FLEX LNG Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2024

There are 2 speakers on the call.

Operator

Hi everybody and welcome to Flex LNG's Second Quarter Result Presentation. It's August 14 And I'm Oosten Karloklare, CEO of Flex LNG Management. And I will be joined there as usual by our CFO, Knut Torholdt, who will run you through the numbers a bit later in the presentation. Before we begin, just want to highlight, we will do our presentation and followed by a Q and A session where the best question today, can win our summer pack consisting of the Just Flex It T shirt? We are already preparing for Oslo marathon in September.

Operator

I might be on Gas Tech and not able to attend this year, but Knut, he will run this year, he promised me. Flex on the beach street no, beach, Flex on the beach sandals and then of course the Flex cap. So before we then start the presentation, I'll just remind you that we will be providing some forward looking statements. So there are limited details and we will be using some non GAAP measures. So please also read the earnings support together with the presentation.

Operator

Yes, let's kick off with the highlights. Revenues for the quarter, $700,000 which was in line with what we said close to $85,000,000 was our guidance. This resulted in net income and adjusted net income of SEK21,800,000 and SEK30,400,000 respectively. Just a reminder, the difference here is in adjusted net income, we only include the realized gains on and losses on derivatives while in the net income figure we are also including unrealized numbers. So earnings per share came in at a healthy €0.41 or €0.56 on adjusted basis.

Operator

Of the major recent events, we also touched upon this in our earnings report back in May. We have fixed 1 ship on 10 months charter. So we had as some of you might recall, we had fixed Constellation being redelivered back from our 3 year firm charter end of Q1 last year. And we then decided to take it in dock early as this is a low period of the market. We completed the dock according to plan and budget and took it back in the market in the middle of April where we traded hotspot for a while.

Operator

We managed to get a cooldown slot so we could get the ship back in cool condition. And then after our spot voyage, we fixed on this 10 months charter with a large Asian LNG buyer. Well, the redelivery then is end of Q1 2025 but where the charter has the option to extend this time charter by 1 year to 2026. So that means we are fully covered 100 percent charter cover for the remainder of the year, also a very higher coverage going forward as I also will touch upon a bit later in the presentation. We as some of you also recall, we have been doing an extensive balance sheet optimization phase for some time.

Operator

And we had one phase where AIM was SEK 100,000,000. We did our balance sheet optimization 2.0 and then 2.1. And correct me if I'm mistaken, Knut, I think we raised $387,000,000 on those refinancing and we actually have a very good As I As I said in the Q1 presentation, we had the extension of Flex Endeavor from 2,030 to 2,032. And with that attractive backlog on that ship, we were able to secure a very attractive Japanese operating lease on that company. And we also amended our bank loan and we have thus secured SEK 430,000,000 of new financing with our net proceeds from these financing of $97,000,000 which Knut will tell you more about.

Operator

During this quarter, Q2 is more or less always the softest quarter. We try to plan our drydockings during this quarter. So we had Flex Constellation, as I mentioned, in dock and Flex Courageous also taken out from a TC out of operation in dock and back on TC. Both ships were done at 17 days each, 3 days below our guidance of 20 days, cost of talking around $5,000,000 according also to our budget. That means we do expect revenues and earnings to pick up in Q3.

Operator

We have all the ships back in operation. 2 ships were out of the market for some time in Q2. So with all ships back in operation, somewhat better spot market affecting the 1 ship on variable higher. We do expect revenues to pick up to around $90,000,000 time charter equivalent earnings also to increase a bit and the same then goes with EBITDA as most of our costs are fixed in the short term. So with our very healthy backlog, which I will touch upon, very strong financial position, good outlook.

Operator

Once again, we are declaring $0.75 of quarterly dividend. Dividend last 12 months is 3 $125 per share implying a running yield of around 12%. So just a reminder here on the guidance, we guided between $70,000 to $75,000 on the TCE rate delivered in the middle of that. We delivered spot on the revenues. We said close to $85,000,000 84,700,000 is as close as you get to $85,000,000 and then adjusted EBITDA.

Operator

We said close to SEK 65,000,000, SEK 63.2 million, a bit lower because OpEx is slightly higher in Q2 than Q1 due to timing effects that Knut will tell you more about. And then as I said, we expect higher revenues and earnings for Q3 and probably, usually Q4 is the strongest quarter for us. We have 1 ship on index linked to the spot market and Q4 tend to be the high season in the spot market. As mentioned, the dry dockings we have scheduled for this quarter was completed according to both plan and budget. I mentioned the backlog.

Operator

So there's been one change from or recently. We have some ships that are on very long duration charters, Flex Rainbow 2,033. We recently extended Flex Endeavor from 2,030 to 2,032, adoption the charter has the option to extend to 2,033 and we utilize that kind of added backlog on that ship to refinance the ship on better terms. Vigilant, we last year extended to 2,031 where the option is to 2,033. And then we have 2 ships to 29.

Operator

We have the Flex Freedom to 27 with option 29. Resolute and Courageous, we announced in Q1 that those two ships were extended from 25 to 27 as expectation, and we do expect these ships also to be declared until 29 Due to the contract structure of these ships where you have a front loaded firm rate compared to the option rate, which you will also find more details about in our earnings support where the remaining ships in our portfolio have a higher about 18% higher option rate. This doesn't apply for these 2 ships and it has a bit revenue recognition effect, although not a cash flow effect. Flex Voluntary Aurora 2026 with option 2 28. Then we have FlexRanger fully open 27.

Operator

And then as I mentioned, Constellation fixed now until end of Q1 'twenty five where the charter has the option to keep until end of Q1 'twenty 6. So that's our 1st fully open ship with Ranger coming back of that in 2017 and we have some ships in 2028, 2029, which we think is a very good window of having ships open for reasons I will explain a bit later in the presentation. Then the last ship, Faxo Artemis, it's on a variable higher index charter where it's linked to the spot market where typically revenues are highest in Q4 and then Q1, Q3 tend to be a bit similar and Q2 being the softest quarter. Here the charter has the option to keep that ship until 2,030. So with the healthy backlog, high level of income visibility, 47 years of firm backlog, which may go to 66 years.

Operator

We have a fairly predictable cash flow. Last 3 years now we paid out $528,000,000 of dividends consisting of the ordinary dividend $0.75 per quarter plus some special dividends in the past. We're topping those dividends up. And as we have said and touched upon a lot of times in the past, the dividend decision factors, I'm not going to go into too much details. The change we have here, we upgraded market outlook.

Operator

For reasons I will tell you in the market section, spot rates are up, but that's not really the driver here. It's really the fact that term rates have been picking up. Well, we'll take this back to green. As I said in last presentation, we were intending to have the color yellow also in Q4 'twenty three when we reported in February, but we got a bit color blind here by all the green lights and forgot to do it. But we're upgrading this again to green, so green colors on most of the decision factors.

Operator

In terms of the dividend and €0.75 once again declared bringing the trailing 12 months dividends to $3.125 And then I think I hand it over to you, Knut, on the financials.

Speaker 1

Thank you, Usen. Revenues for the quarter came in at 84,700,000, slightly down from the Q1, but as explained by this is due to the seasonal lower period impacting the variable higher contract for Flex Artemis and also the spot operations for Flex Constellation. In addition, we had fewer operating days as we had a number of ships in dry docking, resulting in off fire. That returns into a time charter equivalent per day of SEK 72,400. And if you look at the vessel OpEx, as we commented on the Q1 presentation, we were a bit low compared to budget, but that is timing effects of our expenses.

Speaker 1

So we're slightly higher this quarter, but please note the full 6 months average of SEK14,600,000 and we are in that sense in line with our budget. When we look at net income, net income at SEK21.8 100 that is SEK0.41 per share. In the report, you will see that we had realized gains from a derivative portfolio of SEK6.8 million and we had unrealized losses of SEK3.4 million. In the adjusted numbers, we adjust out the unrealized gains and losses. So for this quarter, the SEK 3,400,000 and also the slight FX gain.

Speaker 1

And then we also add back the cash gains that we realized on the amendment of an interest rate derivative swap in April. As announced in quarter presentation, we reduced the duration of 2 swaps, 1 for Q1 and 1 for the 2nd quarter, and that's adjusted into the numbers. So we get an adjusted net income of €30,400,000 or €0.56 per share. Looking at our cash balance, we had NOK38 1,000,000 from operations and NOK9 1,000,000 of change in net working capital. We reduced our debt by SEK 27,000,000 in scheduled installments and they have also the cash from the termination of the swap and then pay dividends of SEK 40,000,000.

Speaker 1

That ends up at the cash balance at the end of the quarter SEK 370,000,000. And as we note here, as the mentioned refinancings are expected to be concluded in the second half of the year, we will free up NOK97 1,000,000. And I'll come back to the refinancing a bit later. On our derivative portfolio, we have reduced the duration of it, but we've maintained the short term high coverage, which is in line with our expectations of the long term interest rate development. When we now add a Japanese operating lease, we will also have a fixed rate element of that.

Speaker 1

And in August, we also amended a so called mirror swap structure, where we now have added $100,000,000 and used the positive value from the Mirror Swap structure to reduce the fixed rate interest rate. And as you see there, it's 6 years starting in 2026 at attractive 82.5 basis points. On the refinancings, this started off with a new contract or the extension of the Flex Endeavor contract, which made attractive for a lease financing and in particular this Jolko financing structures. We will we have raised them $160,000,000 for that. It's at near about 10 years lease financings and that will release about SEK 48,500,000.

Speaker 1

This is a structure where we have a fixed rate element and a floating rate element. And on a blended basis, we have a loan margin here of about so far plus 130 basis points, which is very attractive. On the back of that, we are then refinancing the 2 remaining vessels of the old SEK 375,000,000 facility, we are extending the duration and also increasing the leverage somewhat. That will release SEK 48,000,000. As you see, we are matching the terms of the recent SEK 290,000,000 facility where we have now a margin of SOFR plus 185 basis points.

Speaker 1

In total, this will release 90 $7,000,000 and we expect to conclude these transactions in Q4. If we look at the debt maturity profile, we see that we are now prematurely addressing our 20 28 maturities. We are pushing them now. So we have remaining maturity in 'twenty eight of $103,000,000 and then spreading out the remaining maturities. And with that, I hand it back to you, Istern.

Operator

Okay. Thank you, Clot. So you don't want to summer kit for your holiday with Madonna? So okay, let's look at the market. So this is the overall product market for LNG.

Operator

Quite muted growth in the quarter, up just about 1% year over year compared to last year with U. S. Being the main GOAT engine, now solidly behind ahead of Australia and Qatar, 40 3,000,000 tons in the first half of the year versus 41 and 44,000,000 for Australia and Qatar. Interesting to see that despite the conflict in Ukraine, Russia is still growing and expect them to grow even more so now with we have seen 2 loadings on the Arctic LNG 2, the new liquefaction plant where they have been able to source older steam tonnage for this project to do the loadings as we alluded to in our May presentation where we said that we thought that shadow fleet of LNG ships would develop based on the discussion we had with the different market actors and interest in the S and P market. So not really surprising for us to see that, rather a bit surprising that some people didn't expect this to happen.

Operator

Schaaf had a lot of time to prepare for this and we are basically following the recipe for the petroleum market where they have been successful in keeping oil barrels flowing to friendly nations, typically India, China, Brazil. So it's really the BRICS. So we do think that the Russians will find also willing buyers for these LNG volumes. On the import side, we have mature Asia being Japan, Korea, Taiwan growing 4% driven mostly by coal shutdowns. And of course lower prices also helps.

Operator

Europe had a mild winter with high inventories coming out of the season, somewhat muted energy demand and then reducing its imports by 20% year over year, which means more cargoes are flowing again back to Asia. China growing very steadily 10% driven by low prices compared to other feedstocks, India even more so 25% impressive growth in India. Thailand been growing for a long time now 11% and the rest of world also very good growth, 28%. So we do see more shift of cargoes to Asia, which I will come back to her shortly. If you look at it graphically, you will see the U.

Operator

S. LNG export share going to Europe, which kind of increased dramatically once you had uncertainty with Russian flows to Europe and even more so when you had the invasion, stayed at very elevated levels. The energy situation in Europe is more manageable these days and prices have come down, which enticing Asian buyers back to the market with now the Asian importers being bigger again than Europe, which used to be the case in the past. As you can see here in European gas demand, year over year change, we do see some pickup in industry, but power generation residential is quite muted. And also gas storage levels at around 85% is quite high compared to the past, the 10 year average solidly ahead of that.

Operator

And then as I mentioned, Asia is where we see the growth, which is generally positive for shipping, shipping flexible cargoes all the way to Asia via Panama is almost, yes, it's about twice the distance than going to Europe, but few LNG ships utilize the Panama Canal. Panama authorities have had discussions with LNG exporters to try to find ways to entice them to use the Panama Canal, but a lot of people are trading out of Cape of Good Hope, which means that Ton Mile goes even more quicker since Suez is not really a feasible route this time. So if you have a U. S. Cargo going from U.

Operator

S. To Europe, typically rule of thumb is about 5,000 nautical miles going to China, 10,000 nautical miles going to China via Cape of Goodtop 15,500 nautical miles. So it's really a big driver of ton mileage, which is good for the shipping market and which is also why shipping market have the sentiment has turned in the recent months. So you do see here on the right hand side, Asian LNG imports is up in the high range of historical demand and much higher than last year. Recent trend there lately, again, about Russia.

Operator

We have had a somewhat surprising invasion of Ukrainian troops into quite far into Russia, all the way to Kursk, not that far away from Moscow and these are creating uncertainty about Russian pipeline volumes that going to Europe is still quite a lot. It's also still a lot Ukraine in transit as you can see here on the left side of the graph affecting potential purchasers like Austria, Slovakia, Moldova. And that's been firing up the European gas prices recently as I was more concerned about supply situation. But then we also see a similar response in Asia. Asia also want the LNG.

Operator

They have been through a heatwave where cool demand has shot up and we actually see a similar increase then in the JKM which is the Japan Korea market or the Asian spot price. And this really needs to be higher than the European gas price TTF in order to make the cargo economics so that you are willing to take the longer route to Asia rather than just selling the cargo into the European market. Henry Hub prices still at low levels, making this spread between US domestic gas prices and international gas prices very attractive for those people with a contract that can ship the cargo from U. S. To either Europe then or Asia.

Operator

So as I mentioned, spot market has also turned up recently. We do follow the seasonal pattern here. So coming from fairly good levels at the start of the year when we are in the winter season and then you have the lull in the shoulder months, let's say March, April where you hit the bottom and then trending upwards right now 2 stroke, the modern type of LNG ships $80,000 $85,000 and the dotted line here represent the future prices. Well, we do see levels of $130,000 $140,000 in the peak winter season. That's why we also think that our numbers will be the best in Q4, affecting the one spot ship we have.

Operator

All our levels are lower than we've seen in the past. It's still historically very high levels. Once you're getting above $100,000 most ship owners with a spot ship is quite happy. But what we have been more which we think is a more positive sign is the trend up in the term rates. So for some time now, we have had a soft spot market, which have dragged down the rate curve where short term rates been lower than long term rates, but that has changed.

Operator

So while long term rates, 10 year charters, these are typically for new builds, economics around $95,000 a day, which is needed in order to defend an investment of, let's say, SEK 260,000,000 at yardstick price plus the lead time typically 3.5, 4 years and the kind of financing cost of that kind of lead time. So 5 year rates now ticked up slightly ahead of the 10 year rate, which I think bodes well also then for the ships we have coming open 26, 27, 28 where we can recontract ships, hopefully at better levels than what we have today and thereby increasing our revenues down the road. In terms of the order book, still it's quite a lot of new builds for delivery near term. This is one of the reason or the main reason why we have taken protection by having a very long backlog in near term until '26, 'twenty seven, 'twenty eight where we think market condition looks better because then we have been through this massive order book. Of course, the order book is for two reasons.

Operator

It's a lot of new projects coming to the market which needs and require ships. And then it's the general face off out of the older steam ships that are uneconomically, which needs to be replaced and there are still a lot of these ships which eventually will be phased out of the market. Positive to see now that with the high prices of newbuilds and the long lead time, very seldom you see any speculative contracting. The contracts being done are mostly for Qatar for their planned expansion and renewal. And then ADNOC was recently in the market securing a few LNG ships for their expansion and renewal projects.

Operator

So less than 7% of these ships in order around 350 of those are speculative or open. If you look at the steam ships, we just on the left hand side here have like a scatter graph where you will see the redelivery of these steam ships. So as we said in the past, most of these steam ships were built against 20, 25 year charters back to back typically with LNG purchasing contract. And typically these ships were built around 2,000. So these ships are now coming off or rolling off existing legacy contracts and we do not expect the vast majority of these ships being able to extend those contracts.

Operator

So these ships will be phased out of the market because they are not economically because of the inefficiency and the size of these ships. So here we see all the ships being redelivered near term and the age of this ship and some of these ships are rather old. And then as I touched upon, we have seen buyers linked to Russia picking up a couple of these ships for their trade in order to lift the volumes from the sanction article LNG 2. If we look at the right hand side, it's economics for these ships. Given their inefficiency, the rates for these ships are much lower than for the modern tonnage.

Operator

In terms of the product market, despite the moratorium by White House on U. S. Export licenses coming into force. In January, we still see a lot of activity in terms of buyers committing to long term offtake agreements and even doing so in U. S.

Operator

Because most buyers feel confident that the moratorium will be lifted regardless of who will win the election as there is a lot of projects ready, it can create economic value for the country, exports which generate trade surplus and not really trade surplus in general for U. S. But at least an improved trade situation and also jobs. So we do see people signing up not only to Qatari volumes, but also in U. S.

Operator

For U. S. Projects that are being put in a bit of a limbo right now, but where people are signing up because they think this moratorium will be lifted depending a bit on who wins the election either later this year or probably next year if the Democrats win. So good to see that the volumes are quite healthy, 48,000,000 tonnes contracted in first half of the year, which is not far off the previous year despite this moratorium and the duration of these contracts on average 14 years. So as I mentioned then, there's a lot of project in the U.

Operator

S. Ready for being green lighted once the moratorium is lifted despite not any U. S. Project being sanctioned in the first half of year. We saw project other places.

Operator

Of course, Northfield West in Qatar, 16,000,000 tons, which is why they are contracting more ships. In the United Arab Emirates, the 10 1,000,000 tonnes which we also expected and why ADNOC, Abu Dhabi National Oil Company, is out in the market also contracting LNG ships, one project in Canada and one in Oman bringing the FID volume to 30,000,000 tons in the first half of the year. And once we get the moratorium listed, there's a lot of volumes that can be sanctioned very quickly in the U. S. And while we are waiting for this, as I mentioned, these projects are signing up more offtake agreements, which means that once the moratorium is lifted, they are ready to go because they have the required contract coverage to FID those projects.

Operator

So that is kind of underpinning the 3rd wave of LNG. We will see a lot of growth in the market from 2026, 2027, 2028 where we have most of our ship open so we can benefit from this growth in the market. We can benefit from the replacement of steam ships and the fact that term rates today are higher than what we have in our portfolio today, so we can reprice the portfolio. And as Groot mentioned, interest rates are also on the way down expectations. So interest expenses is actually our biggest cost component.

Operator

So if interest rate drops, that will also be beneficial for free cash flow. So growth will then come from Qatar and U. S. And I think we are well positioned to capture that growth. So with that, I think we just summarized the presentation.

Operator

We delivered numbers according to our guidance, EUR 0.56 of adjusted earnings per share, which is the measure which takes out the unrealized effects of the derivatives. We have secured 1 new contract for Flex Constellation. We have some new financing that Knut has talked about, which are very attractive in our view. We have done the drydocking schedule for this year. Next year, we will have 4 ships for drydocking, 3 in 2026 and then 0 in 20 7.

Operator

So we have this on a regular basis. Every 5 year, we take the ship out of service. This year we've been able to do that on 17 days in average. Revenues is expected to pick up in Q3 driven by all ships back in operation, higher spot rate on 1 ship. And then we think numbers will be probably better in Q4.

Operator

We'll come back with a guidance on that when we are reporting in November. And once again, we're declaring our ordinary quarterly dividend of $0.75 per share, giving you $3.125 on a trailing 12 month basis, 12% yield. And we are well covered to pay that dividend with pro form a cash balance of SEK467 1,000,000,000 I believe it was and then of course the backlog I showed you earlier today. So with that, I think we conclude the presentation and Knut might have some questions on his laptop.

Speaker 1

Yes. Thank you all for the questions you have provided. We have a number of them. But maybe start with the market and the sentiment for long term contracts. Have you seen any change in sentiment or activity?

Speaker 1

And how do you then view the opportunities for types of Flex Constellation and Flex Ranger?

Operator

Yes, I think it's easy to say something, but we are a bit data driven as well. So we do see that rates have picked up on the term rates. Spot rates of course, it's not unusual that spot rates picks up. They usually pick up the bottom out typically March, April and then they go up. But we do see also the term rates picking up there and we are once in a situation where shorter term rates or 5 year rates are higher than 10 year rates which is how the market should be in a balanced way.

Operator

If somebody can commit to taking a ship for 5 year at the same rate as a 10 year, most people will commit to taking 5 years rather than 10 years. Typically, people want a discount if they're taking a commitment of 10 years rather than 5 years. So we are getting a bit better balance in the market. We do see increased inquiries for term rates. It's not really surprising because there is this roll off of steam tonnage I shown earlier today.

Operator

The steam ships on legacy contracts being rolled off, People don't want to keep those ships. They want to renew them with much more efficient ships. We have shown in the past fuel efficiency per cargo ton lifted on our ships is about 58% better than a steam ship. So that means that it's not only good economics, it's also good for the environment. So when people are committing for a 5, 10 year charter, they don't want steam technology.

Operator

They want the new ships. So we do see more inquiries for that for fleet renewal and also some of these projects where are now signing up SPA contracts are also starting to look at locking in shipping. So I think that bodes well for our strategy here trying to fix that wind on airtime where we have seen muted growth of the market in terms of volumes and then having our ships available ready for the next wave of LNG.

Speaker 1

We touched upon in the presentation on the Russian shadow fleet. So a number of questions here. How do you see that impacting the LNG shipping market? Is that their ability to grow to a large fleet and how that will impact the global trade?

Operator

Yes. This is not like a new phenomenon. This is a well developed situation on the tanker side, both the crude tankers and the product tankers. But also on the LPG side, I run advanced gas as well. The shadow fleet on the VLGC is very big there.

Operator

We're talking up to 15% of the fleet being in this captive shadow trade. So it's for that particular trade, it's Iran, China. On the petroleum products, it's typically Russia, India, China, maybe Brazil. On the crude, it could be Venezuela, Iran and then Russia. So this it's a lot of read through from the other markets.

Operator

It's basically the same thing happening. All the ships are being taken up by the affiliates with the Russian counterparties and they go into a captive trade. Once that ship goes into that trade, they will never come back to the regular trade. It will stay in that trade. If they have insurance at all, it's with our shady counterparty.

Operator

And this is a way of the sanctioned party to avoid the sanction and being able to generate revenues on the products. So it means that you know, you could have some steam tonnage that we thought might be scrapped will go into that trade. But this basically also tend to replace those ships that the Russians were trying to buy a lot of ice breaking Arc 7 ships which were sanctioned and are not delivered. So they have to find a way to arrange that logistics without those ships that they contracted. So it doesn't really affect the net fleet growth because some ships are not being delivered and some ships that we thought would be scrapped they might go into this trade and we will never be in this kind of trade.

Operator

Most serious actors will not be in that trade. But it just changed the dynamics because we haven't had the shadow fleet in LNG in the past. But it seems like this is something that will happen now and with a lot of similarities to the tankers and the VLGC side. But you know, it's not good in the sense of you have a lot of ships trading around the world without proper insurance and maybe not proper maintenance and these ships are old. So it's a, you know, it's a time bomb before one of these ships end up in a situation where you will have spills and ships sinking, breaking whatever which will be an environmental catastrophe.

Operator

It's not that serious on the LNG side because LNG is cooled methane. So if something happens that gas or the LNG on that ship will heat up, become gas vapor or basically methane vapor and it will evaporate. But that is not the case if we look at the crude tankers or the petroleum tankers, then you have a product that's not going to evaporate, but it's going to be landing on somebody's shores.

Speaker 1

Then we are transitioning over to more to the trading pattern of the global fleet and a normalization in the Panama Canal operations. But still, most of the ships are trading to the Cape of Good Hope. Do you see Andy trend back to a normalization with transit to Panama Canal or continued that the Cape of Good Hope will be the preferred route?

Operator

I think the booking schedule in Panama is not really always suitable to the LNG's trade. It's very rigid. A lot of things can happen in the market. You book a slot and you have a cargo, certainly prices moves and you rather want to send that cargo somewhere else or in terms of your ballasting a ship and if you're going Pacific Ocean when you're ballasting on that ship, there's really no place to pick up a cargo except for U. S.

Operator

If you're ballasting from China to the Atlantic, you can pick up a cargo in Australia, you can pick up cargo in the Middle East, West Africa. So it gives you a lot more optionality to fix that ship on a cargo. While if you go in the Pacific route, you only have just one option. So the canal authorities have been in dialogue with LNG players to try to find a system that incentivize them to use the canal more, but we still see that people just don't they don't like the rigidity and also there are costs associated with using the Panama Canal. If you have a lot of slack in your program, for example, you have a commitment to deliver cargo, you have a natural boil off.

Operator

So kind of some of the fuel has sunk cost. So if you are using the Panama, you're paying them the toll, you go through, you come to China and then you are waiting for 10, 14 days in order to discharge. You will not stop the boil off. So you have to kind of consume that. And then it's not really any cost of going the longer route.

Operator

You save the Panama fees and you're just burning the same basically amount of LNG. There are some differences there because some ships are have equipped Relig system. We have 4 ships with a partial Relig, 3 ships with a full Relig. So if you have those kind of ships, very advanced ships, you can use the Panama, you can go to China, you can idle there and you can re liquefy part of the boil off and then get that back to cargo so to reduce your fuel. So it's really a bit also dependent on the specification of the ship in that trade.

Speaker 1

And then a follow-up to that, as we've seen more and more cargo going to Asia and also taking the long route through the Panama Canal and also with the Cape Good Hope, The ton mile effect of that versus the fleet supply coming over the next

Operator

year? Yes. So of course, in general, of course, we always like when you have a pull to Asia, especially if you have a pull to Asia with congestion in Panama because as I mentioned, these numbers in nautical mile, it really drives up the requirement for ships. So we've seen that now and lately often if you have ships from U. S.

Operator

Going to Asia and not utilizing the Panama, they will typically use the Suez Canal, better weather and shorter route. Today, nobody is using that except for those taking cargo into Egypt, which has switched from being an exporter to importer recently and then to Jordan. Except for that, nobody is using the Suez Canal for transit except for these 2 ships linked to Russian buyers for Arctic 2. So it's positive. We want as much LNG to flow to Asia in general because it drives off to the mine and that's one of the reasons why I would say spot market has been surprisingly good this summer because we didn't really expect that much pull to Asia.

Operator

And then on top of that, you have the Suez crisis, which also adds some extra ton mileage.

Speaker 1

Then to Europe and EU ETS, how do you see that play out for the modern 2 strokes versus the steamers and the dry fuels?

Operator

Yes. I can start with the question. You are more in charge of the implementation on our side for it, but I can just give you some broad idea. So of course, for this year, ships trading into Europe will have to buy CO2 carbon permits or basically the ETS to for the emissions they are creating. And of course, this is being implemented over a couple of years with a higher threshold you have to buy every year.

Operator

Eventually, this will be 100% of the kind of documented emissions you have on 50% of the trade. So if you're going from U. S. To Europe, there's 2 legs in that trade. It's the Leiden leg and then it's the ballast pack.

Operator

So that's why you're getting to 50% because you are 50% in Europe and 50% in U. S. Which don't have this EU ETS. So the price of this EU ETS of course is volatile. It can be €100 or €60 So you have to measure that kind of emission you are creating and then it's not offsetting it because it's not a carbon offset but you have to pay for that permit of the documented CO2.

Operator

So that will create a cost of emissions, which I think is the best way of dealing with global warming. If people pay for it they have a real monetary incentive to do it. Much better than having bureaucrats making a lot of rules and giving out a lot of subsidies better put a price on it and behavior will change. So we are generally in favor of this. We like our CO2 and we think it should be implemented more worldwide.

Operator

It will be a competitive advantage for us. As I said, we have a fuel consumption per ton cargo transported about 58% lower than our steam ship. That means the steam ships has to buy a lot more of this carbon credits in Europe to off, not offset but to pay for the permit of emitting. So that 1st, you have the steamships there. And economically, as I mentioned, on the fuel consumption, they are small and then you have this carbon penalty on top of it.

Operator

So generally, we like it. It's good for us. And then Knuther has been in charge with adapting all time charters because this is not our cost. So we this is a cost pass through. We cross up on these taxes.

Operator

So this is for the charters account, which has to pass it on to the consumer who eventually pays for this. So that means all our time charter, under a time charter, the time charter, we get paid a fixed fee. We run the ship and they will pay for all costs associated with that trade being Panama Canal, ports and fuel. So we guarantee a fuel consumption and that is what we are allowed to utilize. And then when taxes come on top of it, taxes related to the trade, they will also pay for that.

Operator

So we implemented that so that we are sending them documents. This is the CO2 we are meeting. This is the CO2 we have to buy. Here is the invoice. Please either refund us or provide us with those carbon credits so we can hand them over to EU organ in charge of this.

Operator

Do you have something to add then?

Speaker 1

No, I think that we are doing any reporting. We are passing this on to our charters as long as we are on a time charter base. Slight geopolitical question, U. S. Elections, do you see how that will impact the LNG market?

Speaker 1

And I assume here in particular the permitting process in the U. S.

Operator

Yes. No, I think of course if Trump wins, it will have the positive effect for LNG that we think this moratorium will be lifted very quickly. Of course, there's a judge already in Texas who have decided that this is not allowed. So of course, that decision in a court in Texas don't really will affect this. But I think if Trung wins, it will be repelled quite quickly.

Operator

If Harris wins, it will take some more time. But I think it's in any event, it will happen. They kind of put this in January in order to attract more votes from kind of green boats. This is a good case for them especially after permitting oil drilling in Alaska. They had to do something and this looks good on a tweet or whatever.

Operator

And then eventually there are so much gas in the U. S. Because this can create so many jobs that we do think that reason will prevail and eventually they will slowly say that, okay, you can start issuing permits again. And of course, there is a lot of pressures from all donations as well to on U. S.

Operator

Politicians to allow this. Both allies in Europe and Japan are pressing on U. S. Politicians to repel this moratorium, and I think that will happen regardless. And once that happen, a lot of these projects have been filling up with new LNG offtake agreements.

Operator

So once it lifted, they are more or less ready to go and we'll kick off the next wave of U. S. LNG.

Speaker 1

Good. Then we'll round up a couple of questions on flex and strategy. How do you view the outlook for growing the fleet and the company being M and A, second and tonnage in new buildings.

Operator

Yes, I thought you were going to say how to spend it. That's usually a question we get. Okay. Now as we said repeatedly, we are 13 ships. The last ship we got delivered was May 30, 2021, Flex Vigilant.

Operator

So of course, we are happy to grow, but we have to grow profitable. We're not going to grow just to have a bigger fleet and a bigger revenues. It has to be accretive. It has been hard to find good growth prospects the last couple of years because of the skyrocketing newbuilding prices going from the low when we purchased the chip at 180 ish to 260. So it's a very big ramp up in prices.

Operator

Not only have the prices gone up, but also lead time gone out from 2.5 years to certainly 4 years. And that cost a lot of money when interest rates is about 5%. So that I just have to repeat what we said in the past. I think we demonstrated for some time now that we are not going to pay to grow. We're going to do a discipline.

Operator

If we find right now, I think the order book is already so sizable that we don't really need more orders and I don't find it very attractive, 260,000,000 having to wait to 20.28 I don't find that attractive compared to paying dividend in this period of time. So I think we need to if we are to go, it's more natural to do that through consolidation. We are the world's biggest listed LNG shipping company by far. We have a modern fleet. We have a good track record.

Operator

More or less all the ships or the LNG ships in the world, it's about 650 underwater, 350 on the construction. That's 1,000 LNG ships. Almost all of them are owned privately. We have 13 ships, Kulku have 13 ships, Awilco has 12 ships. The rest of the ships are in private hands.

Operator

If you are a private owner, you have a good fleet, you want to go public, cash in, have a better position having a stock rather than a private ownership, you should reach out to us. Don't call Morgan Stanley or JPMorgan. They will charge you a hefty fee to take your company public rather call us and we can maybe consider giving you some shares in Flex for the ships you have in your private account.

Speaker 1

Then there's questions on balance sheet optimization and what you can expect going forward? Are there more in the pipeline? I guess I can take it on the 2 financing we are announcing today is basically triggered by the 500 day extension on the contract with Cheniere and also availability of an attractive financing package in Japan. Concluding that, that means that we also then have to address the 2 other vessels or have the opportunity to address them as they are fairly low levered. This was the first transaction we did in the balance sheet optimization program for the bank financing.

Speaker 1

So they have amortized and values have also improved with the banking market. So that concludes those 3 ships. As you also saw, we are then also in discussions with some of the banks to convert a term loan tranche to an RCF. So we maintain our $400,000,000 of the bullet on non amortizing RCF capacity. For a next refinancing, that will most likely be subject to contracts and the long term contracts and the availability of attractive financing.

Speaker 1

We are very pleased with the package we have today. And also I want to mention that with the Jolko, we are introducing a new bank to us, which we are very pleased with working with in this process and look forward to expand business with as well. So for now, we are it will trigger for more refinancing is probably a new contract.

Operator

Yes. I think it has to be interest rate derivatives optimization, which is next. Now we have run through we were way ahead of Fed. We started doing a lot of swaps early 2021, 2020 2 when rates were low, well ahead of a year before Fed started to hike rates. That trade have generated $127,000,000 of profit since 2021.

Operator

We have monetized and crystallized most of it. I believe balance sheet now is around SEK 35,000,000 of unrealized gains, so SEK 127,000,000. So most of the gains have been realized and crystallized. Rates are now picking down again. We have plenty of trading limits.

Operator

So we will be opportunistic to have to see if there are levels which are attractive to lock in a higher hedge ratio. We have been anticipating a pivot from Fed peaking our hedge ratio in Q2. Long term interest rates have fallen a lot since the employment figure in U. S. 1.5, 2 weeks ago.

Operator

So we will monitor that development and see if there are opportunities to hedge rates at attractive levels as they have been going down quite a lot recently. And typically, we try to use windows where there are distress in the market like when Silicon Valley Bank fall collapse to secure good terms for our shareholders.

Speaker 1

That concludes the Q and A and announcement of who wins the Fleisch Kit.

Operator

Yes. You can have a look at the names.

Speaker 1

We have one very active shareholder investor asking questions and it's a number of questions reaching all of the topics and it's Peter Svejoen.

Operator

Okay, better. Then you will have the Flex LNG kit. Before concluding then, I just want to again, thanks to the technical team and our crews who have done fantastic once again a fantastic dry docking of Constellation and Correges. It's the 6th dry docking we have done, now the last 2 years. Or actually one half year all according to time and budget.

Operator

So we're very happy with that very high technical quality on our team. And then we will be back in November with our Q3 numbers which we have guided today, so we don't expect any surprises in November. In the meantime, you can enjoy the €0.75 per share of dividends, which I think will be payable at the end of the month. Okay. Thank you everybody for listening in.

Speaker 1

Thank you.

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Key Takeaways

  • Flex LNG delivered Q2 revenues of $84.7 million with net income SEK 21.8 million (EPS €0.41) and adjusted net income SEK 30.4 million (EPS €0.56), meeting guidance.
  • The company secured a 10-month time charter for Flex Constellation with a top Asian LNG buyer (option to extend to Q1 2026), providing 100% charter cover for the remainder of 2024 and reinforcing 47 years of firm backlog (up to 66 years with options).
  • Balance sheet optimization phases (AIM 2.0 and 2.1) raised $387 million of refinancing proceeds and a new Japanese operating lease, with SEK 430 million in new debt amendments releasing ~$97 million of net cash in H2 2024.
  • Q2 drydockings for Flex Constellation and Flex Courageous were completed in an average of 17 days (3 days below target) at budgeted cost, and with all vessels now back in service and an improving spot market, Q3 revenues and earnings are expected to increase toward ~$90 million.
  • The board declared a quarterly dividend of $0.75 per share, bringing the trailing 12-month payout to $3.125 (≈12% yield), fully covered by cash balances and backlog visibility.
AI Generated. May Contain Errors.
Earnings Conference Call
FLEX LNG Q2 2024
00:00 / 00:00