Q2 2022 FLEX LNG Ltd Earnings Call
So without further ado, I hand over the floor to Eysen Koleklev, the CEO of FlexLNG Management, who will guide you through today's presentation together with our CFO Knut Roholt.
Go ahead Einstein, the floor is yours.
Hi everybody and welcome to FLEX LNG second quarter result presentation. We are pleased today to deliver strong numbers, our revenues of 84 million with 10 million higher than in Q1 and aligned with the guidance of approximately 85 million. Net income and adjusted net income came in at 44 and 33 million respectively where the main difference is the gains we have recorded on our interest rate swaps.
earnings plus here and adjusted earnings plus here came in at 83.61 respectively
giving us a strong profit for the quarter.
We in June announced three new contracts, two 7-year charters and one-time charter of 10-year with very good counterparties.
This added 24 years of backlog and we now have a backlog of minimum 54 years with the new contracts adding about 750 million of new revenue backlog.
With our strong earnings visibility we are also retracing our revenue guidance for the second half of the year.
Q3 revenues are estimated to be around 90 million while we expect Q4 revenues to be somewhere in the range of 90 to 100 million, i.e. numbers for the second half of the year will be even better than the first half.
The quarterly dividend is 75 cents per share, but in this quarter we are also adding a 50 cents special dividend, so in total we end up at a dividend of 1.25 dollars per share.
We have recently concluded a balance sheet optimization program where we raised 137 million of fresh cash and we are now distributing some of this cash or excess cash back to our shareholders.
with our distribution the last 12 months of $3.5 per share. This implies an attractive dividend yield of around 10%.
Let's touch upon the recent contracts. As I mentioned, we added three new contracts in June . Two new seven-year time charters for FlexEnterprise and FlexAmber, which already commenced on July 1st and will be running until end of second quarter 2029.
We also fixed FlexRainbow on a 10-year charter, which will start in direct continuation of our existing time charter, which is elapsing in January 2023. I.e. this ship is covered until start of 2033. All together, this added 24 years of backlog, as I mentioned. Our backlog is now 54 years, with additional extension options which could further increase this backlog.
We have been busy fixing out a lot of ships recently. Prior to Covid we have only fixed one ship. We fixed the Flex Artemis on a variable time charter in the autumn of 2019 and that ship was delivered on that contract in August 2020.
During 2020 the market was very depressed, also affecting the long-term time charter rates. And we decided to rather play the spot market and wait to fix our ships when the market has improved. So last April we fixed five ships to Chenier, Flex Endeavour, Flex Ranger, Flex Vigilant, All Commence, the time charter last year.
FLEX volunteer commenced third time charter with Chenier during the second quarter and FLEX Aurora will commence a time charter with Chenier at the end of third quarter this year.
In May last year we also fixed two ships Flex Freedom and Flex Constellation.
Flex Constellation for a prompt three-year time charter, where we deliver that ship to the charter in May. And then Flex Freedom for a five-year time charter, where we deliver this ship to the supermajor in the first quarter of 2022.
Last autumn we also fixed out two more ships, Flex Resolute and Flex Courageous, which were delivered to the charter at the beginning of 2022. These contracts are for 3 plus 2 plus 2 years, but we are very confident that these ships will sail under these time charters for a total of 7 years.
And then, as I mentioned, we recently fixed three more ships, Flex Amber and the Python Rainbow, on 24 years of total contract duration.
This means we have a very strong
Charter backlog.
During our May presentation for the first quarter, we put in three stars in this overview. We put in a star on Rainbow, the Amber and the Enterprise as these ships were coming open in the market and we were very confident on our ability to fix these ships out on attractive new charters.
So for FlexAmber and the Enterprise we replace the variable time chart that these ships had and we replace them with 7-year fixed higher.
time chapters as mentioned while facts rainbow is fixed forward for Q1 next year and then for a duration of 10 years bringing that ship into 2033.
Our spot exposure has thus also been reduced quite a lot. In Q2 we had three ships on a variable higher index, Amber and the Python Artemis.
We also had about one half-ship in the short-term spot market. These were Flex Aurora, which we fixed on a five to seven month time charter, and where she will be delivered to Chenier at the end of Q3. Flex volunteer Chenier agreed to take early delivery, and this ship was delivered to Chenier in the middle of Q2 after servicing spot markets.
Going forward then, most of our income is fixed rate higher, so our earnings visibility is very predictable. The only ship then exposed to the spot market is Flex Artemis, which is on a variable higher time charter linked to the spot market, which is elapsing in August 2025 with further extension option by the charter.
So, let's talk a bit about the dividend.
We have put up in the past our list of the key decision factors influencing our board when we are making the appropriate dividends.
the key decision factors influencing our board when we are making the appropriate dividend level.
As you can see, our adjusted EPS has been picking up. Q2 is usually the weakest or softest quarter in LNG shipping, as this is the low season of the market. With our increased fixed rate higher contract, our Q2 number for this quarter is actually stronger than the Q1 number.
This is the fourth time we are...
paying out ordinary quarterly dividend of 75 cents. After we fixed nine ships last year on attractive contracts, we hiked our dividend to 75 cents and we are continuing paying that quarterly dividend. In addition this time, we are also paying a special dividend of 50 cents, bringing it to 1.25 dollars per share, because as I mentioned, we have been through a big refinancing phase where we have boosted our cash.
balance to 284 million at the end of second quarter. So when we are looking at these decision factors, we said last May that we expected all these...
factors to turn green by the second quarter and so they have.
Our earnings are strong, the market outlook is good, we have a fantastic backlog, our liquidity position with 284 million is very strong, we are passing all the financial covenants with flying colours, we have no upcoming debt maturities near term.
and all the ships have been delivered. So capex liability are only related to the ordinary dry docking of these ships, which we will have four of next year, but such cost is about 3 million per ship.
Other considerations are a bit more difficult to assess, but with our Fed aggressively fighting inflation, a cool down of the Chinese economy and fairly volatile financial markets, we still keep this.
factor at light green. Nevertheless, we are paying a very juicy dividend for this quarter.
So, with that I think I hand it over to you Knud for a financial wrap up.
Thank you, Eisten. And let's have a look at the financial highlights for the second quarter. Revenues came in at 84 million and as mentioned 10 million higher than the first quarter of 75.
This equates to a time-chatter equivalent per day of 70,700.
This is significantly higher than the second quarter for previous years and as already mentioned by ASTAIN, the second quarter is normally a seasonal low quarter in LNG shipping.
So the higher result is explained by our fixed rate contract portfolio, where we have a higher number of vessels on fixed rate contracts.
We have the two new seven-year contracts for the Amber and the Enterprise. That will go from a variable higher contract to attractive fixed rate contracts. So the seasonality effect in the coming quarters and the coming second quarters will be significantly lower.
If you look at the operating expenses, they are at par with the first quarter and the OPEX per day is at about 13,000 per day, which is at the guided level we previously announced.
If you look at the interest rate expenses, they are also at par, and that's partly explained by our interest rate hedging portfolio, which we see on the second line.
which is the gain on derivatives of 14 million for the quarter, on top of the 32 million for last quarter.
I will come back on more details on the derivative portfolio on the next slides.
So that comes into the net income of 44 million or 83 cents per share and the adjusted net income of 33 million or adjusted apps per share of 61 cents.
If we look at the balance sheet that remains robust and clean, we have 13 state-of-the-art LNG vessel with an average rate of 2.6 here at the quarter end.
As a reminder that this fleet has been acquired and the book value reflects that these were acquired at historical low prices and is only adjusted by regular depreciations.
Our balance sheet, as already mentioned, has a rock-solid cash balance of 284 million. And if you look at equity of 910, that equates to a book equity ratio of 34%.
If we look at the cash flow for the quarter, it's mainly affected by the refinancing activity that we did in the second quarter.
That is the conclusion of the balance sheet optimization program phase one where we released 111 million during the quarter.
That boosts our cash balance to 284.
As a reminder, amortization in Q1 and Q3 are higher, so it's a bit lower amortization this year due to the semiannual repayments under the ECA facility.
If we then go to the next phase of the balance sheet optimization program.
We have completed phase one. We have one vessel left for delivery. That is the FLEX Endeavor under the 375 million term loan and RCF facility. She will be delivered back to us and under the financing now during September .
For the Phase 2 we have started this with the Flex Enterprise. We have bought her back on her existing fixed rate saline-leashback structure and we have refinanced her with cash. She is probably the only unencumbered two-stroke LNG vessel in the world for the moment.
We have initiated various financing dialogues and we are in advanced stages for a 150 million dollar bank loan facility which is back-to-back with the contract, the seven-year contract with the supermajor.
Then we are...
Considering further refinancing, it's one for optimizing our debt funding but also to free up an additional hundred million dollar in cash.
Our priority is to extend our repayment profiles, improve the pricing under the facilities that will reflect our credit profile but also the credit profile on the underlying contracts.
And then we are further seeking to push out depth maturities and improve leverage to release the $100 million in cash.
With E-HAN we have a number of facilities that we are addressing.
after the enterprise we will consider all of these it could be an amendment an extension of existing financing or plan B financing
But all in all this is what we will spend time on for the next quarters and we hope to revert shortly with more updates on this.
So, let's take a look at our interest rate hedge portfolio. We have a combination of fixed rate lease for the flex volunteer, entered into in December last year at an all-in rate of 4%.
In addition, we have a portfolio of interest rate swaps with a notional value of $853 million.
Historically this has been LIBOR swaps and in Q1 we'd entered into 200 million dollars in 10-year interest rate swap based on SOFR.
During the second and third quarter we have amended and extended some of our LIBOR swaps of additional 250 million dollars and swapped these for 10-year SOFR base swaps at attractive levels.
If you look at the SOFR portfolio, that is on average remaining duration of 8.9 years at 1.9% fixed rate.
That is attractive compared to the 10-year swap rates of 3.1.
also for our LIBOR swap portfolio which has a shorter duration of 2.8 years compared with two year swap rates at 3.7.
Overall this gives us a hedge ratio of 63% on the total depth excluding any utilization of the RCF.
This gives us a solid foundation for any further increase in long-term interest rates.
And with that I hand it back to Åstøn for an update on the LNG market.
Thank you Knut. We have certainly been ahead of the curve compared to the governors of Federal Reserve. We started worrying about inflation with all this fiscal stimulus and have entered into our very good portfolio of interest rate hedges which have so far this year gained 46 million dollars.
Good job on those swaps. So let's talk a bit about the market. The market global LNG volumes is up about 5% in the first seven months of 2022.
As in the past, most of this LNG export growth is driven by the US. The US is contributing about half of their growth in the first seven months of the year, with 6 million tons additional exports.
Russia, despite all the sanctions for Russia, Russia is still increasing its LNG exports, particularly from Yamal. And of course there are really no sanctions on Russian gas, so the Russian gas will continue to probably grow. And as we've seen on the oil side, Russians have been able to offload some of the volumes to Asian buyers if the European buyers are not interested.
The other bracket here is mostly Australia and Malaysia which have added about half of these 4 million tons and that brings us up to 232 million tons of exports in the 7th first month of the year.
More interestingly is on the import side where Europe has been gobbling up LNG spot cargos on an unprecedented level.
So far this year about 2 out of 3 U.S. LNG cargos have ended up in Europe compared to 1 in 3 last year.
In some sense, you could say Europe has been lucky because the cooldown in the Chinese economy driven by Covid lockdowns have resulted in lower demand from China and Chinese imports this year is down by more than 20%.
So, their imports is down 9 million tons and European buyers have just been able to get access to these cargos, which would have been a lot more difficult if the Chinese economy was running at normal capacity.
If we're looking then more into the European gas crisis, Europe came out of this winter with very low levels of gas and this was further aggregated by the Russian invasion of Ukraine in end of February which kind of put a panic in the market.
European gas consumption in the first half of the year is actually down 10%, but this is mostly driven by pipeline exports, especially from then Russia. And the pipeline gas flow in the third quarter so far is down 75% compared to the levels in 2021. And actually the levels of imports from Russia were pretty low in 2021 in Europe compared to the prior Covid levels.
Nevertheless, given the rapid increase in LNG imports in Europe , European gas inventories have actually been brought back to the normal level and we are seeing the inventory levels approaching 80% coming into September . However, the gas crisis has not been alleviated with a reduction in the Russian pipeline flows.
Europe will face a very difficult time during the winter as there is not enough LNG in the market to replace the Russian pipeline flows.
So if we look then at pricing, the price of LNG has rocketed.
These are the numbers from close of day Monday when the TTF, which is the Dutch gas price, hit $84 per million BTU. This is close to $500 per barrel of oil equivalent. And we also saw the German one-year forward electricity price equating to somewhere close to $1000 per barrel of oil equivalent.
The Glüttehof LNG into Europe had however created some bottlenecks.
So we see the widest spread between LNG and pipeline gas prices in Europe ever.
So, the price for LNG cargo delivered except in northwest Europe is $60, so a $24 spread compared to the Python gas price.
The European gas price is also driving up the spot price for LNG into...
Asia, where the JKM, which is the Asian benchmark price, is more or less on par with the LNG price in northwest Europe .
Even though the Henry HUB now is at a 14-year high of around $10, it's immensely profitable to export these cargos from US to either then Europe or Asia with the arbitrage of around $200 million per cargo. But keep in mind that about two-thirds of all the cargos are still being sold on long-term contracts at a discount to oil.
So, that gives a price of around $12 per million B2, and these cargos are mostly shipped in to Asia. And Asia is mostly tapping the spot market for marginal cargos in the peak season, which is usually the winter. So we are certainly in for our interesting winter.
If you're then looking at forward prices.
It
High gas prices are here to stay, the future prices are way above the oil price linked contract price. So in the bottom of the graph here you can see the Henryhope price, it's at a 14 year high now of $10, but given the vast shale resources in the US the future pricing is leading to a lower price in the US.
The grey line here is the price for LNG sold on long-term contract linked to oil, which is still at a fairly low level when you are comparing to the spot prices on the European gas rub TTF and the JKM, which is the Asian spot price for LNG.
Lately, Europe , as I mentioned, has been the main driver for the price increases and prices are at the premium to Asia. And this premium is also why the spot market was very soft in Q1, following a very strong spot market in Q4. The high price in Europe has incentivized export from US or the Atlantic area into Europe rather than to Asia, which entails longer sailing distances.
and thus absorb more shipping capacity. However, as I mentioned, there is a big price spread between the gas price in Europe TTF and the LNG price in Europe . So we do see some cargos being shipped to Latin America and Asia as there is really not enough capacity to import these cargos into Europe .
So, high gas prices actually mean for us higher earnings potential for our modern LNG carriers.
All LNG carriers are about 60% more efficient than the older steam generation.
and they are substantially more efficient than the diesel electric or tri-fuel ships that were very popular 10 years ago. We have here highlighted our sensitivity on the charter rate given different LNG prices. Keep in mind that LNG ships mostly utilize the LNG on cargo as fuel, as we are utilizing the boil-off from the cargo tanks to fuel the propulsion of the ship.
and having a more efficient ship means that you have a bigger cargo to sell at your destination. So if we are looking at, for example, prices today of $55 per million BTU, if a spot steamship is making $15,000 per day, which is basically its OpEx level, you can add a premium of $104,000 per day.
for a tri-field ship because this ship is much more efficient and generally a bit larger than a steam ship. But you can add another premium on top of that of $71,000 per day for a two-stroke
ship like a Maggie XDF, bringing the charter rate to $190,000. Of course, these are theoretical numbers based on the fuel consumption and the cargo parcel size, but this means that in theory with a $55 LNG price where a steamship is making 15,000, you could pay 190,000 for a modern ship. So all in all, a tight LNG market even increases the premium.
that all ships can command in the market.
So let's have a look at the spot market. The spot market was super strong in Q4 where we actually saw the highest spot rates ever for LNG ships.
But as I mentioned, we had this shift of trade from Asia into Europe with the European gas crisis, and this resulted in a lot shorter sailing distances. Sailing distances fell 15% from Q4 to Q1, and this released a lot of ships available in the market, driving down freight rates at the start of the year. However, the market bounced back rather quickly. Usually the spot market bounced back around the middle of March. This is time ahead for investors to do theirHH recap
bounced back a bit quicker this time and the market recovery were very strong with rates above $100,000 during May into June before we had this closed down of the Freeport LNG export plant in US. The Freeport LNG export plant has 15 million ton of annual production. So this resulted in a loss of around 15 to 17 Cargos on a monthly basis thus releasing a lot of especially realtors in the market.
And with more ships available in the market, freight rates plummeted back to around $60,000-$70,000 before now, recently bouncing back strongly again to around $120,000. Some of the bounce back probably explained by the expectation that 3-port would start up again loading from October . This has now been pushed back to November , as we learned yesterday. This might delay the uptick a bit by a month or so.
But the future rates for LNG spot rates are super strong for Q4, where we can see probably rates in the $200,000 range again. And it also explains why we have a bit range in our Q4 revenue guidance, as we have one chip linked to the spot market.
So, let's have a look at the term market which has remained strong the whole period.
The term market has been less volatile and very firm even in this period with spot market weakness.
One year time charter rate for MEGI XTF ships are above $170,000 per day. The three year rate is around $140,000 per day. So these are extremely high period rates for modern tonnage. And of course, as I mentioned, driven by a tight LNG market, high LNG prices, where these modern ships are commanding a high premium.
Another factor is the new billing prices have really been picking up. We did our investment in ships in 2017 and 2018 when new billing prices were at around 180 million tonne dollars per ship.
The last year or so we have seen a big increase in the price of LNG carriers, driven by higher material prices, both nickel and steel, higher labour prices, but also much tighter balance at the yards because of the glut of orders not only from LNG carriers but also from the container ship, which is making yard slots fairly scarce. Today if you want to order a ship...
you are talking 2027 deliveries, so actually the delivery time for LNG ship now is longer than most of the upstream LNG export plans.
With a price now approaching 248 million dollars for a new building, which is the price SSY is pegging now in the recent report, this has also driven up the five-year time chart rate. With higher CapEx, you need to have a higher rate to defend that investment. Five-year rates have almost doubled during the last 18 months from mid-60s to mid-60s.
now up to $110,000 per day which also gives us comfort on the further recontracting of our fleet
Looking at the fleet structure, as I mentioned there's been a lot of LNG orders and the order book is now around 250 ships. This is driven by two main factors. One being the replacement of older tonnage which is inefficient as I previously illustrated and the second factor of course is the high growth of LNG exports coming from especially from 2024 and onwards. And all the new ships for this trade is the new type the Mege XDF.
The purple ones there are the specialized ice ships for the Russian Arctic trade, which doesn't really usually trade in the ordinary LNG carrier market.
But we do see here that there's a lot of teamships still in the market and I will come back to that also shortly.
So looking at the order book as I mentioned around 250 ships but very few of these ships have been ordered on speculation. Almost all of them have been ordered towards new contracts or fleet renewal. So out of these 250 plus ships only 30 ships are available for new charters and very few of them in the period has until 2025.
So that gives us some comfort in our ability to also re-contract our ships once they are coming open.
Heading back to the steam ships, we have had this graph with the dinosaurs for a couple of years now. These ships are too inefficient to continue to trade for longer term. A lot of ships are coming off existing legacy contracts, typically legacy contracts with a duration of 20 to even maybe 25 years. There are already 36 ships.
steamships open in the market with average age of 28 years and then there are rolling off 100 ships steamships from contracts by 2027 and these ships will face a very hard time going forward not only because of the high LNG price making them
economically obsolete, but also because next January we have new IMO regulation, which we call the EXXI and the CIA, which will put a much more stringent requirement on the efficiency of ships and we think this will result in a very big spike in attrition of older steamships, which will be replaced with the newer typeships.
As mentioned the global gas crunch is also creating interest for new volumes.
We have seen an uptick in contracting for LNG.
We have had during the last 18 months about 100 million tons of new volumes being signed up.
With the gas crunch in Europe , you should think that the European buyers were the big buyers, but actually even though China has a reduction in their LNG import this year of more than 20%, they are signing up almost half of these volumes because the LNG story in China is in its early phases. This year, actually, Japan will probably import more LNG than China, and they are leaving more than 10 times as many people in China.
So, China will continue to grow once they are getting control with the COVID and are reflating their economy. We do also expect European buyers to be signing up for more SPAs as they need to replace a huge amount of Russian pipeline gas with LNG and probably also then renewables.
So we have a list of some recent contracts. I'm not going to go through all of them, but for sure there is a new wave of new LNG export capacity coming.
So then let's finish with the first slide, the Q2 highlights. I'm just going to repeat them. Revenues 84 million, 10 million higher than Q1 in line with our guidance. Net income of a healthy 44 million adjusted for these derivative gains. We came in at 33, translating to 83 or 61 cents of earnings per share respectively. We have recently announced three new contracts.
adding further backlog to our fleet, which now has 54 years of firm backlog.
Our revenues guidance remain the same as we recently updated 90 million of revenues we expect in Q3, slightly higher than in Q2. And then we believe Q4 will be the strongest quarter, 90 to 100 million of revenues we expect depending a bit on the spot market affecting the one shift we have on index. So with that we are also happy to announce today our biggest dividend ever, 1.25 dollars per share.
including the 50 cent special dividend. This gives 3.5 dollars of dividend the last 12 months or a yield of around 10%, which we think should be attractive for our shareholders. And with that, I conclude today's presentation. We will now open up for some questions. So please use the chat function at any time or send an email to ir at flexlng.com and we will try to answer most of the questions.
shortly. Thank you.
Okay, thank you everybody. I hope you enjoyed the presentation. We are now going to do some of the chat questions. So, Knut, maybe you could start. Yes, and thank you all for the questions. I think we can start off with the question from Oma Nocta from Jeffries.
So, thank you very much.
We now have the sizable revenue backlog and the highest visibility since the company was created. What's next for Flex? Are you happy to continue operating with your existing market footprint or do you see opportunities for expansion?
That's a good question, thank you Umar.
Of course, we are mostly driven by what is good for our shareholders. Of course, I think we can easily scale our company for our size, which is at least double, easily.
Kind of investing in ships now as the price which we just shown her of to on 200 close to 250 million dollar for a ship ships are due for delivery in to 2027 and if we're then spending 270 million of cash on my 250 million of cash And that cash will be tied off until 2027 You know we don't really see it as a very attractive
investment choice, given also the rather large order book. So so we rather prefer sending some of them on the back to our investors and special dividends energy prices here in Europe are Sky high, so maybe a special dividends will be a good timing for that today Of course, that is organic growth. We are also open for consolidation. I think you know we have a very good stock the stock is you know the biggest market cap of any
we also have to make sure it's good for existing shareholders. We're not going to pursue growth just to grow our fleet and build a bigger empire. We're very happy with the status today, and we can certainly continue just operating with the existing fleet if we deem that to be more attractive than growing. Yeah. And a follow up from Omar on
demand side of it or if we've been approached by the US LNG expert projects the fast-tracked that you to come on stream in the second half of the decade.
Any approach for either for existing or new buildings? Of course we are in constant dialogue with a lot of the charters, we have a lot of repeating customers. For the Fast Track project we don't really have any ships available. Fast Track, as I mentioned the earliest ship available is in the middle of 2024. There are certain options there, so the first fully open ship is in the middle of 2026. So we are focusing on those ships, seeing if there are...
opportunities to even add duration to existing contracts like we just did with Amber and Surprise and Rainbow because we find the term rates quite compelling and they create a good value for us locking in that cash flow.
And then there's final questions I can take.
balance sheet optimization program phase two. If the 100 million plan unlocking of cash in addition to the cash you have would raise the financing, would raise from the financing of unencumbered vessel. So just...
specifying that Q2 we had cash balance of 284 million then into Q3 we bought back the the enterprise so she is unencumbered now once we refinance her if you take she was bought back at 137 million dollar and then we refinance her again with with 150 million so the 13 million there is included in the hundred million
And also maybe worth mentioning because we had this accordion feature on the 375 million loan where we could add a 4 chip So what we were considering was to add and surprise to that facility Increasing it to 500 million dollars, but what we can see now with this new contract for enterprise we can finance even better, you know 150 rather than 125 million and and lower margin as well based on on a long-term contract So we are therefore optimizing and not utilizing that accordion feature
that you know the last 18 months.
We are basically gone from 100% sports text posts until April last year all the ships were either on index or short term cc.
So with kind of the fixed signal of 12 ships as are shown in in one of the slides We have really taken down the credit risk and improved our credit profile This enabled us to tap into very attractive depth both in terms of leverage margins duration and and also putting in the ball work facilities where the cost of having access to this cash is very low. For example, there isn't
375 million facility, 250 million of that is structured as a revolver, which means the cost of having that credit line is only 0.7 percent per year. And if you've been in shipping for a while, which we have been, you know the optionality of having cash is huge in shipping because there's always something happening. So that's why we are now utilizing our strong balance sheets and credit profiles to raise cheap debt. And then we are structuring in a way that it doesn't really cost us a lot of money to carry this debt.
be good dividends for shareholders. And that leads into a couple of questions regarding our dividend. So can you give any guidance on future extraordinary dividends or alternative uses of excess cash?
shareholders. And that leads into a couple of question regarding our dividend. So can you give any guidance on future extraordinary dividends or alternative uses of excess cash? Yeah, okay.
We kind of made a decision last year when we had contracted out nine ships in that period from April to November . We've taken on the risk that we hiked our dividend to our 75 cents on a quarterly basis equating to $3 a year, which we found like an attractive long-term sustainable dividend. However, as we have gone through the balance sheet optimization for reasons I have explained, we have ended up with a lot of cash, so that's why we are sending back a special dividend. We're not going to guarantee...
like chips on longer duration. And then also kind of the financial markets as well. You know, actually right now with this kind of strong position, we don't mind volatile financial markets because that can create opportunities for us. So we're not gonna guarantee special dividends, but you can assume that we will always be shareholder friendly. We are also invested in this company and we also like dividends. So we will continue paying a
you know, very healthy dividends, special dividends will happen when, for more on all occasions I would say.
Okay and then to round up on the questions on the cash there's a question on our working capital requirement. I think we can say that we have a financial covenants relating to our cash balance.
It's the triggered now is a 5% of the net interest bearing debt. So it's about $75 million. And we have previously guided that we have sort of a management comfort level around $100 million. And also just on the working capital, what mentioning working capital in LNG shipping is negative. So it's a bit different from the tanker business and the bulk business. Tankers and bulk business, you do voyage charters. So you get paid when you're discharging your cargo.
On LNG, all the contracts are time chartered. This means we get paid in advance. So our working capital requirement is actually negative because we always get paid early and we pay our bills later on. So working capital is not really something we are required to hold. We are financed by our charters. So working capital then only relates to the kind of the cash covenants imposed by the banks.
Okay, it leads over to another question regarding new buildings and new building orders. How is your risk reward assessment of ordering a new building at current elevated prices?
Can the current Charter Age defend the investment?
It's a good question. We have shied away from it. Maybe that's wrong now when we see prices approaching 250. Maybe we should have ordered at 220. It's really gone up very quickly. It's driven by the commodity prices, labor prices, and the fact that the yards are very much busy these days also with container orders and LNG orders. And this is pushing off the yard prices. Even though the yard prices are going up, the yards are not really making a lot of money. So the margins are fairly thin here.
We think today it's it's hard to defend ordering ships at around 250 for delivery in 2027 and that's why we are the focused on our existing ships trying to extend Duration on those and we have found that to be more attractive We have another questions on more of the operations and how is the Ukraine crisis impacting supply and demand and your tanker traffic
Ukraine is not the exporter of LNG. No LNG is exported in that region where you have a conflict today. This is mostly affecting Russian pipeline exports to Europe , where you have a tug of war between Russia and Europe , where Russia is holding back volumes, finding excuses to halt it. And that is of course casing.
a lot of demand for LNG, not only in Europe but worldwide. On the LNG side in Russia you basically have two export regions. It's Yemal, the Arctic, where you have Yemal and Arctic LNG2 and then Sakhalin on the east side of Russia. The direct effects on LNG shipping is very, very important.
There's not really any direct effect. It's indirect through the shutdown of Russian pipeline flows. The most, that's commercial. If you think from the operations view, there is one direct consequence and that is all the Russian seafarers, which is finding it hard to find employment today because of the sanctions we are not able to pay Russian seafarers. So you have a lot of Russian seafarers who are out of job.
Because of this conflict, so that's very unfortunate And it makes recruiting harder
And then a final question is a bit on the future, but are our LNG ships able to transport hydrogen when in five years this may be needed?
I think you have to wait a lot longer than five years, but the simple question is no We transport our very cold Cargo, it's LNG minus 162 degrees or minus 260 Fahrenheit if you're gonna go to hydrogen you have to be a lot colder high liquid hydrogen is minus 253 degrees so it's 90 degrees Colder it's only transit degrees from zero Kelvin the absolute coldest
you can go in the universe. So this would require a totally different ship. One thing is of course the temperature. Another factor is that hydrogen is the smallest molecule in the universe. So this molecule could easily escape kind of piping or the cargo containment system and hydrogen is extremely flammable. So you know this puts a totally different aspect on the safety.
you know there's never really been any accident with the LNG ship but for hydrogen it's a much more complex cargo to transport temperature wise, leakages, flammability and also the fact that hydrogen is not really dense so you need in order to transport the same amount of energy you need a lot more ships so no hydrogen is not something we're planning to transport on all ships whether it's efficient you know most of hydrogen is produced from natural
for ammonia, sorry, but if you're doing the electrolysis process, then you know, if you look at electricity prices here in Europe , you know, this is not really viable today. One of the other ways of transporting hydrogen which is slightly easier is, as I mentioned, ammonia. So basically you're making hydrogen, you are dirtying the hydrogen with nitrogen to get ammonia which is easier to transport but which has some certain drawbacks.
It has drawbacks in terms of toxicity. So it's lethal, it's toxic in terms of corrosion. And actually even though it's explosive, it's hard to ignite, so you need a lot of pilot fuel. So we will stick to LNG. I think cleaning up LNG would rather involve carbon capture systems. I think that's the most viable path forward.
Done with the high LNG prices, are flex buses fueled by LNG? That's a very good question. Yes, almost all the time. Once we pick up our cargo, we take this super cool cargo on board and keeping something at minus 162 centigrade is quite difficult. We have a boil off of around 007 on our ships.
So it means that every day you're losing 0.007% of the cargo in boil off, but we're not losing it. We are using it as propulsion. We are burning this LNG, natural gas, and fueling the ship. So it's actually, you know, you're getting into an area, if you had a lower boil off you would have to force it out. Then you come to the discharge port, then you have to make a decision. What you usually do is you keep some of the cargo on board, which we call the heel.
because then you can keep the cargo tanks cold. You can't load LNG into a ship unless it's minus 130 degrees in the cargo tanks. So if you're stripping out all the LNG, first of all, that will take a lot of time. So the import terminals are already congested today. So if all the ships are going to heal out, they are going to get even bigger bottlenecks. So especially in Europe , you don't really have that option today.
But let's say you are doing it. Let's say you are healing out because the gas price is so high and you are burning very low sulfur oil on your ballast legs.
That creates another problem and that's the bottleneck on the export plant because if you are arriving at the export plant with your Cargo tanks warm you need to cool them down So you have to do what we call a gas up or cool down or cool down Where you have to add LNG in smaller amounts spray it in the cargo tank Get the temperature down to 100 minus 130 before you can load LNG and this again takes a lot of time and you know
birthing space on these terminals are limited so Very it's it's not very often that actually people heal out even though in economics It sounds very good so for most of the time laden by last we burn LNG you
And then I think we can wrap up the two final questions in one It's a big topic what will happen to the steamships and How will our vessels be impacted by EEXI and CII regulations?
Yeah, okay, we have been talking about this for, at least I have been talking about this for five years as the big business opportunity for us, because we have the modern ships, the steamships are very inefficient. In all of the shipping segments, steamships propulsion has gone away for a long time. So the new decarbonisation rules are going to push these ships out of the market, but also the high LNG prices. It's not economically to run these ships anymore. And that, you know, less ships in the market means usually supply and demand higher rates for the existing.
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