is a very supportive financing position to be in the support of the business and our business case.

Speaker 1

We have over the last 3 years been quite active in the interest rate market. We entered into the market in with a lot of additions with long term interest rate swap in 2021. As the interest rates have increased, we have also added more but also amended the duration profile to make use of the gains and reduce the tail end risk of this portfolio. So today, we have hedging of our interest through traditional interest rate swaps, but also off balance sheet items like fixed rate leases. For this year, we have an average net hedging ratio of about 65%, And then it tails off more or less equal as you will see in the forward curve of the SOFR rates going forward.

Speaker 1

We are monitoring the interest rate market pretty closely, and we are looking into when to add more exposure on the tail end to increase our hedge ratio from 25% and onwards. And that concludes the financing sector. And back to you, Istern.

Operator

Okay. Thank you, Knut. So in terms of the interest rate hedging, Jay Powell, he was on 60 Minutes on Sunday and talked about the interest rate market and seems like March will be a bit premature for a cut, but May seems very likely and It doesn't rule out bigger cuts down the road. So I think we have a profile of the hedging, which is very much in line with our pivot from Fed within this year, which we have expected and position ourselves for as inflation is starting at least to subdue a bit. In terms of the LNG market, we had another eventful year, seems to be the case every year.

Operator

Frankly, 2 was all about curtailment of Russian pipeline gas to Europe prior to the invasion and subsequent to the invasion when we had the blow up of the gas lines. This migrating down to more normal levels. We did have our peak in Sport LNG price last August of August 2022 of $100 per million BTU equating to around $100 per barrel of oil. We are now down to more normal levels, dollars 8, dollars 9 now, which means that LNG is cheap again. And when things are cheap, people tend to consume more of it.

Operator

So we are now at our big discount to oil. More importantly also, we are at a huge discount to especially diesel. So this means that it's firing up demand in new regions. And actually in longer term, it's better to have a more sound price of the product, otherwise we will have demand destruction. In terms of the exporter and importers, we have a swap Of the tranche, we have China coming back being the biggest LNG importer again after they became the biggest in 1, they implemented the 0 COVID policies, which resulted in China reducing its LNG import in 2022 of 20%.

Operator

They are bouncing back in 2023 and retaking the TRON as the biggest importer for the 2nd time. Japan has additionally been the biggest, but Japan is firing up the nukes and also the power coal power plants. They built, I believe, 40 of those since Fukushima. So we do see that Japan demand has been on the soft side, But as I will come back to, there are emerging Asian countries which is snapping up these cheaper cargoes. Last year was a year with limited new capacity being installed, although we did have a volume growth of around 3% driven by U.

Operator

S. Particularly. Restart of Freeport contributed with a lot of new volumes. This year also IEA with fairly muted export capacity being implemented and there are some certainty about Arctic LNG 2. So 13,000,000 tons, half of this is about Arctic LNG 2, The first train, this is operational.

Operator

They are planning to commissioning it during Q1. So we'll see How the Russians are managing to sell these cargoes, the experience from the crude markets, both oil and products, seems to be the Russians are very fine and good at finding loopholes and finding customers who are willing to buy this cargo. So this will be one of the key questions for this year, but for certainly, if they are moving the cargoes, they will be very ton mileage intensive. Fragile Maritime Supply Chains has been a big factor. That sounds like something negative, you know, For shipping, it doesn't isn't necessarily a negative.

Operator

We drive on inefficiencies. Inefficiencies means typically higher ton mileage and also maybe higher ton time. So it means you need more ships in order to shift cargoes. So We had the drought in Panama. We still have the drought in Panama, the water levels in Gatun Lake, the main freshwater supply for the Canal.

Operator

This is our water escalator which needs to be refilled with water all the time. The water levels are still at low level. There are still restriction in the number of transits And this will stay in place until at least the summer when we will see whether there is a sufficient rain season in Panama to replenish those water resources. From end of the year, we had similar issues with the Suez Canal there. It's not about water, it's about war and the Houthi rebels attacking the maritime traffic.

Operator

And today there are no LNG carriers going through the Red Sea to utilize the Suez Canal. And of course, This has some effect on tonne mileage, especially for the Qatari volumes going all the way through Cape of Good Hope to enter European customers rather than going the shortcut to Suez. So let's look at a bit on the export and import side. As mentioned, strong growth from U. S.

Operator

Actually grew 27% in Q4 and 12 13% for the year, Flat for Australia and Qatar, the 2 other major exporters. Russia is the 4th biggest exporter, fairly flat Volume export from Russia, there's no sanction on LNG. There are some sanctioning by the U. S. And U.

Operator

K, which are not allowing Russian cargoes, but for the remaining countries, they are happy to take this cargo and especially EU who have been boosting their imports of Russian LNG. Malaysia, fairly flat. LGR was one of the outliers last year growing healthy through 2023. On the import side, As I mentioned, China bouncing back 16%, still a bit below the levels we've seen in 2021 prior to the COVID restriction and now with the price of LNG being competitive, we expect China to grow quite healthy also in 2024. Japan is on a bit of a decline And South Korea, Taiwan fairly flat.

Operator

The big order driver, if you follow macroeconomics, India has been enjoying a very long boom now. And with prices coming down to these levels, we see strong growth in India. If you look at the Q4 growth factor at 43%, adding 15% for the year. So we expect this to continue. And rest of the world, you see very strong growth in Q4 driven, as I said, by these low prices.

Operator

Europe fairly flat, and I will cover that in more detail shortly. So just to summarize the big movers and shakers, U. S. Growing steady, Algeria as I mentioned, Qatar, Flat and Egypt where there has been issues with the feed gas from Israel given the conflict in the area. They have not been we have had shutdowns of feed gas from Israel to Egypt liquefaction plants.

Operator

There's also been domestic demand for this gas. So they've been exporting less than in the past. However, this is not that important for the shipping market. Egypt is very close to the main import nations in Europe. So it's very low ton mileage on these voyages.

Operator

Yes. Heading back to Europe. And Europe has been the lucky man the last two seasons. European LNG imports used to be at around 80,000,000, 85,000,000 tons. Once the Russian started to reduce the flow of cargoes of gas to Europe, Europe had to turn around very quickly to get access to these LNG cargoes.

Operator

And this is mostly U. S. Where you have flexible LNG cargoes. And they've been bidding up the price. And as mentioned I bid at the price all the way up to $100 per 1,000,000 BTU, making LNG unaffordable for emerging Asia.

Operator

And but With 2 winters in a row with fairly mild weather, the Europe has been able to fill up its inventories. This is also driven by what I will cover on the next slide, demand subversion or demand destruction. These kind of high prices is, of course, affecting behavior and use of LNG. So gas consumption in Europe has fallen off a cliff and it's now shortly bouncing back. But as you can see here on the right hand side, inventory levels in Europe are quite healthy.

Operator

We have some time still to go. Usually, the kind of the season where heating season lasts until 1st April, so we will be drawing down this inventory. And then once we're getting into the spring, Europe will need to fill up its inventory levels again in order to be prepared for the next winter. So as I mentioned on last slide, Europe had a huge demand destruction on the gas side driven by these high prices. Demand in 2022 was down 12%.

Operator

It's been weak in 2023, but we do see some green shoots there. On the graph on the right hand side, we have seen European gas demand bouncing back driven by The residential and commercial sector also driven by industry. We haven't really seen it on the power side, yes. So this is something we will monitor and we do expect low prices will affect consumer behavior. Looking at the Merge in Asia, as I mentioned, there is some region where we see demand really bouncing back.

Operator

Japan import on the weak side. China is up, but we do see some of these other countries, as mentioned, India, but not only India. Thailand, very strong growth last year. Bangladesh and Pakistan, which has been forced out of the market by these high prices are now returning and buying up more cargoes. And then the big item which has been recently It's the U.

Operator

S. Moratorium on more export licenses. So U. S. Has grown to become the biggest LNG exporter in a very short time.

Operator

And actually while exports now are at around 85,000,000 tons with the projects in the pipeline in U. S, U. S. Is set to almost double its exports from existing projects regardless of this decision. However, it's unfortunate that we have this situation.

Operator

Europe is still in desperate need of getting access to more LNG to kind of fill the gap from the Russian curtailment. And of course, the rest of the world is also reliant on LNG in order to force out coal. The coal consumption is huge. If we are to do something with this, of course, renewable is a solution, but LNG is certainly a solution to reducing the coal consumption. So there are a couple of projects in U.

Operator

S. Which has been more or less ready for FID this year. And we mentioned some of the big projects there, Calcevus Pass 2, the Sabine Pass expansion, Port Arthur expansion like Charles, who had a license to export but which were not allowed to renew it or it, so they have to apply for a new one, Commonwealth, Delfin and Freeport Train IV. So all of these projects now are in a bit of limbo. As former U.

Operator

S. Politician said, all politics is local. This was Tip O'Neill. So This is driven by, of course, Biden have to reach out to the voters on the green side or the left side of his party in order to secure the election coming up in November. But for these projects, it's unfortunate.

Operator

We do think that they will come back again regardless of whether it's Mr. Trump or Mr. Biden wins the election because these are huge projects which are very important for the allies. Very important for the economy, creating jobs, and these projects are ready to go once they get this permit from the Department of Energy to export to the countries buying these cargoes. So let's look at the maritime inefficiencies again.

Operator

So yesterday I found up a new word, Canale Ballism. So This is related to the fact we have had these issues with 1st Panama Canal, the drought really driven down the number of transit of LNG ships going via Panama, rather ships are going for the safe route, Cape of Good Hope As also the fees in order to skip the queue in Panama have reached new highs, we were up all the way to about $4,000,000 to skip the Q last autumn or actually more winter than autumn. So this has driven ships to rather go via a cap of good hope where you also have certainty on your schedule. And then lastly, now the Suez Canal where wall traffic has gone given the onshore security situation there. So this has driven up Cape Brething, which of course is good for the ton mileage and observation of shipping capacity.

Operator

A bit more details on the Suez Canal. Of course, flows in the LNG market is more or less that What is being produced in Asia is being consumed in Asia. So the Australian projects are going typically to Southeast Asia. And so the swing factor tend to be the American volumes which are flexible in nature. But There are still the Qatari.

Operator

Qatari is a big player. Qatari is exporting about 80,000,000 tonnes. They will grow a lot with the new expansion projects they have. So they sell quite a few cargoes to Europe. And if you are going we are Suez, it's a big shortcut rather than going to Cape of Good Hope, which is the case today.

Operator

Let's dig into the shipping market. So here we have a graph of the headline rates assessment for a modern tonnage 2 stroke. And we can see on this line the gray one being the rates achieved last year and the dark blue, the average last couple of years and then the light blue being this year so far. So we have the seasonal softness we have seen all the other years And then the dotted line being the future freight rates. So we do expect the market to find a bottom.

Operator

And then as usual, we will have a seasonal peak Once we are getting into, I would say, August, September typically, then you see a ramp up in the rates. So we do think that we are well positioned with Constellation doing docking in Q2 and being ready in the market once it's ready for takeoff later in the year. And we could also have some rallies here depending on the price structure of LNG. If there is a contango, which is often the case, we will have more buildup of floating storage and Constellation is a partial related ship, very well fitted for such a trait. Average distances, I mentioned a lot of the U.

Operator

S. Cargo has been going to Europe, given Europe's desperate need to get access to LNG, which has reduced the distance being sale. But with prices now low and more demand from Asia, also the inefficiencies in Suez, we could see a better picture on the tonne mileage going forward. New building prices has gone up a lot. As Knut mentioned, we contracted ships when they were cheap.

Operator

So we have been contracting ships back in 2017, 2018, paying about $185,000,000 per ship. Ship price today have fallen a bit from $265,000,000 to $262,000,000 But if you take that number, It's an increase in the price of a ship of $80,000,000 We have 13 ships, so that's $1,000,000,000 in appreciation of the ships since we contracted them. So we have a book equity of SEK860 1,000,000 or so. If you add that appreciation, you are at value adjusted equity of SEK 1,650,000,000 and our market cap today is around SEK 1,500,000,000. So we do still think we have a very good kind of net asset value protecting our assets and also backed by the charter backlog I mentioned.

Operator

So these kind of high prices on the newbuilding side also means that you need to have a higher rate in order to defend such an investment. Keep in mind, interest rates gone from 0 to also stabilized now today at around 4% on long term interest rate, which means that in order to build a new ship, contract the new ship and give our rate for our long term charter, we see that rates are at around $100,000 per day, which is, you know, substantially higher than the approximate 80,000 we achieved last year. So we do think we will find good opportunities to recontract or tonnage once it come open at better rates. We have seen softness in the shorter term rates and we actually now have a contango structure in the term rates where longer term charters are more expensive than shorter term, reflecting the fact that we have a lot of ships for delivery this year with a bit muted volume growth on the export side, But which should give us a lot of opportunities to recontract ships because as I show on this next slide, Contracting of ships is of course tailing off. The high prices and of course our rather big order book already means that very few people contracting on speculation.

Operator

Out of this order book of around 300 ships, 93% is contracted towards a long term contract and we see little of any speculative newbuilding contracting at all. And we do see the number of ships for delivering tailing off, which fits very well with also the export story where a lot of volumes are coming to the market from 2025, 2026, 2027 and onwards. And once we have this moratorium in U. S. We have a lot of projects ready to be FID ed, which I think will happen, where startup of these volumes will come from 20 27, 20 28, 20 29 when we also do have quite a lot of ships open.

Operator

So another thing I've been talking about now for close more than 6 years is the technology change. So When we contract the ships back in 2017, 2018, we contracted the newest type of ships. It's a 2 stroke engine, it's a super efficient ships. It's about 60% more fuel efficient than the old steam turbine generation of ships. Those ships were contracted typically in the 1990s into 2000 against a 20 year time charter, 20 year, maybe even 25 year time charter.

Operator

And these ships are now rolling off those legacy contracts. And given the inefficiency of these ships, Given the poor environmental profile of the ships, we see a few charters extending these ships. So we have about 24 steam turbine ships expected to be redelivered from a long term contract this year, 25 next year, 12 there. So this replacement of old inefficient ships will result in more opportunities for modern tonnage in terms of fleet renewal by the charters. So as I mentioned, it was 46 year old ships being scrapped last year, 6 ship in total.

Operator

The year before, it was 1. In 2021 when the market was super hot, it was 7 ships. We will be coming into our age now where we will have double digits of scrapping of older tonnage because it's overdue. The only reason this hasn't happened is that these ships have been on long term charters and not being in the spot market. And then let's look at the export market I mentioned, a bit muted on the growth this year given the uncertainty about Arctic LNG 2.

Operator

And then from 2025, 2026, 2027, we will have a big growth of this export market. There are 70,000,000 tons of ready project for FID, the Northfield Qatar project will of course go ahead regardless of what Biden is doing in the U. S. And I might even add further volumes. And then we do have this project in U.

Operator

S. In limbo where we need to have a resolution on this moratorium before these projects can be greenlighted and adding further growth to the market. So before concluding, we will come with our annual ESG report later, probably around April. We have annual lease year report with a lot of measures. But we have also been part of the CDP, carbon disclosure project, where we are filing for a lot of data and getting a score.

Operator

We got 23 results yesterday, February 6th, and we've been ticked up from B- to B. So I think that's a pretty good result for us given the lean organization we have in terms of reporting on all these measures. So before we head for the Q and A session, I'm just going to repeat the main highlights. Revenues, dollars 97,200,000 in line with guidance. We are delivering SEK 37,800,000 adjusted net income, which is the most applicable number, which gives Earnings per share adjusted of $0.70 We are a bit in a softer market now, which is no surprise.

Operator

We will be ready for the spot market with Flex installation in the Q2 after we have been carried out the dry docking offer. We're happy to have a 2 year extension of Dassault 2 20 7 adding further backlog to our fleet and then we are guiding similar numbers for Q1 this year as last year, a bit softer because of the spot market affecting the variable higher time charter. And then we might do some docking in Q1 or most of it we do expect to take place in Q2. So with good numbers, healthy financial position, We are declaring quarterly dividend, dollars 0.75 bringing it up to $3.125 for the year. And That should give a yield of 11% it's probably 12% now.

Operator

Okay. So Knut, let's see if we have some questions.

Speaker 1

Yes. Thank you for the questions that you have sent in. And I think we start off again with Umer Nokhtar from Jefferies. And there's a number of questions regarding the Red Sea and also Panama Canal. So from Omar, these restrictions, are they enough to offset the newbuilding deliveries and the lead to your tighter market?

Operator

I think for the Red Sea, it mostly affect Qatar. Qatar, they might get a bit short on shipping and need to re let in some ships in order to have sufficient capacity to move the to move the Qatari volumes to Europe. So I think it depends a bit more on the trading pattern. Who is going to be the major pillar of cargoes this year. Is Europe going to be desperate to be the buyer of 1st and last resort?

Operator

Or are Europe going to stay a bit more back now and leave some more room for the Asian countries that will affect the market more? Panama, It's never been that important for LNG. A lot of the LNG ships, they route via Cape of Good Hope anyway. So, you know, we've been frank about the fact that this year we do see a bit more ships than molecules. But on the other hand, we also do expect that finally we will have scrapping.

Operator

Usually people don't scrap their ships in a good market. We have had very good markets 2021, 2022, 2023. It doesn't give a lot of incentives to scrap a ship. But Keep in mind when these ships are getting older and you know, they already are a bit outdated on the technology. Are you then willing to commit a lot of money to dry dock those ships and typically you have to replace a lot of these older systems.

Operator

So I think That will be a bit more important. I think also the price curve of gas will be important Because if you have a contango structure in the price curve of gas or LNG, you will have floating storage, which Typically, any year can take out 40, 50 ships of the fleet in kind of this contango trade. So that I think it's probably a more important driver.

Speaker 1

And following up on the Red Sea, The insurance rates have increased if you're trading in that area. And also there may be other costs associated with being there. How is that affecting Flex?

Operator

Yes. Right now it's not a single LNG ship in the Red Sea. But you know, before Everything blew up. We also had ships going through that area as the situation at that time was considered to be moderate risk for ships without a link to Israel. So but that drove up the price of the insurance.

Operator

So typically you need a war risk insurance in order to go through that area. The biggest provider of war risk is the Norwegian War Risk Fund. And the price we saw on the pricing of getting our insurance to go through that area went up 10 times. Today it's probably a lot more, but we haven't asked for a quote because we haven't had any instruction to go through that area. However, in our time charter, it's basically we are a private driver.

Operator

So we show up with our ship and the crew. And under a time charter, it's the charter who is responsible for the routing and the instruction to the ships where to trade. That also means that a charter is responsible for taking the cost associated with that trade. So If the charter elects to go through Suez, there will be a Suez tariff to pay, which they will have to pocket. And they will also have to cover the war risk associated with that.

Operator

So that is something they will put into account when instructing the ship. The same goes with Panama. If they go to Panama and they pay $3,000,000 in order to skip the queue, we are not paying that. It's their instruction how to trade the ship. They have to carry all the costs associated with that.

Operator

And from this year, this also includes the EU ETS. So it's the emission trading system of European Union started to be implemented for the maritime sector this year, which means that if we take a ship into Europe, we will need to buy carbon quotas for the emission associated with that trade. So typically, if you take a U. S. Cargo to Europe, you will pay carbon emission for 50% of the route because it's 1 ballast leg and 1 laden leg.

Operator

But again, this is a cost of the trade. We pass this cost to our charters as they are the one deciding where the ship goes. And of course, this has created us some issues in relation to the Red Sea because A journalist, they typically ask you, are you sending your ship to the Red Sea? But under a time charter and every single voyage in LNG shipping is a time charter regardless if that's a spot voyage, a short voyage, a term charter, it's a time charter. And under a time charter, charter is the one instructing the ship.

Operator

We will have to follow them. Those instructions, we have a contractual obligation to do so. However, in our standard time charter, there is certain provision in relation to safety. So the master has to assess the situation together with us, whether it's safe to comply with those instructions. If it's not, then of course, we can reject.

Operator

But that also opens you up to litigation, what is safe and what is not safe. It's a bit of ambiguity, and we rely on advice from outside advisers as well as the people writing the war risk insurance in order to make that assessment.

Speaker 1

And while we are at cost, there's a question here on demand for crew with the big new order book and deliveries of new building in the coming years. How do you see demand for crew and the situation for Flex?

Operator

Yes. It's a very Relevant question because top of my head, there's about 1,600,000 seafarers in the world. A lot of this used to be Russian crew, which these days there are certain restriction on those and lot of that crew base were LNG officers. So that means it's you need to replace you know, in some instances that grew because, you know, you might not be able to pay them. So that has also created some issues.

Operator

You have Ukrainians, which is also a maritime nation where a lot of Ukrainians have elected to rather stay at home and and fight the war rather than being at sea. So yes, it's not that easy. However, you know, LNG business is maybe the most technical sophisticated part of the shipping industry maybe together with containerships. So that means you will typically always be able to attract talent for this business, which means Basically, we need to poach people, the best people from the tanker space or the LPG space. So basically, you're passing on the problems.

Operator

And at the bottom of the sector, you typically have small dry bulk. So You're cascading the problem down. And yes, it's getting harder to get people. LNG will always be able to find people. But these are sophisticated ships.

Operator

You cannot let everybody just run these ships because there's a lot of technology in these ships. So it's getting harder. We are able to do it. We try to retain our crew. We try to be a good employer so that people want to sail with Flex LNG.

Speaker 1

And we have questions from BTIG, and it's related to Flex Constellation. And the re chartering options and alternatives and what's your preference?

Operator

So this is Greg or? It's Greg, yes. Good to see you, Greg. Key chartering opportunities, let's see. We need to get a kind of firm redelivery date and But our plan is to once we get that back to Docker and market her, we already been around talking to people.

Operator

We if we had a contract, we would of course announce that. So given the nature of this business and the name of the company, we are open to do shorter, longer, medium term. We really need to see what is the economics. And then if it makes sense, we are open to fix long. But if we don't get the numbers we want, we are happy to trade a ship back again in the spot market.

Operator

We've been out of it for some time now. And we I have to say we missed the action. But that you know, we are super comfortable with that. We're 94% coverage for this year, so we can afford to have our ship in the spot market if we deem that to be more attractive than finding a term deal.

Speaker 1

Then there's a number of question on EU ETS, how are we prepared? How is that? Is there any cost for us?

Operator

I think I already covered it. It's part of the time charter logic. So the charter instructing the ship, if they're instructing the ship to go into EU, that is associated with cost of trade, which is the EU ETS. So we have amended our time charter to where kind of we will typically, they either they will buy the carbon quotas and surrender them to us and we will surrender them to EU or we buy them for the charter and send them a bill for those carbon emissions and then surrender it to EU. For us, it's not a cost.

Operator

It's a pass on to the charters. And of course, in the end, they need to pass that cost to somebody and that is Mr. Consumer. So there's no tax without any costs. So in the end of the day, it's the consumer paying this tax, not us.

Speaker 1

Then we are segueing over to Business Development and Capital Allocation. So maybe We'll start with the growth questions. How do you plan to grow Flex LNG beyond the 13 vessels?

Operator

We had this question now for some time. We're looking at the market, but we are Stewards of the shareholders capital, you know, if we contract a ship today, If we're super lucky, maybe we get the ship in 20 27, but the slots availability are now getting into 20 28. So that means that we are spending, let's say, SEK262,000,000 today to get a shipment in 28. So it's 4 we are not seeing that money for 4 years. It's not the price, it's not $2.62 because we need to have supervision.

Operator

We might need to draw a loan, a building loan with a bank which needs interest rate. Interest rate is 4%. They might want a margin 2%, so that's 6%. So once you're taking that into account, The cost of that chip is not $262,000,000 it's maybe $285,000,000 or so. That means that, is that a better use of our cash than paying dividends.

Operator

So far, we haven't been convinced that it's better to spend that much money on new ships. So we rather focus on the ships we have. We have one ship now open in Q2. We have FlexRanger fully open in 2027. We might have some ships open in 20 28, 2029.

Operator

So why not focus on the ships we have opened 'twenty seven, 'twenty eight rather than splashing out all this money on new ships. So we are not there to pursue growth because Knut and I can be happy with having a bigger fleet. Our number 1, number 2 and number 3 focus is return on equity, return of that money to shareholders through dividends and we're not going to pursue growth just to be big. We rather be big on dividends.

Speaker 1

And there's a question related to that on paying dividends versus buying back our own share. Yes. How do you look at share buybacks?

Operator

Yes, we've done it in the past. So we did this, it was end of 2020 into 2021. So we bought back about 1,000,000 shares at that time because we deemed it very attractive. Haven't well, have to check the stock price after the webcast and see it. So we're open to do that.

Operator

If we feel the stock is getting Too much suffering because of sentiment. We might elect to buy back some shares for sure. So we're open to that. Could be an alternative, not ruling it out. But for this quarter, we are focused on paying our dividend and let's see what happens.

Operator

It really depends on where we see the best use of the company's cash.

Speaker 1

And you mentioned growth for newbuildings. Richard Diamond from Castlewood Capital asks, is there any room for industry consolidation? And would you consider a NAV to NAV acquisition?

Operator

Yes, Richard. Hi, to you. I hope you have a good time in Dallas. Of course, we have said for many, many years, we are certainly open for consolidation. We think there is A lot of consolidation opportunities because it's quite fragmented on the owner side.

Operator

A lot of or actually, the Surely the vast majority of LNG shipping companies are private, very few in the public domain. So we think it But you know, we don't want to go to bed with strangers. We want to go to bed with people. We share the same values, philosophy, ethics and also the fleet in terms of having a modern efficient fleet. We don't see any value in merging with somebody who has a lot of steam tonnage.

Operator

So we need to find all those parameters so that we can have A marriage rather than a 1 night stand.

Speaker 1

And then a question on reinvestment in the existing fleet And then particularly on air lubrication system, is it technical possible? Is it economically sensible to do that?

Operator

Air lubrication has been something that have been coming up the last couple of years. So just give you a highlight of what that is. It's basically you are putting a compressor on a ship and you're making small hulls holes under the hull. And that compressor is taking air and compressing it and it's creating bubbles under the hull. So the theory behind this is these bubbles Under the hull is going to reduce the draft when you are going through water.

Operator

Of course, ships are going through water. It creates a lot of resistance. And if you can reduce that drag, you could potentially then either save fuel or reduce or increase speed. I think for our ships, they are very modern and efficient. So we looked at it when we contracted.

Operator

We weren't totally convinced. And As far as we understand, we did the right choice because the 1st generation of air lubrication system has not lived up to the promises. The makers of these systems are saying that the 2nd generation is a lot better. Let's see when we get the data. And a lot of ships today are being built with this system.

Operator

On our ships, because the efficiency of the engine is like 50%, 52 percent thermal efficiency. That means that on a natural boil off speed, we still have a very high speed of 17.5 to 18 knots. So we don't really need more speed. If you add this, it might go and then but you also need to utilize natural boil off speed. So, You know, putting this on and getting like a turbo from going from 18 to 19 knots doesn't really make a lot of sense.

Operator

On older ships, it could make sense as part of your strategy to improve your carbon emission indicator Because my EOS chip then, if you have a tri fuel or so, you have a speed of 15 knots and you need to force boil off in order to go quicker. If you're adding this, you get higher speed. So then it makes more sense to put it on an older ship. However, On the older ships, you might not want to invest that much money because it's less technical efficient. So but that said, We've seen this happening also on the retrofit side.

Operator

It's quite easy to retrofit the air lubrication system. We've seen it on our 10 year TriFuel where they put this on while she was doing a 10 year special survey. So it's open, but we are not considering at the moment. But Down the road, if price of carbon is continuing to increase, if the carbon emission system It's worldwide where you have to pay for it and you get a more monetary incentive to reduce emissions, then we might consider it. But certainly not before these ships are doing a 10 year special survey.

Speaker 1

I think we'll round off with the last question and that's more of tips to retail investors that want to follow the daily development in the LNG spot rates. And the question is if the BLNG2 on Baltics, quoted on CME. If that is a good proxy for our open positions or other?

Operator

Yes, it's a bit of a problem this that there's very limited data on freight rates for LNG. It's a bit of a niche market. It's a lot hell of a lot easier to follow the drybulk and the tanker market because there's a limited there's very many sources for that kind of spot data. I would say that, you know, you can go to the CME, there you get the Freight Derivatives. You can see the kind of the forward freight market for a couple of different routes.

Operator

So the Baltic LNG is a good source. You also have Spark, which is a provider. I follow them on Twitter or X. So that's also a good source to get data on the spot market. Fernpulse.com by fernless is also a good source for rates on several of the segments, Rydberg Tankers, VLGC, LNG, although they only quote on that page as far as I know spot rates for high fuel ships which are a bit more inefficient than those ships.

Operator

So I would use all of those. And If I come up with some better sources, I will come back to that and maybe we could even make a link on our page. But a good source is to follow Sparks on X. They are regularly giving update on the rates.

Speaker 1

And that is for the 2 stroke or is that for

Operator

They have for both, both for the older Trifull chips and the 2 strokes, yes.

Speaker 1

That concludes the Q and A.

Operator

So, yeah. Thank you, Knut. I hope you have a good birthday celebration today. And thank you everybody for listening in. We will be back in May with the Q1 numbers and give you an update on the company and Our results in relation to the guidance provided.

Operator

And if you are fond of dividends, don't miss out on the Advanced Gas

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Earnings Conference Call
FLEX LNG Q4 2023
00:00 / 00:00