FLEX LNG Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 23, 2024

There are 2 speakers on the call.

Operator

Management and I will be joined by my colleague, Knud Troholt, our CFO, who will run you through the numbers a bit later in the presentation. We are doing this presentation live from Nudal in Oslo. And following the presentation, we will do a Q and A session where you can ask questions with the chat function or send an email to ilflexlng.com. And as usual, we have some nice gift for you for the best question. The best question wins the Flex LNG summer kit consisting of, of course, our caps, the Flex and the City sunglasses both in the pink and black.

Operator

We have a water bottle so you can hydrate. This nice Flex, just Flex It T shirt, running shirt, I was using it yesterday. And with Sunny Oslo now 26 degrees, it's also nice to have some sunscreen, Flex on the Beach sunscreen. And we also have a big Flex on the Beach bathing towel here. So hope you can provide some good question.

Operator

That's the most fun part of this presentation. So before joining, I just going to remind you about our disclaimer. We will be providing some forward looking statements, some non GAAP measures and the limit to completeness of details. So we also recommend you to read our earnings report published today as well. Okay.

Operator

Let's kick off the highlights. Numbers very much in line with what we have guided. The revenues came in at SEK 90,200,000, which was, as mentioned, in line with guidance of approximately SEK 90,000,000 Our net income and adjusted net income came in at SEK 33 200,000 and 37,900,000 respectively, giving our earnings per share and adjusted earnings per share of 0.62 or 0.70 cents respectively here. Knut will give you some more details on these numbers. It's basically now adjusted numbers.

Operator

We only take in the realized gains and losses on interest rate derivatives, while in the net income and earnings per share, we take in both. Recent events, we have added quite a lot of backlog so far this year. First, we announced the extension of 2 ships with the Supermajor. This is a Flex Resolute, Flex Courageous. They have been now doing about 2 years of the 3 year period they were fixed for.

Operator

This contract is 3 plus 2 plus 2 years and the charters have now in February March announced that they will extend those contracts from end of Q1 '25 to end of Q1 'twenty seven. And there is a further option here until Q1 2029, which we do expect will be utilized. Additionally, Cheniere, which have chartered Flex and Devon now for, yes, getting close to 3 years actually slightly more than 3 years. They extended this contract, which has been extended also in the past, extending this contract now by 500 days from Q3 2030 to Q1 2032. So this is now the 2nd longest contract we have in our portfolio.

Operator

And lastly, we also have secured a contract for Flex Constellation, a new contract. This is the ship you saw the picture of the funnel on the front page. We had this ship on a close to 3 year contract starting in 2021. She was redelivered in March from that charter. We took her into our dry dock and traded her spot and we were able to find a 10 months firm charter beginning in May and which takes this ship until end of Q1 2025 where also the charter has the option to take that ship until 2026.

Operator

As we have said in the past, which we also said in our Q4 presentation back in February, we were a bit cautious in terms of the market. There's a lot of ships for delivery this year, while the number of molecules coming to the market is on the low side. So the balance looks a bit in favor of charters rather than owners and we therefore are very happy to find a good contract for Flex Constellation taking her out of the spot market for this year. This year, we have 2 dry dockings, the sister ships Constellation and Courageous. As I mentioned, we took Constellation into dock end of March, finalized that according to plan and budget.

Operator

And now we have her sister ship, Flex Courageous, doing a similar exercise. She's out of dock and we are doing the final modification and expect to have this ship back in operation and back on TC end of May. Q2 is the softest quarter due to the seasonality. So we do expect our time charter equivalent earnings to be reduced slightly in Q2, which has been the norm since we started this company. We expect this average rates to be around 72,000 to 74,000 as we do have one ship on variable higher charter and we also have Constellation exposed to the spot market for a short period of time in Q2.

Operator

Thus, revenues with 2 ships out of dry docking and the spot market, as mentioned, we expect revenues to be close to SEK 85,000,000 for Q2. Once again, the Board is pleased to announce our SEK 0.75 per share dividend for the quarter. We have changed a bit how we are paying out the dividend. We are paying it out from contributed surplus, which might have an effect from some of our shareholders in terms of dividend taxation. This depends on where you are investing from.

Operator

It means that now the last 4 quarters we paid out a dividend of 3 point €1.25 per share implying a yield of around 11%. The stock was up a bit here in Oslo this morning. It's now up about 1%. However, liquidity in the Norwegian market is fairly limited as most people investing in this company is doing that in U. S.

Operator

And U. S. Is yet to open, open ups now in 25 minutes and we'll see how the market react. In any case, we are in a very strong financial position. We have added more contract backlog than we have consumed this year and these factors all support our dividend capacity.

Operator

And I will come back to the dividend in more detail shortly. Just to touch upon the guiding, as mentioned, we delivered SEK 90,200,000, we guided revenues of around SEK 90,000,000 Adjusted EBITDA came in slightly higher than the guiding. We guided approximately SEK 70,000,000 delivered SEK 70,600,000 and also the TCE in line with guidance. As mentioned, Q2 is the softest quarter. We also have 2 ships in drydock for this quarter.

Operator

So we expect slightly lower revenues and adjusted EBITDA for that quarter. And then typically in Q3, we will have all ships back in operation that tend to be a better quarter impacting the ship we have on a variable higher. And usually Q4 is the strongest quarter as we are heading into the winter season where demand is peaking. 2 ships in drydock and both of these are according to schedule and budgets. We expect the CapEx related to this dry docking to be around $5,000,000 and that $5,000,000 will then be depreciated over the 5 year docking cycles about $1,000,000 a year in depreciation from this dry docking.

Operator

Having a look at the ships, Constellation here on the left hand side and then Correj just when she was in dock, she has now boarded outside alongside Kai on the yard where we're doing the final preparation to take her out to sea and back on TC end of May. Looking at our fleet portfolio today, we are still at 50 years of minimum charter backlog. There is a couple of options attached there. We do expect most of the options to be declared, which will then bring the charter backlog closer probably to 69 years than 50 years minimum. As you can see, we have ships coming off in 2,030 and they were recently extended to 2,032.

Operator

Vigilant last year was extended to 2,031. We have 2 ships with a supermajor maturing 2029. We have Freedom also with a supermajor maturing 27, but where the charter has the option to extend that ship to 29. Resolute and Courageous recently, as I mentioned, extended from Q1 'twenty five to Q1 'twenty seven and there they also have an option which we expect to be declared taking those ships to 2029. Cheniere also have 2 ships more.

Operator

They have Endeavor and Vigilant. They have Voluntere and Aurora where firm period is to Q1, twenty twenty six where they have an option to take those ships to 28. And then Cheniere also have a 5th ships, FlexRanger, which was extended in November 2022 until end of Q1, 2027. So that's except for Constellation, that's the first fully open ship we have. FLEX Constellation, as mentioned, she had a docking stay.

Operator

She was in a short period of time in the spot market. She's now on a 10 month charter where the charter has the option to extend that contract until end of Q1 2026. So a lot of coverage, 100% covered for this year. And then we have one ship on a variable higher charter where that higher is linked to the spot market. That is firm until Q3 2025, but here the charter has 5 single option until Q3 2030.

Operator

And given the fact they're paying market rate for the freight, we do and they lose the remaining options if they are not declaring the first option, we would expect at least a couple of these options to be declared. So that backlog, of course, together with our sound financial position creates a good environment for paying good dividends. Once again, we are paying the regular €0.75 per share, approximately $40,000,000 The last 12 quarters now or 3 years, we have paid out $510,000,000 in dividends and counting as we have illustrated here on the slide. So just before handing over to Knut and the financials, just the kind of key decision criteria for the dividend as we have covered also in the past. We have become a bit color blind on green lights.

Operator

Last presentation back in February, I believe it was 7th February, we warned that we had a bit cautious outlook on the spot market. But having such a number of green lights, we forgot to take down the market outlook to yellow. We have taken it down to yellow now given that the fact that there are numerous ships in the spot market and a bit soft spot market is dragging down the front end of the term rate curve. Except for that our earnings and cash flow are strong. We have been growing the backlog, increasing the earnings visibility by these new contracts this year.

Operator

We have a lot of cash, SEK 383,000,000 that Knut will cover. Flying colors on all the covenants, no debt maturities before 28. CapEx liabilities are 0. We don't have ships under construction. So CapEx liabilities are only related to the ships that we are drydocking and we have done more or less the drydockings for this year.

Operator

So with that, I give it to you, Knut.

Speaker 1

Thank you, Istain. So let's have a look at financial highlights for the quarter. Revenues in the Q1 came in at 19,200,000 or that calculates to a time charter per day of 76,500. So the lower numbers for the Q1 versus the Q4, that's explained by the seasonal softer spot market impacting the revenues from Flex Artemis as well as some off hire days for Flex Constellation while she entered drydocking. Operating expenses in the Q1 is lower at SEK16,700,000 and the reduction is explained by timing effects of when we expense certain operating expenses.

Speaker 1

As you may recall, in the Q4, we had a number of swing sets expensed on our fleet, while we had 0 in the Q1. So operating expenses will be a bit lumpy in between quarters, but we stick to our guidance of OpEx per day of SEK14,900 for the full year. Interest expenses during the quarter is fairly flat quarter on quarter, but as you see on the gain on derivatives, we, in the Q1, we booked a net gain of SEK 7,300,000. That includes NOK700,000 in unrealized gains and NOK6,600,000 in realized gains. During the quarter, we have also amended one of our interest rate swap.

Speaker 1

We have reduced the duration NOK50 1,000,000 interest rate swap and thereby we have received a cash proceed of NOK5 1,000,000. And I will come back to that later. That results in net income for the quarter of SEK 33,200,000 or NOK0.62 per share. If we look at the adjusted numbers, here we adjust out unrealized gains of both interest rate derivatives and from foreign currencies. So we strip out SEK 700,000 for the interest rate derivatives and also the FX loss of SEK400,000.

Speaker 1

And then we add back the SEK5 1,000,000 we received from the amendment of the interest rate derivative where we reduced the tenure of that swap to July 2025. And that gives us an adjusted net income of NOK37.9 million or NOK0.70 per share. If we look at the cash flow for the quarter, we received SEK 49,000,000 from operations. Then we have slightly higher net working capital as we have prepayments in relation to the 2 drydockings that we have. SEK 26,000,000 in amortizations of our debt.

Speaker 1

And as we note here, if we compare the depreciation of our fleet versus the amortizations, we pay SEK7.5 million more to reduce our debt. And here again, the NOK 5,000,000 from the termination of the swap and we paid out the NOK 40,000,000 in dividends, giving us a end of quarter cash balance of SEK383,000,000. If we look at our funding portfolio, there are no changes to our debt position except for scheduled amortizations. And as we highlight here, the split of financing between leases and term loans and also the geographically diversified providers of this both from the U. S, Europe and Asia.

Speaker 1

And in this structure, we have the SEK 400,000,000 revolving credit facility, which we then use for cash management optimization during this high interest rate environment. And while we have SEK383,000,000 in available cash, we repay our RCF during the quarters to save interest rate cost. A reminder that our first maturity on the loan portfolio is in 2028. And if we then revert to our interest rate hedging portfolio, which comprise of the interest rate derivatives, which has a book value today of $45,000,000 And in addition, we have fixed rate leases, elements of that of nearly $200,000,000 That gives us a sound hedge ratio in this high interest rate environment. As I mentioned that during the Q1, we reduced the duration of a $50,000,000 swap, giving us $5,000,000 in cash proceeds.

Speaker 1

And post quarter in the second quarter, we did a similar one for another $50,000,000 which gave us a $5,400,000 cash proceeds that you will see in the next quarter. Today, we also released our 6th annual ESG report for 2023, which where we explain more about our initiatives for reducing emissions and how we deal with our environmental footprint, business ethics and code of conduct and also self help and safety for our seafarers and offshore onshore personnel. One of the key highlights here is our 7% reduced emissions compared to 2022. And also this report should be read in conjunction with our CDP reporting, which we announced last quarter, where we had received a B rating improved from B- in 2022. So that concludes the financial sections and back to you, Jaesten.

Operator

Okay, great. Thanks. Yes, let's look at the market. Best way to start looking at the market is to look at export and imports. As you can see here on the left hand side of the graph, there are 3 major exporters of LNG with U.

Operator

S. Now becoming the largest one, 29,000,000 tons in the 4th 1st months of the year, Australia and Qatar neck on neck, both of them 28. So those three countries are the major exporters. Despite Russia and sanction on Russia, there's really not any widespread sanctions on Russian LNG, although there are Russian sanction on the new project from Russia, Arctic LNG 2, which I will cover more. But despite this, Russia is still growing and maintaining the 4th largest exporter of LNG.

Operator

Malaysia, the 5th, and then there's a lot of other countries in the other bracket including Norway. On the import side, we have seen a marked shift this year in where the cargoes are flowing. Europe entered the storage levels at a very high level and have been lucky 2 winters in a row in terms of the winter temperatures and thus the gas requirements. And with ample storage levels in Europe, Europe has been pulling back from the market and which has also sent prices down to very competitive levels. And this has opened up a lot of demand in Asia and especially emerging Asia.

Operator

China, despite somewhat disappointing growth in China after scrapping off the COVID policies a bit more than a year ago, they're growing very healthy, 15% up and have become once again the biggest importer. Japan, flat together with South Korea and also Taiwan, which are the more mature Asian economies. India, a lot of economic growth in India and optimism about India lately growing at the same pace as China at 15%. And then as you can see, the highest growth actually is in the other packet, which includes a lot of emerging Asian economies, up 28% there. The biggest outlier, I would say, is Thailand, growing this year 1,000,000 tonne, up 25%.

Operator

And Thailand actually also grew 25% the full year last year. So we do see that the prices are spurring demand in Asia, which will cover on the next slide here. You do see the graph of the price of LNG come down a lot. August 2022 was the peak when the European gas prices hit $100 per 1,000,000 BTU on par with $600 per barrel of oil. Today, we are stabilizing around $11,000,000 $12 for both the LNG in Europe or the gas price in Europe TTF and then the JKM, which is the Asian spot prices, where we actually now see a situation where spot LNG is cheaper than contracted LNG.

Operator

So about approximately 1 third of this market is spot market where people are contracting the LNG on a spot basis, while the other part of the market is contracted LNG, which is typically priced towards oil prices at a discount to oil of around 20%. Henry Hub flatlined at around $2 which makes it very profitable for U. S. Exporter to export natural gas out of U. S.

Operator

To international markets. And I would say, as Stephen in Bloomberg have covered in our article recently in Bloomberg, these prices are spurring demand in Asia. And of course, it has a huge impact on this price drop, especially as I will cover in Europe, which is very dependent on spot prices. When they fall, the importers basically get a lot more LNG for their money and it's almost like a tax relief. So just to give some more details, European LNG imports lagging, as I mentioned, 20% behind last year because of the ample storage levels.

Operator

Demand subversion, although we do see some green shoots in terms of demand coming back in Europe with these prices. And then also some more contribution from renewables. While in Asia, we see much higher demand than last year and in the high range of the last couple of years. I mentioned Europe, the region the most dependent on spot cargoes. Natural gas storage levels came out very high into this winter.

Operator

Out of the season, we are around 67 percent full storage level now when we have started the injection season. And the target for you is that you want to get to 90% fully storage level by end of November and I do think we will be on track to meet that target. But as I said, Europe is very dependent on spot cargoes. And for some the last couple of years now been the buyer of 1st and last resort. Now they are pulling a bit back from the market, leaving room for emerging markets.

Operator

And as we have said in the past, Europe's energy policy is a bit like a Jon Bon Jovi song. It's living on a prayer, hoping that the weather will be good. And if not, they have to be paying off in order to entice those cargoes to go to Europe rather than Asia, which also means that when you see on contracting of new LNG, it's not it's some of the rather the European superpowers signing up for flexible portfolio contracts, this being ENI, Shell, Total, Equinor, buying flexible LNG from especially U. S. Where they can trade that worldwide as there is so much political uncertainty about regulatory framework for natural gas in Europe when you have a 20 year horizon.

Operator

Looking at bottlenecks, it's been a lot in the media lately, most recently with the Suez Canal. So traffic through Suez has been very limited, more or less non existing this year after the Huti Rebele starting targeting marine traffic. And we do see Qatar have started to divert cargoes to Cape of Good Hope, 3,000,000 tonnes this winter season, which is up basically infinity. We've also had congestion issues in Panama, especially end of last year. But we also see it now with the auction prices in Panama being very high.

Operator

We've seen close to $2,000,000 in auction fees for Panama. So we see a huge drop in U. S. LNG going through Panama and they are rather being sent a long way from U. S.

Operator

To Asia via Cape of Good Hope as Suez is not really our very viable alternative, which both of these two trends are dragging out sailing distances and thus requiring more ships than if the canals were working properly, which is in general good for shipping market as ships has to stay longer and that you require more ships for each cargo in order to move the cargoes. We have had some couple of questions lately about 2 topics, so we will just cover them briefly. What we see a lot is questions about what about closure of Stetor of Hummus, what will the impact be for LNG market? So of course, there are 2 big LNG exporter in that region. So while in oil, it's a lot about Saudi Arabia, about 20% of the oil is flowing through the Strait of Omeros, which is a rather narrow Strait.

Operator

It's a bit similar for LNG. Here, the bigger producers are Qatar and United Arab Emirates. So while on oil, it's about 20% of the market. It's quite similar for LNG. About 20% of all LNG is traveling through this narrow strait.

Operator

And of course, a closure of this will be devastating not only for the exporter but also for the world economy as energy prices would soar. We think that is a very, very low probability, but it's a high impact. And on the right hand side here, you can see the 2 major exporters, Qatar and United Arab Emirates, where those cargoes have gone the last 16 months from January 2023 until end of April, you do see a lot of these cargoes going to Asia, which makes sense. It's the shortest route and especially India, which is where they close situated to these two countries. So we don't think this will happen.

Operator

The effects for the world economy of closing this straight is too big, both in terms of oil and LNG. And actually, Iran is also very dependent on getting their oil cargoes especially sold, which are typically being sold to China. So China also have an interest in keeping the traffic through this trade open. Then the second question we get quite a lot is Russia and what will happen with Russia. As I mentioned, Russia being the 4th biggest exporter and they're planning to ramp up.

Operator

Arctic LNG2 should be up and running. This project have been hit by sanction, which is postponing the startup of this. The Russians state that the first train should be operational, but they are planning also to add further trains to this project, 2 more trains, which could bring up the capacity for the project from 7,000,000 to 20,000,000 tonnes. And then they do also have some other projects. So this is a big uncertainty.

Operator

However, what we have seen in the past is the Russians have been able to get surprisingly many hydrocarbons on ships. If we look at the oil and the petroleum market, we do see now EU this week have not been able to sanction Russian LNG. It's really just the U. S. And the U.

Operator

K, which is not importing Russian LNG, but now the EU has let the member states decide themselves whether they want to ban Russian LNG. In general, we do think that all the cargoes here will be produced and we will have a bit of a similar trading picture that we have seen in the product and the oil side where the BRICS are supporting each other. So we do think that if Europe are not taking the Russian cargoes, the other countries in the BRICS being Brazil, India, China, South Africa will are willing buyers of the Russian LNG, which will result in longer sailings distances. The limiting factor for Russia being, of course, the number of ice breaking vessels they have, so they will have to do more ship to ship transfers. Also getting this the Arctic LNG 2 project up and running It's more challenging with all the sanctions.

Operator

But we do not expect any shut in of Russian LNG. That has not been the case. On the oil side, we don't expect it to be happening on the LNG side either. And this could potentially be the start of our LNG dark fleet. And trade winds have a good article, Lucie Hainen, trade winds today about a lot of activity on the steam side where there's a lot of unknown buyers.

Operator

So if you don't have subscription to that, I think at least we can cover this a bit here in our presentation. We do think that the Russians are planning to do something similar we've seen on the oil and petroleum side and that these cargoes will flow and they will be maybe soaking up some of the steam tonnage that would otherwise be scrapped. Looking at another driver here is, of course, coal. With the high LNG prices, coal has been coming back a lot. We have seen that in EU during the energy crisis.

Operator

Coal really grew quite a lot despite this not being the intended policy of EU. With gas prices now coming down to Earth, EU has been able to reduce their imports, but China, India, the big coal consumer, keep growing their coal conceptions. There's been a lot of talk about LNG and emissions. There came out a new good report recently from BRG Energy in April measuring the BRG emissions from various sources of both LNG, pipeline gas, coal, etcetera to measure the greenhouse gas emission intensity of these various sources. And what they actually find is U.

Operator

S. LNG is quite good in terms of the GLG emission and thus reducing coal by around half in terms of emission. And EIA also came out with a report recently this year where actually the methane emissions from coal is slightly higher than the methane emissions for the natural gas value change. So we do think that LNG is a good way of reducing emission, not only the greenhouse gas emissions, but also the pollution emissions, this being the SOX, the NOX, the particle matter, which is really detrimental to people's health. So we find LNG as a good solution, but that doesn't mean we have to be complacent.

Operator

We still have to bring down emissions from the LNG value change. And I do think that the ARC ships being the most modern ships with a lot of these ships in our fleet, 9 out of 13 being MEGI ships, hardly without any meet any emissions are a good solution in order to bring down emissions in the value change. Okay. And then before concluding, just have a bit look at the LNG shipping market. Newbuilding prices have been on an uphill way the last couple of years, gone up about 40% from the bottom, have stabilized now at around $260,000,000 And this together with a long lead time, lead time now typically 4 years, high interest rates have pushed up the long term term rates you need in order to invest in new ships to around $100,000 With the softer spot market, we have now shorter term rates, the 5 year term rates actually being lower than the 10 year charter rate, typically shorter duration time charter rates tend to be higher than the long term.

Operator

But right now, the whole rate curve is in contango given the near term weakness in the spot market. And this is, of course, driven by what we see here on the next slide, a lot of ships coming for delivery 2024 and 2025, while the new volumes to the markets are typically coming end of 2025 into 2016 and onwards, which I will give some more details on shortly. We, however, do see that with these high prices, contracting activity has been a bit more subdued lately. It's mostly been Qatar active buying more of the ships they have reserved as they are rapidly expanding their capacity and need ships. And we do actually now have a situation where we have our order book stretching all the way out to 2,031.

Operator

That said, even though there's a lot of ships for delivery, more or less all of these ships are contracted, They are not contracted on speculation. And there are two reasons for this. It's because of the high growth, which I will cover shortly in the market. So you need more ships to take that growth. And then it's the fact that we have a lot of older steam ships, which are economically and competitively and where we do see our need to renew the fleet and scrap these older ships.

Operator

So we need new ships to replace those older ships. And looking at rates today with spot rates for modern tonnage at around 50,000, That means the steam ships are making rates in the low $20,000 which means that when you take in the cost of docking these ships, these are very expensive ships to dock because they are old. It means that these ships are running at OpEx level. So if you had the if you had installment and interest cost on top of that, these ships are not making any money at all. So that together with a lot of these ships coming off long term contracts, we think as also described in trade winds today will result in more steam ships being scrapped in the coming years.

Operator

And that, together with more growth, will rebalance the market sometime from end of 'twenty five, 'twenty six, '27 onwards when we have ships available again in the market. So before concluding, just showing the different projects. Qatar almost doubling the capacity export going from 77,000,000 tonne, expected to be 142 1,000,000 tonnes by end of this decade. U. S, despite the moratorium from Biden, they are set to almost double their exports.

Operator

We do expect after the election, the moratorium will be lifted and U. S. A lot of these U. S. Projects which are ready to go will be sanctioned and we will see more growth from U.

Operator

S. As mentioned from N25 onwards, when we have ships open and we can recontract them, As I mentioned, the long term rates are at around $100,000 Last year, we made $80,000 on average on our ships. So we do think that will give us an opportunity to recontract ships at better rates later this decade. So to conclude, as mentioned, revenues in line with guidance, net income and adjusted income SEK 33,000,000 and SEK 38,000,000 respectively, giving us SEK 0.62 or SEK 0.70 dollars of EPS depending on the measure. We have done a lot of contracts this year for 3 extension and 1 new contract, as mentioned.

Operator

Our dry dockings are going according to plan. We do expect Q2 as usual to be the softest quarter for the year. But once we get both ships back in operation in Q3 and spot market typically get tighter in Q3 and even more so in Q4, we expect revenues and earnings to bounce back in Q3 and Q4. And with that and the strong contract position, we are declaring a dividend SEK 0.75 11% yield. And as Knut has mentioned, we have a very good financial position to keep on paying this dividend, which has been $510,000,000 the last 3 years.

Operator

So with that, let's see who are winning the Flex Summer gift in the Q and A session, Knut. I think I have to move all this stuff. Let's see. Do you want some sunglasses?

Speaker 1

Okay. Thank you for the questions you have sent in. You mentioned maybe we should kick off with one of the comments you mentioned at the end here. There's been a number of comments regarding the dividend and sustainability of the dividend. Do you have any more to elaborate?

Speaker 1

And there's also comments questions about what the decision factors are for the board. We have listed a number of them.

Operator

9, I believe

Speaker 1

it is. Yes. So maybe you can elaborate around the decision process and your view on the sustainability

Operator

of the dividend level? Yes. I think it's a couple of items. Of course, we look at the earnings. So I think the best measure and that's why we have the adjusted numbers is the adjusted earnings per share, SEK 0.70 because there we only include the realized gains and not the unrealized gains.

Operator

So we are paying out slightly more than our earnings today, but it's not much, slightly more in terms of but how we look at it, of course, we have a contract portfolio. And as I mentioned, we do have some ships coming off charters later in this decade from 2026, 2027, 2028 onwards where we do see the ability to possibly recontract those ships at higher rate levels. Another factor is the fact that we have $383,000,000 of cash. And every quarter, we are paying down our debt. So the kind of amount once your debt gets lower, you also your interest cost gets lower.

Operator

So that means that when you have $383,000,000 of cash, we could do either 2 things. We could do what you would call a dividend recap. We don't need to have $383,000,000 on the balance sheet. We could probably pay a huge one off dividend of $250,000,000 or so and then rather stay on a lower cash balance level. However, we have structured a lot of this cash as a SEK 400,000,000 revolver.

Operator

So we don't really pay the cost of having it, the cost of carrying it. We reduce the revolver during the interim of quarters where we are paying around 70 basis points to have it on standby until 28. So it's more about those kind of factors. We do think options will be declared. A lot of these options have higher rates.

Operator

So we do think that eventually over time our earnings will grow. And then over time our interest expenses will fall once we are deleveraging as we as Knut showed in his graph, we are deleveraging $7,500,000 more per quarter than our depreciation. So we are quite comfortable with that. We can run this company with less than $100,000,000 of cash. We don't have a lot of working capital.

Operator

We saw this quarter, we had a bit of buildup on working charters are paying us higher the 1st day of the month, which means that all charters are paying us higher the 1st day of the month at the latest. And then typically, we are paying our expenses later in the month and then debt in arrears. So that means it's very we have a negative working capital to run the business. So I think that makes it quite easy to also model the cash flow. Right now we're paying out a bit more because we have the money to do it and then eventually down the road we think this will kind of stabilize at the level where earnings will be up and interest expenses will be down because kind of if you look at it, our OpEx $14,900 most of our cost is finance cost, is installments and interest.

Operator

I also do believe my personal view is that at one time here Fed will pivot. It's only one time that we have had Fed hiking interest rate at this kind of level without having any effect on the real economy and that's been in 1994. So I do eventually think that we will see a pivot where rates will be coming down as well. And we have kind of anticipated that in terms of cutting a bit on our duration of our hedges in order to be able to benefit from that as well. And then of course, we have the decision criteria which we have shown in the slide deck.

Speaker 1

And Sherif Almagabi from BTIG asked, with no maturities until 2028, have you given the thought of prepaying some of the debt to increase the financial flexibility? And I guess, as we discussed in the presentation, we have the $400,000,000 RCF and in between quarters, we use that, we prepay it down to reduce the interest rate cost and in essence it is a reduction of that in between quarters, but we maintained the commitment, which in fact, in our view, increases our financial flexibility if there are investments that can be made, but also to support the business case in general.

Operator

Yes, it's like having a checkbook ready with very limited cost and we can jump on any opportunity. You know, we have in the past provided bid on several ships, a lot of ships to be honest, where we can then put a bid in on those ships without having to go to an investment bank or some bankers to underwrite the financing for us. We can bid because we have the revolver there and gives us a lot of flexibility. If we pay it back, we don't get it back. So it reduced the flexibility.

Speaker 1

And that segues exactly into the next topic of how to spend it and investments. Certain questions are more specific. We've been sort of muted on newbuildings on the speculative side. But the question more on the opportunities to order new buildings backed by long term contracts.

Operator

Yeah, lately it's been mostly Qatar being active in the tender market, ordering more than 100 ships based on these tenders and contracts. We have not participated in that for reasons we have explained in the past. So there's been a few very few tenders for new buildings, also being a reflection of the fact that new building prices are high. Lead time is high. Once you have risk free rate at 5.3% and you have to wait for 4 years to get the ship that also drags up the cost of that ship.

Operator

So that CHF260,000,000 might easily become $280,000,000 to $285,000,000 when you're also adding in supervision costs. So that means if you do a calculation on it, that's why you get to these rates of $100,000 Today, there's a lot of modern ships on the water, MEGI XDF, which means that instead of doing tenders for newbuilds, more people are looking at existing tonnage. We find it more favorable to rather bid in on our ships. We have Constellation coming up in 2025 or 2026. We have Ranger coming up in 2027, we have Aurora Voluntaire coming up in 2028, which means that we can rather bid on the basis of those existing ships and probably be more competitive than building a new ship.

Operator

That said, of course, we are looking at it from time to time, but we find it more interesting to market our existing ships. We are looking sometimes for buying secondhand tonnage, so far not been successful. Being successful bidding and buying ships is really about having the highest bid. So that doesn't necessarily make it successful if you win. So we try to always measure kind of if we are buying other ships, we don't want to impact our dividend capacity negatively.

Operator

So if buying ships and getting a lower return on that and paying our dividends is what we have to do, we'd rather pay out the dividend.

Speaker 1

And then there's a specific question on ship technology and size. And would you consider 180,000 cubic for and any advantages by that size?

Operator

Yes. Our advantage is it's 6,000 cubics bigger, so that's the main upside. There is downside, however, it makes it a less slightly less tradable possibly. You have to do a ship shore compatibility studies. It's a bit easier when most people are doing the 174 ks size, which is the kind of the market standard.

Operator

But for sure, we're open to look at 180. There are pros and cons. What we are most focused on is on price. So we will measure that towards the price. If buying 180 is a lot more expensive, well, maybe not.

Operator

If it's basically the same price, well, maybe we do it.

Speaker 1

And there we have a question from Scott Leung in SSY Global. With the general perception that newer is better, but commercially, there's not too much of a difference between a newbuilding today versus our vessels. Can you say something about the commercial attractiveness of our vessels versus a new building?

Operator

It's you're right, Scott. It's like 3 or 4 different technology. You have the steam and then you of course have new steam and old steam. And then you have the tri fuel and in that tri fuel segment you also have a bit the 1st generation tri fuels and then the 2nd generation and some size difference. And then once you get into the 2 stroke, you have a modern diesel engine for our ship which can burn LNG.

Operator

And the thermal efficiency of that engine is basically the same as all ships as the new builds. It's around 50% to 52% thermal efficiency. So on the ships they're building today, it's more about adding more equipment. So maybe they're adding a full relic. We have full relic on 3 out of our ships.

Operator

We have partial relic on 4 of our ships. So that is a factor. Maybe you add this air lubrication, which is kind of compressor pushing bubbles under the hull to reduce drag or friction through the water, which optimize speed a bit, some energy saving devices, but a lot of energy saving devices we are retrofitting to our ships. So there's very few differences in terms of our newbuild today and the newbuildings we have today and efficiency is more the same. I think there's one benefit of having a ship that's been trading for some while, it's been to a lot of ports.

Operator

It has already checked all the boxes in terms of the ship short compatibility studies. So it's not like you have to do that walk all over again when you have a new ship. It's been proven, you know, sometimes you have some new hiccups when you take delivery of the ships. We have found out of those hiccups and we have corrected those hiccups, which means you have a ship which has a proven track record in terms of operational performance. So I think people always like new, but our ships are as good as new.

Operator

And if you look at the pictures from some of our drydockings, these ships looks brand new once they're getting out of the dock after the 5 year special survey.

Speaker 1

I think that concludes the Q and A session for this time.

Operator

Yes. Okay. The gifts, yes, let's give it to Scott then because it's a good question. So Scott, you will be the lucky winner of all the stuff I showed earlier as well as this bathing towel, flex on the beach. So I wish you a very good summer.

Operator

I hope you enjoy it. Remember to use the sunscreen and we will be back in August hopefully when it's still summer with our Q2 numbers which we have guided today and as I mentioned we do think Q3 will be stronger because then we have all ships in operation and typically rates will be higher in August than they are in May. So usually historically we are starting to be sniffing on 6 digit numbers once you're getting into end August, September. So for us, it doesn't matter that much. 12 out you know, we're fully covered for the year.

Operator

12 of the 13 ships are on fixed hire, but we have one ship linked to the spot market. So we like the spot market to be good. And typically, a good spot market also drags up the term rates. So with that, thank you for joining and have a good summer.

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Earnings Conference Call
FLEX LNG Q1 2024
00:00 / 00:00