Q1 2022 FLEX LNG Ltd Earnings Call
Good day, and thank you for standing by welcome to the Flex LNG first quarter 'twenty to 'twenty two earnings presentation Conference call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be the question and answer session to ask a question. During this session you will need to press star and one when your telephone keypad.
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Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today, why still collect left field. Please go ahead.
Thanks, Ron and welcome everybody to today's flex LNG have F gas by a matter of fact.
Oh of Flex LNG management, then I would once again be joined by our CFO , Chris Hall, who will talk you through the numbers a bit later in the presentation.
As always we will conclude with a Q&A session.
Before we start the presentation.
Oh, if the disclaimer that we require some forward looking statements. We use some non-GAAP measures and there are limitations to the completeness of beat that or we can provide in this webcast. So we recommend that you also have your own.
That's helpful.
Oh Wow okay.
Okay, let's kick off with the highlights on a short summary of them, it's fair to say that while the first quarter, how well it.
It's been a fantastic period forgot cargo owners, given the global and the deer shortage with elevate that LNG prices worldwide. It has not been as good for us.
It ships in the spot market the spot freight market has been challenging due to.
The rapid shift in trade pack them to shift in trade started in late 'twenty or 'twenty, one well ahead of the wall and their crane and O curve as European buyers started to mop up the spot cargos and show how they got supply given the low gas inventory levels.
The two you up instead of Asia resulted in a sharp drop in sailing distances and thus freeing up more ships in the market.
With significant lower active at the end of the spot market. This adversely affected the earnings on the trade in their ships as well as approximately one and a half ship.
Which we attended in the spot or short term Tc market during the first quarter.
In any case, despite a challenging spot market, we were able to deliver revenues of $74 6 million in line with our guidance presented in February there are avenues for us thats about $40 million lower than in Q4 of last year, but it is fair to say that Q4 was exceptionally good given the.
All time high spoke about.
How about the powerful of the decrease in revenues due to lower earnings on the ships on valuable higher contract. While the remaining half was due to spot exposure in Q1 for the one of our ships mentioned, yes.
Despite softer market net income came in at $255 8 million or 1.05, a dollar a share a big chunk of the earnings was admittedly I really have to do all portfolio of interest rate derivatives.
And so that's going on our blue water due to fed tightening we secured the majority of that against higher interest rates through interest rate swaps and Chris will give some more details about our hedging strategy a bit later in the presentation are adjusted for the big gains on interest rate swaps earnings per share.
In that 45 cents per share.
As we guided in our February presentation.
I'll repeat them today, we do expect to deliver sequential quarterly improvements in other revenues, which will be felt or cash flow.
We have a strong backlog with 98% contract called which for the next two quarters. So earnings variability as it relates to two to three ships with valuable higher rates being exposed to the spot market is however affected now given the recovery and small grains dividend protocol.
75 cents per share, which gives all shareholders an attractive yield of about 12%.
As I will explain we are also well positioned with pay ships coming truly open over the next 22 months Andrew.
And with strong term markets.
We are upbeat about the prospects of re contracting these ships.
Yes.
Turning to page four.
And our fleet status as you can see from the slide we are more or less fully cohorts for the air the only possible open position is flex amba, which could.
Possibly be it he deliver end of October unless the charter utilize that last one year extension option.
From childhood called wish for Qs two through careful is that 98%. That's explained during Q1, we had a couple of ships coming off shorter term time charters and commencing a longer time charters.
And John and Fat Boy Flex courageous and flex with absolute was delivered from shorter term contracts and following delivery of the two ships commenced time charters with a super major that.
Barrier for the new time charters are minimum PFS with two plus two optional yes, bringing that pad two seven years in total voyage ships due to the structure of the time charter for the ships and contracts. We do expect that the charter will eventually the cloud that seven year period.
In fact reflects fee, though mostly at the level from a short term 10 months time charter. After he delivers she was delivered in direct continuation to a super major for a period of IVF by the charterer has options to extend the period to also 70 F and thoughtful.
In February we also got Flex O.
We delivered from a 17 month time charter and we fixed her on a short term flexible time charter of five to seven months or so with a super major and this duration match exactly with the delivery window for the Chinese contract commencing in Q3.
Flexible volunteer which made a killing in the spot market last year, especially in the fourth quarter had a very weak first quarter. As there were very few specially acquirements at the start of the year, which resulted in significant wasting time for the ship during this quarter.
However, able to eventually fix the ship for our short spot voyage and that after I agree with <unk> early delivery of the ship to them about two months ahead of the origin is scheduled in Q3.
Flex voluntary thus became the fourth ship to China with a duration of about $3 seven yes, rather than the original three five years.
<unk> has also utilize the option to add a fifth chip flex. So I will just be the fifth chip going to churn out during Q3 with a minimum period of three and a half yes flexibly.
Lastly, I am always the first ship that will be fully opened in January 2023, and all of you. This is a fantastic position as the modern large ships.
<unk> piled through 2025 as I will also touch upon later the term market is very strong as charters are willing to pay up to secure fuel efficient tonnage given the elevated LNG prices and the introduction of E <unk> and the European emission trading scheme for shipping next year.
Lastly, we have ships on variable higher contract. That's mentioned this being fixed Artemis on a minimum five year variable higher contract with <unk> as well as specs Amber and flex enterprise discharged our flex and flex enterprise has one additional extension option for each of these two ships. So if the charter utilized this extension.
Options, which we think is likely the ships will come open during Q4 2023 in Q1 'twenty 'twenty four as mentioned with regards to flex Rainbow. We think this provide us with very attractive marketing windows for these ships.
Yeah.
As I've already covered.
Our contract portfolio extensively on the previous slides I just want to highlight the development and the charter coverage over the next couple of yes. Most of the backlog now is no fixed higher but we also maintain variable higher backlog on the payer shifts which gives us exposure to the spot market, which is usually a juicing the earnings when we are approaching.
The winter season, we also do have some ships coming open in this period as mentioned and we have a.
Look at this more as an opportunity than a challenge given the way its long term markets.
Slide six is our revenue guidance for the year on the numbers are the same as we presented in February with the only difference being that the Q1 numbers, although actual rather than our guidance as you can see the level. According to the guidance provided and we all know we're also guiding about $80 million.
In Q2 right in the middle of previous guidance of between 75 and $85 million as mentioned Q1 revenues are on the weak side due to a soft spot market. However, the spot market has bounced back. So we expect to generate higher revenues going forward. We have also caused the gap periods for both flex voluntarily.
In fact in Wuhan and we are therefore expecting casual improvement with revenues in the next couple of quarters in aggregate. This means we still expect revenues for the year to be broadly in line with what we delivered in 'twenty or 'twenty, one despite a bit slow stocks.
Turning to slide seven dividends.
Given our previous communication it should not come as a big surprise that we are thinking through our dividend of <unk> 75 per share as we have highlighted in the past, we prefer having a stable dividend level, rather than adjusting up and down every quarter. This means that we sometimes pay out more and sometimes less.
But over a longer term isn't that salt and we aim to pay out a full earnings over this cycle as we have also been doing in the past as you can see from this slide. Additionally, we given our forward backlog. We also do expect less volatility in earnings than what we have seen in the past.
As we covered in detail in previous webcast, we apply a balanced scorecard to assess the appropriate dividend level for Q1, the earnings only receive a yellow light, but with a large backlog strong outlook in very sound financial position, we expect all the lights to turn Gideon again, shortly so with that.
We will now go through the financials before I return with a market update.
Thank you.
Let's turn to slide eight and the financial highlights we delivered revenues just shy of $75 million and within the revenue guidance of $72 $5 million to $80 million.
This translates into a time charter equivalent.
Of 63000 per day.
The quarter on quarter lower revenues is due to the weaker spot market in the first quarter impacting our three vessels on variable higher contracts and the performance of flex volunteer and flex as explained by a step.
The background for this aftermarket will be covered more in detail later in the presentation.
No pricing expenses was $14 4 million.
Or 12300 per day and Opex for Q1, we have made the one off accounting adjustment relating to previous period and this is explain more in detail in the earnings report.
The adjustment has a positive effect of $2 9 million on the operating expenses.
For this adjustment the operating expenses were higher quarter on quarter due to higher number of crew rotations and handovers in Q1 versus Q3 four.
<unk> for the vessels trading in the Pacific are more costly due to the continued severe COVID-19 restrictions and quarantine requirements.
In addition, ordering of spares and supplies associated services for the full year, we expensed in the first quarter. Thus this should result in lower operating expenses for the rest of the year.
Our main change this quarter is the gain on derivatives of $31 9 million, which relates to our interest rate derivative portfolio.
As a result of increased loan.
Long term interest rates this portfolio.
10 years to develop positively for us I will come back and cover more on our interest hedging and derivative portfolio later in the presentation.
In comparison net income for the quarter was $56 million and adjusting for the gain on derivatives. The adjusted net income was $24 million.
This results in a.
Earnings per share of $1.05 or adjusted earnings per share of <unk> 45.
On the next slide for the balance sheet.
For the quarter, there were no material changes on the balance sheet.
The total assets is about $2 6 billion consisting of a fleet of 13 state of the art LNG vessels with an average age of two five years and with a book value of $2 3 billion. In addition to a cash balance of $175 million.
As covered on the next slide the cash balance will further grow with the completions of the balance sheet optimization program.
<unk> four.
Q2.
On the liability side the vessels are financed by a diversified mix of leases ECA financing and traditional bank debt with the first maturity due in 2025.
We updated our balance sheet optimization program in the fourth quarter earnings presentation in February and today, we announced that <unk>.
<unk> 375 million Bank facility was signed in April and utilized to refinance the flex Ranger and flex.
Rainbow in April .
The aggregate $320 million financing for the 210 year leases or flex constellation and Flex Grace's were also signed in April and is scheduled to be concluded tomorrow.
This leaves us with a $905 million in book equity and a robust equity ratio of 36%.
On the next slide.
We see the cash flow for the quarter and our cash balance at the end of the quarter ended up but $70 million to $175 million.
This is $727 million lower than last quarter, primarily driven by lower cash flow from operations as explained earlier.
Also note that we pay high <unk> in Q1 compared to Q4 due to the semi annual repayments under the $629 million ECA facilities.
This quarter, we did not have any proceeds from financings. Thus the net of $40 million paid in dividends. The cash balance came in at <unk> hundred $75 million.
As shown in the graph the cash balance will grow substantially in Q2, as we finalize the <unk>.
<unk> face of the balance sheet optimization program.
$111 million will be.
Trade up.
Following the completion of the Ranger Rainbow constellation and courageous financing.
And in Q3, we will refinance the existing lease where the flex endeavor with her being the third vessel under the $375 million Bank presented there.
As the bank debt.
The amount for this vessel is slightly lower than the existing lease does not affect us negative $12 million, resulting in net cash of $100 million.
Being released under the balance sheet optimization program.
Which should be concluded materially tomorrow.
The growing cash balance then further adds to our already clean and robust balance sheets.
So turning to the next slide.
More on our hedging.
Hedging.
With the increase in interest rates, we thought it will be good to also provide some insight in our interest rate hedging portfolio.
Over the last couple of years, we have built up a derivative portfolio with an aggregate notional amount of $876 million of plain vanilla interest rate swaps.
This had just.
Floating interest rate risk under our debt financing.
With this offering long term interest rates and the new financing added to our debt funding we utilize the big drop in the long term interest rates. During the first week of March and secured interest rate swaps of $200 million with tenders up to 10 years at an average rate about.
One 7%.
In Q1, the derivative portfolio gained about $32 million and we also informed that during April at gain an additional $16 million due to the rising interest rates.
In addition to the interest rate swap portfolio. The interest rate risk is further hedge through our fixed rate leases in particular for flex endeavour and flex enterprise and flex volunteer.
Despite the delays when <unk> is scheduled to be refinanced in Q3, the two remaining leases provide us with them about 219 million or of.
Off balance sheet hedge to the fixed rate lease.
There is no mark to market of the interest on the P&L for these basis well above the 10 year $160 million used for flexible Nanterre, which was done in December last year carrying an all in interest of 4% and provides a very good hedge against rising interest rates.
Yes.
Our hedge ratio, including the fixed rate leases does gives us a hedge ratio of 70% over the next years with.
With an average duration of four six yes.
And average fixed interest of 125% compared to about three presents for a similar period.
Today, our hedge portfolio gives us a good coverage for expected high interest environment in the period ahead.
So in conclusion, we're quite pleased to see that our conservative interest rate hedging policy notes pay itself.
Contributors to maintain the cash flow visibility from our time charter backlog.
And with that I hand, it back to you I assume.
Thank you Chris.
Yes.
Uh huh.
I mentioned the fight against the inflation and how with the higher interest rate and as <unk> explained we are well protected against higher interest rates.
With this in fixed at leases.
When it comes to inflation and keep in mind, our asset base consists of 13, modern LNG carriers with higher raw material prices like steel aluminum nickel and energy.
Gas yard capacity and increasing wage costs it should not come as a big surprise that the cost of building a modern LNG carriers has increased a lot. We bought 11 LNG carriers at the bottom of the new billing cycle in 2017, and 18, which we have not taken delivery of <unk>.
Similar vessels today, I'll close to that $225 million by Clarksons and I have also been lift both the new billing.
At closer to $230 million. In addition, you would have to cover new billing separation cost and bulk of costs keep in mind. These biases. Our four ships delivery in 2020 success. Most of the 2025 slots have now been filled so if you are making this investment.
You will have seen our income for the next four yes and to replicate our fleet you will have to spend about $3 billion. If you then deduct the net debt.
<unk> earned $1 $4 billion, you end up with equity requirement of close to $1 6 billion and this equity will be yielding CLO for the next four years or so so not only are we well hedged against higher interest rates first of all assets also provide our investors with good inflation protection.
Okay, then finally, turning to the market and our market section in our February presentation. We illustrated the high growth of U S. LNG exports with U S exports going 23, 8 million tons in 2021, 5% thing humbled and 20% of the global market growth that yes. The U S.
LNG exports continue.
It did in the first quarter with $4 4 million tons increased or slightly above 20% goals.
And despite the wall in Ukraine, Russia has not had any problem finding buyers for the LNG cargos and managed to go without exports by 1 million tonnes LNG exports from Russia is not sanctioned by U S and <unk>.
Nor his question pipeline gas.
Europe is heavily reliant on the Russian gas.
I will explain shortly is heavily European Congress on rapidly expanding LNG import capacity to make them less dependent on the Russian pipeline gas and this will create additional long term LNG demand. This is positive for the LNG shipping market, even if more cargoes are going through U S. LNG export capacity will also have to be expanded.
To meet this incremental unexpected growth of the LNG market.
Speaking of LNG demand on the demand side as I've touched upon in the highlights we saw a big pool of cargos to Europe in the first quarter and this was the main reason for a soft spot market as Tom mileage plummeted, while the market grew about 5 million tons of 5% in Q1, the LNG imports in Europe grew by.
A staggering 13 million tons in the first quarter compared to last year. The strong demand from European buyers drove European prices above Asian prices and resulted in less LNG available for all of the markets. Consequently, Asia. The case that impart by 6 million tons in the first quarter given the high cost of Ellen.
Our spot LNG Asian utility swapped out spot LNG cargoes.
The more coal.
Has that carbon emission.
The cost of carbon emissions are substantially less in Asia, then in Europe , if any cost at all this is certainly not good news for environment as the Asian, we're not alone in firing up more coal plants. We are also seeing a rapid increase in coal consumption in Europe with detrimental effects on the local air quality as well as global warming.
Yeah.
Slide 14, and let's drill down into the U S. LNG exports of U S. LNG exports continued to grow and by end of April exports were up 21% compared to last year.
It's fair to say that almost half of this growth was due to the bag fees in U S. In February 2021, while exports retro paled at several liquefaction trains for a short period. This was a peak of nature incident, which happily didnt not this.
Because then LNG prices would have gone even more ballistic hence February exports. This year were about 2 million tonnes higher than last year.
The high export growth in U S is set to continue during 2022 as two new liquefaction plants with a combined capacity of 15 million tonnes started exports in the first quarter and will thus contribute with further Walt.
In our February presentation, we argue that's high LNG prices would incentivize export those discrete out every single methane molecule to the liquefaction plants and this was very much the message communicated by Cheniere in their recent earnings call and our February presentation, we estimated that <unk> would increase the LNG exports by <unk>.
Tons, DCF or 17% given the price picture that this estimate is probably a bit too conservative as the U S energy information administration forecast, 25% growth in U S exports Dcs in the recent short term energy outlook. This means U S is set to become the world's largest LNG <unk>.
In 2022.
Turning to slide 15, where we break down whether U S. Cargoes are heading we hold.
Also shown the development cargos destination in our February presentation, we illustrate that the European market share for U S. Cargoes increased from 15% in July to 75% by January . This trend has continued and Europe has so far this year maintained 72, 3% market share of U S. <unk>.
<unk>, which is very high compared to the past such European <unk>. However.
However, almost entirely unprecedented in 2019 after a warm el Nino winter, coupled with the outbreak of trade war between U S and China, resulting in accrued loan of the Chinese economy. We also saw European LNG imports spiking with the European market acting like I think during the first four.
Month of 2019 European LNG in both almost doubled.
However, the European LNG.
It was down due to <unk>.
LNG glut, while we are now experiencing scarcity of LNG with high pricing back in 2019 European imports. We're also from a broader set of suppliers with the share of U S cargoes going to Europe , only at 40% significantly less than today in the summer of 'twenty two.
Following the COVID-19 outbreak European buyout also gobbled up by a lot of cheap LNG, but again this was due to low demand and not high demand as we see today.
Slide 16, and a closer look at the impact the shift in trade pattern has had on the freight market in general the longer the ship sail the bad debt for the French market as the market will then acquire more ships to ship the cargoes as Atlantic cargoes have been predominantly shipped to you about other than Asia.
At least so far this year the average sailing distance of the LNG fleet has dropped considerably from Q4 to Q on the average distance is known by 15%, which is a really big drop in such a short period last year, we saw a big boost to Asia throughout the year with sailing distances improving during the year starting.
Fast about 4550 nautical miles.
In closing in close to 5000 nautical miles on average by the end of <unk>.
And this goes a long way to explain why the spot market Russell pipeline last year. Despite all the new building being delivered with the prudent to York Avenue sailing distance top two for two on one nautical mile in the first quarter of this year. This is exactly the same as in trends in the first quarter of 2019, when we also experienced.
A big pool to Europe as I've just explained.
With cargo pricing still favoring Europe , we do expect sailing distances to stay lower than last year, but we would expect the trajectory of the avid selling business to follow the pattern from 2019 with casually in case of sailing distance during the year that is one difference between 2022 and 2019.
In 2019, LNG exports grew by about 35 million tons, while we expect around 25 million tons. This year and in the aspects are more bullish on growth in forecast LNG export growth of around 30 million tons in 2022.
In 2022, there are however, significantly fewer ships for delivery in 2019, and 2000 1940 ship once ships were delivered while the number. This year is only 27 ships. So the ratio of LNG cargoes to new building deliveries are more favorable this year.
And so we do expect LNG freight market to become gradually Ida, which is also evident from the term market, which I will cover a bit later in the presentation.
Another factor is that in 2019 as I mentioned LNG was cheap do today, a glut of LNG today LNG is very costly.
This significantly increased the premium with charters can pay for modern ships compared to older ships.
The market has become much more <unk> than back in 2019 and keep in mind. This is part of the de Carbonization rules like EA <unk> CIA taking FX next year together with the European emission trading scheme for shipping.
Slide 17 in returning to Europe European LNG imports grew a whopping 52% from January to end of April This Jeff.
<unk> is trying to cope with it the energy crisis, we do see both increase in imports in all major markets. As you can see on the right hand side with the key in both nation, increasing its LNG imports by 43% to 85%.
Italy is the outlier with a growth of only 20%, but this is due to Italy and our important why are they close to their input capacity of around 11 million tonnes a year.
This is also why we do see the Italians planning to ramp up their import capacity quickly by adding two <unk> are used in addition to expanding the capacity of our onshore re gas terminal, Italy is very dependent on the Russian pipeline gas in both.
In the past been hesitant to keep the size Kremlin, but the Italian Prime Minister Margaret Argo Dogger is no signaling a sharp shift in Tallinn and the policies policies something he shares with the German Chancellor will offshore.
And the Italians almost alone in expanding in both capacity most European countries are not planning to swiftly add LNG import capacity to wean themselves off reliance on Russian pipeline gas as a very colorful on next slide.
Slide 18.
With the world and their cane in the global energy Crunch and logistic reality has staged a comeback.
Most European countries are now planning for a future where they will be significantly.
Where they will significantly reduce the pipeline gas imports from Russia, some even talking about banning it altogether, hence European Congress are therefore planning to substitute this energy imports with increased LNG.
As well as expansion of renewable capacity.
And our February presentation. We also touched upon this point highlighting that the biggest gas consumer in Europe , Germany does not have a single LNG and fulfillment while not for long, Germany has now woken up to a new energy landscape and are rapidly moving forward with plans to add two or possibly three large.
<unk> LNG import terminal and they have already chartered in four fsrus with the first in both capacity and plan to be an obligation by early next year.
Germany wants to replace the gas imports from Nord stream, II, which now seems to be a dead in the water with LNG, they will need to import about 40 million tons of LNG.
40 million tons or about half of the total European LNG imports last year, So we're not talking big numbers.
EU is to replace all of the Russian pipeline gas with LNG.
Would equate to around 110 million tons. This number does not include Turkey, which was also a big natural gas imports.
Placing such a large volume is however, not realistic in the short run that could be achieved achievable by the end of this decade is sufficient new LNG is both to the market.
Clothing into our recently released a study of replacing 72 million tonnes of LNG equivalent volume should be feasible by 2030.
Needless to say there are several LNG projects today competing to fill this gap.
In any case the expected growth in European LNG imports require a lot of annuity gasification capacity.
E import terminals to be constructed and this is now happening on an unprecedented scale, while European utilities and energy companies are soaking up more or less all available fsrus in order to tap.
Important projects.
<unk> market has been extremely challenging in the last five years or so which has resulted in a lot of fsrus instead heading as LNG carriers in order to find employment by boosting the fsrus to good use as import terminals. These units are taken out of the shipping market and thus adding to shipping.
Demand other than competing for cargos.
Slide 19 gives an overview of the contractual obligation that you have a path towards Russia in terms of pipeline gas contracts.
These contracts usually structured as long term offtake agreements with minimum volumes in the past. The Russia has also sold natural gas through European bias in the spot market through the electronic sales platform, although spot volume last year were very muted.
In any case, Europe , including Turkey have contractual obligation to take around 180 bcm of Russian gas.
This Turkish imports from Russia was last year close to 30 Bcf.
It really about <unk> hundred 50, <unk> around 110 million tonnes of LNG at wavelength.
Mentioned.
Some of the existing contracts will expire naturally led to our loss and chances today are slim for renewal of this contract unless the political landscape changed dramatically there as well.
Also a risk that the Russians.
Insistence on.
Bill payment can cause disruption to the Russian imports.
This we have already seen happening in Poland, Bulgaria, where flows have been halted by Russia as they have not been able to agree on a newbuild payments product gaps.
I'm also today is in disruption of Russian pipeline gas two okay, and the risk of sanctions could potentially lead to switch the replenishment of Russian gas than what is being illustrated in this graph in any case. This is good for the LNG market.
So while all this LNG commvault.
<unk> Abraham webcast, we illustrated all export plants being built and there is a lot of them, but more will be needed now and since February of two projects have suddenly popped up and been sanctioned with startup already next year.
We have already seen projects being bolstered the market <unk> time, like calcium pass, which started to export cargoes Trent nine months after you'll see receiving.
Which is less time than it typically it takes to build LNG carrier.
The first LNG project in U S. In the Congo LNG projects around by Eni is however, bringing the lead time of export project onto our unprecedented new level with time to market of around a year or so.
There are currently several project in North America, where we expect final investment decision to be imminent.
These are bond field expansion of Freeport, and Corpus Christi as well as the Greenfield project.
And wood fiber left with is a mega project of 27 million tons, but we havent <unk> included a phase one of.
$10 4 million tons is highly likely that also projects in middle East and Africa, where the front end engineering and design or feed has already been completed so these projects to be sanctioned quickly and also several more projects doing marketing of offtake agreements.
The equity partners are discussing whether to go ahead with the investment and the selection of project could add close to 200 million tons of new capacity.
Please note that it's not a complete list of all the project, but just a list of the most likely contenders and all of you.
And.
So then less head into a snapshot of the LNG product market.
As already covered the European spot prices have been trading at a premium to Asian spot prices and this is still the case today, despite and Andrew have being on a bull run this year.
Cost path to Europe , and Asia I'll still massive.
Most of the Asian bias, however, well commvault with contracted LNG for the most part these volumes selling to oil, but also some linked to Henry hub, Hence Asian buyers and the big important nations like China, Japan, and South Korea are not feeling the pinch to a similar extent as European bias.
Which are more exposed to.
Spot LNG prices.
The big pool of LNG cargoes to Europe has however started to Kate logistical issues and the path that desk and W. E T.
Which means the delivered price except in northwest Europe for LNG has been painting, we're at close to the natural gas hub in Netherlands that ETF.
Typically they have been trading within 20% to 50% spread.
<unk> the cost of re gasification of the LNG cargo as import terminal.
However, with the Armada of LNG ships heading to Europe . This year import terminals have been clogging up and these prices have started to deviate substantially and are now at an all time high level.
Off around $8.
Per million Btu spreads with these quotations ranging from six to $11 per million Btu.
If the prudent to Europe continues this plant might very well and.
For some time, and thus incentivizing either floating storage of cargoes outside of Europe , and all that more cargoes will be heading to.
Although regions like Asia, where re gas capacity is sample.
We see a somewhat similar picture in UK, where prices are much lower than in Continental Europe UK. His problem is not really re gas capacity, but the lack of storage capacity. After the politicians have the greatest idea of closing down the whole underground gas storage site in 2017, which was.
The biggest storage sites in the country UK does have a lot less stores capacity, then although utopian paths and also lack gas and power connected activities Continental Europe .
While Asian spot prices are lower than in Europe . There is still a substantial arbitrage to be made on shipping cargo.
These market and with prices coming down from the top C level at the end of 2021 in early 2022, we expect to see increased demand from this region.
A quick glance.
The forward prices for LNG, given the tight market biases.
Given the tight market prices have stayed elevated and prices have also been volatile and responding quickly to news flow related relating to the Russian pipeline flows as evidenced with our newest about shutdowns of pipelines in okay, and the last day or so with European <unk> at par or <unk>.
NIM to Asian prices cargo owners have been.
Incentivize to ship Atlantic cargos, the shortest routes to Europe .
The market expect the European premium to endure for some time, but as mentioned on previous slides the congestion in Europe is creating some bottlenecks.
For a list with positive purpose, we have therefore added a red dotted line to the chart, where we are in the $8 spread between TTS and they delivered the highest for LNG into Europe and assume that this path now for the next 12 months as ramping of import capacity in Europe will take time even for.
The Germans.
Whether this plan will be for $8 $4 or $10 and hard to predict but at least it illustrate that cargoes might be moving to other places like Asia.
If the $8 bottleneck spread stays in place.
<unk> will be priced at premium to deliver price of LNG in New York and this is also one of the reason we think sailing distances will gradually increase throughout the year. We also see in case. We could also seeing is floating storage of ships in Europe . This will not affect the total mileage but will.
Positively affect on time, and thus have a similar effect for the shipping market.
Higher freight demand.
The market they expect the LNG prices do stay elevated for the foreseeable future even in December two and default on December 25, TT S is up 19% and $6 million, respectively. While <unk> is trading at a $1 premium at transit and $17 four same periods. These.
These are levels way above their contracted LNG price, which is converging towards $10. So about 65% of the market will still legacy of LNG at the discount to oil and you'll find these bias mostly in Asia.
So with that background on the market, we have and around the beltway arrived to the crux of the shipping business freight rates.
Let's start reviewing the spot rates, we came from a red hot market in Q4, but with appeal to Europe . The freight market started to soften in early December and then plummeted at the start of this.
These charter rates, our headline rates and as mentioned in the past it masked the development in ballast bonus condition, which value with the market sentiment right. Now it's not this is not an issue as ballast bonus conditions started to improve and less type of already and we're back to fool round trip economics by April .
Headline rates I'll, then thus at similar level as the time charter equivalent earnings.
Since the end of February we have seen gradual improvement in the spot market vessel availability also peaked during end of February and what rates are now well above the seasonal average as we bottom out about a month earlier than in the past.
One thing worth noting is that most of the ships, which have been available in the spot market have been re less available only for shorter periods, rather than truly open for longer duration.
This means it's harder to find our ship for longer periods and this is also one of the reason for the firmness of the term market as of today's spot rates are holding at around $80000 per day, which is pretty decent for this time of the F. The spread between modern two stroke ships and older Forestalled diesel electric ships.
<unk>, which they often called is today at around $30000 per day, reflecting.
The new ship can carry more cargo while at the same time consuming considerable less fuel knots.
Not surprisingly this is a lot wider too inefficient steam ships, if we apply this $30000 spread between <unk> and modern tonnage and plugged in therefore was phase <unk> for <unk>, we do see that the freight market is expected to continue to firm up and follow a seasonal pattern for us.
This means higher earnings for our ships on variable higher content.
You could argue this mega excess spread should be higher than $31000 as LNG prices are in contango with higher future prices at the end of the yes, and today, which should increase this pat.
Then, let's jump to slide 24.
Hopefully in the spot market liquidity.
And the spot market liquidity in 2019, and 20 <unk> Dan until summer of 2021 was paid the goods with an increasing number of spot fixtures being done.
However, with the rush by charters to secure ships on term deals last year the big charters.
The traders and portfolio players have been controlling a greater share of the fleet and this has impacted the spot market with fewer fixtures recently and very few fixed or concluded by independent on us like ourself as the vast majority of fixtures has involved the less.
It ships that charters controlled and are re letting out to all those shadows.
This was also one of the reasons for our spot a soft spot market in the first quarter of a general lack of liquidity in the market with the spot market now filming up liquidity has also improved.
Then the final market slide four today with the improved meant in the market and the expectation for the rest of.
The term market has continued to firm up after a small dip at the start of that.
One year time charter rate for modern tonnage is now assessed by phone list to be hung up until the $8000 per day by Clarkson is quoting is highest homebuilding $50000.
Time charter rate is close to that $118250 by affinity while clarksons is quoting hundred $10000. This is pretty solid levels, which is also why we are upbeat about the fixing of two ships coming open next year and the one ship coming fairly open.
In 2024.
So be.
<unk> message I think we can conclude the market section and I just have one more slide before concluding today's presentation.
I am pleased that we today have also published our fourth annual ESG report.
<unk> is an integrated part of our business our business is to replace dirty coal might clean burning.
Burning natural gas, which is not only good for global warming, but even more so for our local air quality. We have made a substantial investment internally instead of the art LNG carriers, which is consuming about half the fuel of our older steamships, but which also have our larger cargo capacity, thus reducing the carbon.
Vince for each cargo by close to 60% and we will continue to develop our business with the aim to further bring down emissions.
Like in the past our ESG report is presented according to the sustainability accounting standard boats guideline, where we are applying the marine transportation standout as industry framework.
In the report you will find useful data about the most relevant ESG factors affecting our business.
Last year. We also included the example, global reporting initiative and we are this year also providing our separate D. Ally Index. In addition, we will also add the CDP a framework to report on climate related risks to benchmark, our effort and performance against the relevant pass.
When talking about the ESG and the focus is mostly.
And mostly on the E. The environment, but we also have an S energy.
The social aspects I think we covered well in our report and is related to how we react to all of our employees and our business practices.
What is often ignored is the G. The governance aspect shipping is a fiercely competitive industry, we compete globally for freight financing and striking the best New building complex shipping is one of the most international business, where <unk> and then through partnerships takes central.
<unk>.
However, there are still listed shipping companies that are eager to participate in the shipping competition, but who wants to opt out of the competition for corporate control.
Typically you'll see insider, which have captured corporate control to lawyers and bylaws rather than skin in the game. It is not uncommon to see finally boss had generously and where appointment this prolonged period with staggered election in order to limit shareholder democracy.
Additionally, these comprehend might use unfair business practices like poison pills and other procedural tactics in order to insulate management from shareholder influence.
And flex LNG, we have none of this average shareholder is treated as an equal every bond math. This almost tiger boss nonvoting limitation, no poison pills and as a shareholder and an issue at AGM OEM as we can't deeply about shareholder rights yes.
Yes, we do have a large shareholder in our company with about 46% ownership.
Mr. Fredrickson has the best <unk> in the industry not only in relation to shareholder returns, but also when it comes to fair and equal treatment of all shareholders.
Additionally, as rest assure our major shareholder also keep us on our edge and has an excellent track record in changing out management teams, which unlocked delivering satisfactory results for its shareholders.
So with that let's summarize the key takeaways from today's presentation.
Revenues as mentioned $74 6 million in line with guidance spot market has bounced back and term market remains very firm, we have CES active ships, which we are marketing for 2020 four we faced about the earnings potential.
We are 98% covered for the year. So we expect incremental better revenue numbers. The next couple of quarters.
Dividend 75, which gives our shareholders an attractive yield.
And we have a big cash positions that Amazon was out of the $5 million, which we will grow by another $99 million.
<unk> balance sheet optimization program, so with that I think we conclude the presentation and open up for some questions. Maybe you can check if we have some questions on the teleconference, before which whether they're awesome chat questions.
Participants we will now begin the question and answer session. If you wish to ask a question over the phone. Please press.
One on your telephone keypad.
<unk>.
Okay.
Questions via the webcast.
We'll have the first question comes from the phone from Marlin from value investors.
Ask your question.
Good morning, gentlemen, and thank you for these comprehensive presentation.
Strength in gas pricing <unk> in relates reached between modern SDN, we're making engines.
It is two ftes and especially to steamers could you provide some commentary on where do you see the current spread in performance given prevailing market conditions.
Yes. Thanks for your info question on I guess, you are working with <unk> has also in value and vessel surge.
Yeah, I think we touched upon it we have a graph that on the spot market, where we're showing the glatt head for.
Modern tonnage quoted slightly above 80000 in the spot market.
Around 30000.
Spread to typhoon <unk> and the spreads is due to your consuming less fuel and under a time charter fuel is our costs.
For the charters the comps as we are consuming part of the cargo has as few and.
And with the high prices today of course.
The fuel spread is higher.
And then additionally.
You can carry more cargo.
The cargo has been evaluable today, so we do see it as $30000 and noninterest.
Noninterest theme, it's even more.
It's more than $50000 and if you choose to calculate on this payout declared on a like a desktop exercise.
That's bad would probably be even higher.
So this pad is a bit dependent on.
On the peso cured.
More efficient ships.
You have a lower <unk>.
Unit trains cost for those ships when youre taking into account the cargo size and the fuel cost style hope maybe the ethics band.
Yes.
Turning to your balance sheet, you have now completed the balance sheet optimization program, which further solidifies our already strong position in.
In past conference calls you room, and some commentary regarding where you could potentially allocate these funds.
Could you provide an update.
And if you were to acquire vessels, which vintage would you ofer what kind of benefit would you expect to generate the highest returns.
And it's a good question.
We get a lot of question about why we are piling up such a big chunk of cash.
To be Frank.
It's about also we're getting.
As we have derisked the portfolio through a lot of this longer time charters.
The terms were getting.
From finance the Asps have improved.
So then it makes financial sense to lock in.
Our new financing at better terms for longer durations.
We are incorporating in.
One of the bank financing had is to have some more added financial flexibility by adding $250 million revolver. So this enable us to not having to.
To land all of ammonia at all time, we can repay the loan in the word back and this saves us for a lot of financial costs. When we are utilizing the revolver, we only paying out <unk>, 75% commitment fee per annum to having that liquidity available.
So we can.
Kind of improve all our cash management profile, we certainly do have more cash than we need.
To have I think this is also evidenced that.
Paul can sleep.
Good at night is that our dividend is stable given our backlog and our financial resources available.
We also liked.
Or not necessarily have a lot of cash available because I do think if refined transactions that could be accretive.
We don't mind, using the market to kind of back those transactions by raising capital if needed. So yes, we are a bit long cash right now.
Given how the financial markets are today quite more blend volatile I feel that's a good position to have.
And our aim is to get through them.
All the cash to shareholders as we have done in the past we paid as shown on the dividend off we have been returning all the.
Earnings SaaS.
As dividend actually a bit more than that because we are also have some capex last year.
In terms of acquisitions, we are looking all the time to find accretive deals I think.
It's hard to run through the all these days ordering at $2 25 to 30.
Waiting for four yes, having debt capital on the balance sheet. So I think you need.
To find some good deals in order to make sense and also a bit dependent on where our stock is and being biased.
Recently, where I was heading above $30, where I think we are below 25 today. So so so the share price also matter in relation to that Keith <unk> of acquisitions. When it comes to asset type we fulfill the new ships because we do think a lot of the older ships will not be efficient and they will not be able to meet that.
Future regulation in terms of carbon emissions. So we certainly are not looking for older ships.
When we are looking at potential acquisitions.
That's very helpful and certainly having additional flexibility is definitely a positive.
And as I mentioned.
So recall.
Our corporate name as flex LNG.
As you mentioned in the presentation you have a barely two number of vessels coming open through the end of 2023, assuming extension options are exercised.
Given current market strength is it a fair assumption to assume these options will effectively be accuracy and if so would it be at a higher rate.
And I think in a way.
Have the two ships coming open.
Near term Institute ships that are our valuable higher time charters, so that viable higher time charter is linked to the spot rates. So that's why we're also saying that we think it's likely they will.
Exercise because the charters is basically going to willing to pay what they will pay in the spot market. So so so the rates are for such extension would be.
Taking another year with the market exposure, which we are happy with given the state of the.
Spot market and the outlook.
Alright, Thank you for taking my questions that deal for me.
Thank you Dear speakers there are no further questions over the phone.
Okay. I think we have some maybe you can say you have your glasses on.
We have two questions from the web.
Can you comment on the decreasing opex before COVID-19, they used to be around 15000 per day and no. They are much slower.
Yes.
<unk>.
Actually we have guided in the past opex level $13000 per day.
We have delivered on that actually we have been delivering opex slightly below that prior.
<unk>.
Last year, when we have this call with.
Challenges.
And also into 2000 and data have been slightly higher if it's correct me if I'm wrong.
I believe that Opex last year was 13300 <unk>.
So.
We are delivering opex at a level, which we have guided at 13000, they are slightly higher in Q1, because we have.
Quite a lot of Russia and Ukraine.
<unk> has been difficult to accrue rotations zero tolerance policies for Covid.
And China is costing a lot more.
Testing and requirements and longer quality of crude fall through rotation. So so so kind of that.
Covid challenges <unk> no more than two years since we had this problem I'll still something we have to deal with every day.
But in general we are guiding our opex to be at that 13000 level.
And we have a question on China, and reopening and how that might increase current income expectation for flex.
That would be a rate levels.
Revenues, Yes, China of course.
China.
China don't need to buy in the spot cargoes. This year, China has signed up a lot of new LNG offtake agreements and they did so last year in most of the selling to the oil price. They also signing off quite a few agreements now in U S linked more Henry hub basis. So so China will be able to source LNG, although cheaply.
And the and also to cover all of their needs.
Sure.
So that's why we're also seeing some Chinese buyers trying to sell cargos in the market too.
The European so.
People in Latin America so.
We're not really dependent of course, if China comes back at Rolling back I wouldn't rule out that after.
Some.
Colgate <unk> stat.
China will follow the path of U S and you walk the stimulating their economy.
With a lot of fiscal stimuli and then also maybe more on the tightest EMEA and that usually results in demand picking up and when demand picking up you need more energy to fuel that demand. So so once China comes back.
I would expect that to be an on standards and then probably they will be sourcing spot cargoes again and might that IHOP ton mileage and spot rates.
But again three of our ships are now linked to the spot market that has started.
On fixed plant higher so it does not.
Huge impact but of course, China is the biggest LNG imports. So we hope that China will.
Be able to solve their issues with COVID-19.
Go back a bit more to normality like we have done in Europe and in U S and Amazon to normality also means.
Knowing that LNG demand, which they have gone quite a lot the last.
10, 10 years or so.
Oh.
That concludes the questions on the web and I think that's one question.
It's the same question is what are we going to do with all the cash and I think that was.
The headline of the path to a research note this morning.
I can tell you one thing we're not going to just use stupid things with the cash.
Right now, we're just going to finish the balance sheet optimization program get this all the $99 million on the account we're going to use to help all of us to optimize our cash management and not paying too much interest to the banks.
And we will just continue returning jus the dividends.
To our shareholders.
Yes.
And then you know.
We might say, we are still looking for opportunities to grow the company.
But we won't do stupid acquisition, just because we have too much money.
We would rather pay dividends than.
And then buying buying assets at too high prices.
So I think that's it.
Okay. Thank you everybody for joining today and we will be back in August and with the second quarter.
Presentation.
Have a good day.
That does conclude our conference for today. Thank you for participating you may all disconnect have a nice day.
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