Q2 2023 FLEX LNG Ltd Earnings Call
Speaker 1: For numbers I will be joined today by our CFO Knut Thoold who will walk you through the financials a bit later in the presentation.
Before we begin I would just also mention we do have our Q&A session at the end of the presentation where you can send in your questions either using the chat function or sending an email to ir at flexlng.com and if you have the best question for today we do have some gifts for you. So gift number one!
is our FlexLNG boiler suit. We just completed the docking of four of our ships. These are very nice when you do some improvements or maintenance so you can have it while doing some home improvements.
We also have the new Just Flex It running t-shirt which we will be using in Oslo Marathon next month and lastly we have a new edition of our Flex LNG sunglasses. So I hope you do send in some good questions, it's always the most fun part of the show.
some forward-looking statements in this presentation. We will be using some non-GAAP measures as TC and adjusted numbers and of course we cannot cover everything in detail during this short presentation so we would also like you to highlight the fact you can read our earnings release which we also presented today.
So let's kick off with the highlights.
adjusted net income where we only include the real life gains on our derivatives not the unrealized gains came in at 28.2 million or 53 cents per share. During the quarter we carried out dry docking of three ships according to time and budget and that means we have completed the dry docking schedule for the year with four ships being dry docked in the first half of the year. These three dry dockings in the second quarter was then the main reason why we have lower revenues in Q2 compared to Q1 but with all ships back in operation from the second half of the year we are reaffirming our...
So, with our very healthy backlog, a strong financial position with 450 million of cash and no debt maturities prior 2028, after all the refinancing we just carried out, we therefore should come as no surprise that the board is declaring a dividend of 75 cents per share for the second quarter. This brings the dividend the last 12 months to $3.25 per share or an yield of about 10%. So, as I mentioned, we've been busy doing the right-talking this year. We docked Flex and Never in March, Singapore. We did our sister ship Flex Enterprise in Singapore in April .
And then we had two ships, the sister ships Ranger and Rainbow docking in June , Ranger in Denmark and Rainbow in Singapore. We guided in our Q4 presentation that we expected these drydockings to take somewhere between 80 to 90 days and we ended up at 77 days. So I was slightly here.
ahead of our guidance on time. CapEx also in line with estimates about 20 million of CapEx associated with these four drydocking and with that we don't have any more drydocking for the remainder of the year as mentioned. We will have two drydocking next year.
probably four in 25, three in 26 and then we have a holiday in 2027 with zero dry docking schedule for that year.
the ship we have on variable time charter. With all ships back in operation, we expect revenues to jump in Q3 somewhere between 90 to 95 and then a bit more variability on Q4 as support market can really take off especially when we look at the winter coverage fixtures being done recently. So we expect somewhere between 90 to 100 million of revenues in Q4 and that in total should be around 370 million.
which was recently docked. She is open in Q2 2027 and the flex constellation in the middle of 2027. I will come back to this later in the presentation. These are very attractive positions when you are comparing to the term rates and new billing prices for ships for delivery at 2027 and onwards. So once we have finalized marketing of these ships we will move forward to the next open position, which is flexer, run flex volunteer, which are fixed to Cheniere with with re-delivery early 2028 if they exercise the options for these ships which we do expect them to do.
We do in general think that a lot of these options will be declared given where the term rates are heading. As you can see we also have on the bottom here FlexArtemis, the only ship that's on a variable hire time charter, where the rate is adjusted according to the conditions of the spot market. The spot market looks very strong for the second half of the year and that's why we have this option.
came in at 86.7 million and was impacted by the 57 days of scheduled dry dock of the three vessels in the second quarter. It's also impacted by seasonal lower earnings of the variable hire contract for the flex Artemis.
On the operating expenses we see a slight increase this quarter to 17.3 million and this is explained by timing effects of space and maintenance.
Last quarter we were a bit below budget and this quarter we have paid some of those OpExs. So OpEx per day is 14,600 but if you look at the first half of the year the average OpEx per day is at 14,000.
Interest rates continue to increase, so we have an increase of interest expenses to 27.2 million, however this is offset by our gain on derivatives of 17.1 million. Included in that is realized gains of 6.2 million versus 5 million in the first quarter.
if we look at the comments on this slide we also then compare with the first half of the year so we see we have realized gains of 11.2 million versus a loss of 2.4 million last year
So, despite the rapid increase in interest rates, we see the positive effect of our hedging strategy where the net paid interest is only 10 million higher despite the rapid increase in the interest rate levels.
Last quarter we completed the balance sheet optimization program and therefore also booked the write-off of debt issuance cost of 10 million. So that's no longer applicable this quarter.
and adjusting for the unrealized gains on derivatives, we end up with an adjusted net income of 28.2 million. And that results in adjusted earnings per share of 53 cents. Looking at the balance sheet, it's still robust and clean. There are two main components. It's cash of $450 million and our vessels, the 13 vessels with an average age of 3.6 year, with a book value of about $2.3 billion. That gives an equity of 870 million.
solid equity ratio of 31%. If we look at the cash flow statement for the quarter, we have 47.5 million in cash flow form operations and 9 million in change in working capital.
We had 16 million in dry dock expenses and then amortized about 26 million dollars
We paid out last quarter.
75 cents per share in dividends resulting in 40 million dollars and we end up done with a solid cash position of 450 million dollars.
Having a deeper look into our interest rate portfolio, we have made no changes to the derivatives during the quarter. So we maintain a high hedge ratio of 62 to 65% in the coming quarters. It's a mix of sofa-based...
interest rate swaps and LIBOR-based swaps. As the LIBOR has ceased to be quoted, these LIBOR swaps will transition into SOFR swaps during the third quarter.
If we look at the components here we have 820 million of swaps and then we also have 201 million of fixed rate leases in the portfolio. So on the interest rate swaps these are valued today at 58.7 million on our balance sheet and provides a...
The maturity profile is pushed out. First maturity is in 2028 and as you see here it's spread out with the last maturity in 2035, subjected to the exercise and two-year extension option on that financing. This portfolio is provided by a diverse and strong and supporting group of banks. It's split out in various regions so we have banks from the US, from Europe and then also increased our exposure in Asia. So this gives us a rock-solid foundation to support the company coming further. And with that I hand it over to Eisten for an update on the market. Okay, thank you. So let's have a look at the market starting with the volumes. So these are the volumes from January to end of July . In that period we see that the export growth is about 3%. US was flat in Q1 due to the shutdown of Freeport but with Freeport up and running again US volumes are increasing and are the main contributor to volume growth. We have also had shutdowns in Norway and Norway is back exporting so they are also adding 1.6 million same as Algeria.
On the import side, we continue to see strong growth in Europe , adding 5 million tons in those seven months. We've seen less demand for Japan with nuclear restarts, but China bouncing back. China, after they loosened up the COVID restrictions, we did see Chinese demand rebounding from March, and in the second quarter, Chinese import growth was about 20%. So then, looking at the gas prices, they have been incredibly volatile the last couple of years, driven mostly by supply events as well as of course COVID. So looking back, the last year, we saw a lot of growth in the last two years. So we've seen a lot of growth in the last two years. So we've seen a lot of growth in the last two years.
And then, of course, we have the new stream explosion, which cut off volat of version pipeline gas to Europe and actually sending the price of gas as high as $100 pera. Million B to u- for those who are not too familiar with million B to u- that'is five point eight million B to in a battle of oil. So that means that we are talking here about gas prices equivalent to about $600 per battle of oil. And, of course, when prices are going to this kind of levels, demand goes down because of the high prices and switching to coal or propane.
winter to about $10 and we actually then are level where natural gas actually were a competitive towards oil. You see the dotted line here it's LNG being sold at oil price with about 20% discount and of course when prices go down again we can see more demand and now lately the last week or so we have the situation where
Australian workers are contemplating strikes which could cut off almost 50% of Australian volumes or 10% of global volumes. So these are really big numbers. When we look at the Freeport explosion which cut off that plant, we were talking about 3.5% of global volume.
So these are almost two and a half times bigger volumes and I will come back to the situation in Australia. And with that of course we have seen a rally in European gas prices the last week or so and we do expect gas prices to head upwards.
in line with the future cursor as there will be more demand when we're going into the winter. So let's have a look at the situation in Australia. There are several mega projects in Australia as you can see here on the map.
The uncertainty today is around three different projects, which last year exported about 41 million tonnes, close to 50% of all Australian volumes. So here we are talking about industrial actions, where workers are contemplating a strike which will affect
Asian buyers given the short distance to these big markets with Japan, China, South Korea taking the vast majorities of this cargo. So if there is a shutdown it will really create a supply crunch where Asian buyers will have to compete.
for Atlantic based in cargos, mostly US, and drive prices up. Well, we have seen already the fear of this happening, our driving up prices. Of course, we don't expect shutdowns at a similar period of time as we have seen when...
We had the Freeport explosion, which is more a technical issue. But that said, we have seen similar actions happening on the Pollute project in Australia last year, where industrial action closed on exports from June 10th to August 25th last year.
This is still unresolved, but it's something to keep an eye on. Another interesting topic is the supply of Russian gas.
So what we are putting in here with the Drake meme is that Europe has really said they don't want to have Russian pipeline gas and also with the Nordstrom pipeline exploded it's not feasible to move those volumes.
So the share of Russian pipeline gas in the European Union's natural gas demand has been on a sharp fall. And of course this gas has been replaced primarily by LNG. Europe has been incredibly lucky. First we have had the Covid shutdowns in...
China and then we've seen the economic growth of China probably being on the slower side of expectation which has resulted in Europe being able to source a lot of volumes from the spot market and and US cargos especially the flexible US cargos going to Europe but not only the the the US cargos actually when we look at the
Russian LNG is very welcome in Europe and actually Russian LNG into Europe has just kept on going. As we can see on this graph on the right hand side, Russian LNG to EU 37% of the cargos went to EU in 2021. It actually grew to 47% last year and so far this year.
buyers can't really afford to not take the Russian LNG, given the tightness of the LNG market.
So, looking at the European gas market, which has been front and centre the last couple of years, European gas inventories now are at a very high level. We are very close to the 90% threshold that EU was targeting.
for November 1 already today. But again, the winter has not started and of course once you are getting into the winter, European consumers will start to utilise the storage level and deplete it.
as is the seasonal pattern. So IAA had some scenario analysis of how vulnerable Europe is to supply crunches and we have four different scenarios here. So it might be a bit confusing here on the right hand side but we look at...
So once the heating season starts, which is 1 October , what is the level of inventory levels there? And you will see, as you get to November , December , January , February , March, this storage level will be declining as we are using from the storage level.
So how much they are declining really depends on a couple of factors. The biggest factor is whether the winter will be cold or not. And then it will also be about how much gas will Europe be able to source from the LNG market. That's why we've seen the rally in the gas prices last week or so because...
If in the event Asian buyers are competing for marginal spot cargos, LNG supply will be more restrictive and in such a situation where you have a cold winter and restrictive LNG supply, Europe could end up with very low levels of gas.
coming out of the winter this season despite the high storage level today.
So, looking at the market we are operating in, it's the freight market, the spot market has been acting as usual. We have had the spot market cooling down as you are getting out of the winter and once we are getting closer to winter, we are going to be getting closer to winter.
spot rates are going up and following the seasonal pattern today we are already above $100,000 per day for modern tonnage and if you look at the future curves on the left-hand side which is the dotted blue line we see that the future curves are pricing ships for the winter in excess of $200,000 per day in line also with what we have seen in the past but keep in mind there's been a lot of the traders and the portfolio players they have been taking ships on longer term charters.
So, the numbers of fixtures in the spot market has gone down and also the spot fixtures being done today are primarily relets where charters are fixing ships to each other, not independent owners. Looking at more term rates, where we are more active, of course term rates are driven by supply and demand, but they are also driven by new building prices.
and interest rates level. So we've seen new building prices picking up about 30% the last two years and of course when people are doing a tender for new buildings those people investing this amount of money in a ship they need a higher breakeven level in order to defend such a investment also when
when interest rates are picking up. So today, new building prices are at around 265 million with a couple of more ships available for delivery at 27 before we are starting to have only yard slots open for 2028.
So today the 10-year rates, as you can see here in the light blue line, is hovering above $100,000 and then at about $115,000 for the five-year time-shutter rate. So this is one of the reasons why we are also very optimistic about recontacting our ships. We have two ships open in 27 competing with these ships and then two ships also in 20. It's also reflecting of the fact that we have a lot of new volumes coming to the market.
and it's reflecting the fact that still we have a lot of steam propulsion on water with 35% of the fleet consisting of steam ships and we do see more and more of these ships leaving the shipping market and have to be replaced by more modern fuel efficient tonnage driven by economics driven by regulation and also to from next year actually send the order book all uncommitted so
Two the two two to take the on equipment. So they are ready to being.
Maintain and and then you know I think we evidenced that Norway. We guided 80 to 90 days adopt stay for those four ships. We had planned this year, we managed to spend only 77 days on those four dockings averaged 19 days and I think if you compare that with most all of the LNG owners, we are comparing very favorable.
On time and also on cost.
Because don't staying in a dock is costly.
And it follows up with another question on the new buildings is dimension that they'll have some new gadgets slightly different from from our vessels.
So while we are in dry docks do you.
Plan to do any upgrades of our of the vessel is not major upgrades of course, we always do you know software upgrades, the or maybe some new energy saving devices or we're putting in some more sensors, but not major upgrades. You know we have the most efficient engine states to Stoke people ordering ships today are still the two so actually where if you.
People are ordering the Mega ships, which we have nine out of detour Athenian norfleet. This mega ships, because they are quite expensive usually at a one or two high pressure compressors.
Running at 300 bar people today are maybe is often opting for cheaper engines with lower pressure, which result in not as good combustion and more methane slip.
The OSM all the gadgets you have the air lubrication system.
But you know soft so far that also makes the mixed results on the systems I think if if you're at all on new ships today of course shelf generator Esa say quite Pablo is basically if you have a bicycle and you have the number on the bicycle in order to make life, so rather than run running the auxiliary engines you can use the die.
Animal but of course, if you use the Dynamo you also can't fix them. So it's not like you get free electricity you have to build more on the engine, but you can you can use less of the auxiliary engine. So so.
That's the roundabout way of saying that with plan no bigger.
Grants because there.
The chips all states of the Alt, a and we all of them because we could get state of the art ships at the high time at the right price.
What it is today.
Then we have.
Questions on the <unk>.
For finance and basically the recurring question on on a cash parts.
While we are not repaying.
Repaying a depth in order to reduce.
To reduce interest rate cost.
It's a recurring question and it's something that we are we got and it's related to the Rcs for the revolving credit facility. We have basically we use the ICF for cash management.
In between quarters, we repay with available cash to bring down the interest cost, which is actually the question here and that makes it where we have cash available and funds available.
When we need it and it's a follow up on the classical principles of raising.
Capital when you can and have it available so for this Oh C F. When we don't.
Don't utilize it we paid 70 basis points in a commitment fee.
And that's a pretty cheap a way of having capital available.
I'm following up on the market a couple of questions there.
We have a charge from memorial and short question is the winter coming.
Possibly yes.
We are in August once we are getting into October the winter will be combing. So what that teekay will referring to may be take off when I found that.
The European.
Storage levels of gas of course, they are why are they high today.
Reflecting the fact that mute the demand over some muted demand over last winter when we had the two alone, Indiana pretty warm or mild winter in Europe .
And what will happen this year, let's see this year is different from the last three years. The last three years, we have had a law in India. This year, we have El Nino.
El Nino typically means colder colder.
Colder winters in north of Europe .
Wetter winters in south of Europe , usually warm winters in Asia. So you know, even though inventory levels look a look at high today you have to also take into account that all the Russian gas that used to be there to support our gas consumption in Europe is more or less gone. So so there's storage is.
Coming in much more important and the drawdown of of store of the storage levels will probably be much quicker, especially in a cold winter because you don't have the same kind of base load of gas into the market. So the winter will be coming and it will be interesting to see we need to have as much LNG to the market as possible in order to.
Not create this kind of wild swings we have seen in the past.
So that brings us to another question from sugar for El Merk Robby.
We have in the presentation talk and is also in the news now about the potential strike in <unk> in Australia.
So what's the impact on the on the ton mile and there is a risk of a seaborne volumes will drop and we're well down the importers are pick up the slack.
Ross. This is so much volume out of his unprecedented the 10% suddenly for volumes going away with some people to going away its three 5% so.
If that is volumes are curtailed prices will skyrocket, it will not be an of LNG in the market for sure.
And hopefully I can you can only hope it will not be long lasting and we have seen similar situation here in Norway, where oil and gas work you have been contemplating spiking and actually the government to have intervened and said that the consequences are too big we are the biggest gas exports to Europe .
We have a public offer faster and just setting the term by Fiat I think you did.
Australia, so it should certainly consider something similar if it happens of.
Of course, you will see a bulk of ships in Australia.
Which are usually doing.
That kind of transportation from Australia to Japan, Korea, China, Taiwan, So Jacob to see all those ships will be available for the ships. If you multiply maybe 1314 is its a sizable number of ships may be 60 ships will be available market, probably not will be available immediately because people will build.
<unk> them back because they don't know how long the strike will be that they're going to fix the ship on a three months or two months charter and suddenly the strike is over and they are left out of the ships. So you really create inefficiencies and you will have ships going to longer routes to our two U S to Asia.
And.
I think actually shipping market will also be tight because.
And certainty about when will volumes come back of course, when people shut down they had like a timeline when the volumes would be starting up and people could real at the ships. When you have a site theres more uncertainty uncertainty people will holding their ships. So am I think LNG is product market would be.
Immensely tight and then shipping market will also benefit.
But they will not be a good situation and actually I hope it not happen because.
We need the LNG it to stay at the chip level, if you're going to attract new consumers.
And on top of that we have the problems with the Panama Canal, Yeah. So how is that affecting our flex and the LNG industry in general.
We have had the worst walk in Panama since they can all opened in 1914, what the levels are very low and remember this is a big.
You know can all and when you're putting ships through it you need you youre, losing water from the canal into the sea. So you have to refill. These are water balances from lesser walks in these reservoirs are at a low level.
And.
They typically want Panted youre, losing 50 million gallon of water, which is 190 million liters. So Panama haven't had to reduce the number of Panther to keep the water level. So this has created a super tight.
<unk> market in the Panama Canal waiting times today, if you don't have a slot. This almost 20 days and that August and our last November we saw them going up to 26 days, but that's the winter season and the winter season is always more busy you have the high season for container ships going for the shopping season, you have more export of <unk>.
G and LPG.
And typically more routes to Asia, so so at Solvay.
Panama Clogging is a problem that not going way, even though the dwarf us going away Panama is jammed and the reason is calling Panama Canal was built for container traffic increased container traffic the neo Panamax container ships and this was decided before the shale Revolution in America.
But suddenly U S became the biggest LNG export and the biggest LPG export and they can all has not been scaled to suddenly also take all of that traffic. So so that will be on the inefficiency, we see it more on the LPG side and advanced gas, where we are losing ships away from Panama, because it's too much right.
Wasting time, and it's too difficult to fix the ship when you don't know the schedule.
So then there is a bit of a crystal ball.
Question.
What's your view on the LNG.
Commodity prices in the short and the longer.
Now of course, it's a I believe that you know forward rates are not always a good predictor of of prices, but I think it's pretty accurate in the near term.
Although prices will stay tight for a medium term or the short term there will be a lot of demand for the winter market. So the prices will go up does not coming a lot of new LNG to the market near term, which means the market will stay tight you will not get access to the Russian pipeline gas so.
So that will be tight market from 25 on wassa coming a lot more liquefaction plants and hopefully that can bring don't process.
Because otherwise we are passing out the consumers and actually you know, we would like to get prices down to $10 and less because then we can finally do something with coal because LNG should be utilized not only to replace a Russian pipeline gas, but also coal and if you ought to do that which is immensely important.
In terms of pollution Gino's glass gas emissions, then you need to get the price, which is affordable fall that are developing countries and not only European consumers.
So that rounds up the questions, but we'll we'll include one more as Lucy hind firm from trade winds.
What's your guidance for your time to complete the Oslo Marathon.
[laughter] guidance, giving guidance on that as well.
So whether I'm been too so so accurate on the on the guidance for the financials.
Number one we are attending Oslo marathon, the flex the whole flex team in actually exactly one month, but we are not running the full marathon. We are running the half marathon, we don't want to have too much cash on where on the on these guys.
Alethia I might grab my goal as I Intel is my my guys to beat me hopefully I can be at the one or two of them last time I I you know.
And my last half marathon I've been doing 24 of these quarterly presentations. So that hasn't helped my way for them that way. It has gone up so probably a 15 minutes longer time than last time, so below 150.
Good now that rounds up to questions. Thanks, a lot for the question and obviously if you are there if you're all going to gas deck early September for the Big gas conference.
I know you like to run marathons. So then of course I will bring you only had one of these.
Just flex it T shirt. So you can run that use that next time, you run a marathon not a half marathon like the legacy guys like <unk>, maybe at the full marathon, okay somebody need to round off with the winner of the of the flex kits for the questions.
I guess, we can learn there we ended up pets I wonder if this is hakan Lynda, which I knew from my childhood, let's see okay, well, we will reach out to him and give him. The T shirts. So he also can run.
[laughter] Hoffmann upon Oh, my God, the full marathon of course, the flex classes and the boiler suits because if he walks for dual drilling I'm pretty sure. They all are they have a boiler suits.
Okay, Congratulations and thanks. Thank you for all of the questions. Okay. Thank you guys.
And we'll see you in November thank you.
Yeah.