Q3 2024 FLEX LNG Ltd Earnings Call
Recent events, we announced last Thursday that we are already starting the fixing season for 2029 with new contracts for both FlexResolute and FlexCourageous.
where the charter takes these ships firm from 2029 to 2032 but where they have option to keep the ships all the way to 2039 and I will give some more details on this.
We also have one ship being re-delivered. Not a big surprise given where the market is, which I will cover later in the presentation. So we will have her back, expecting her to have her back in March next year.
430 million giving us net proceeds of 97 million and a very healthy cash position pro forma cash of 450 million dollars which is about 35 percent of our market cap today
Next quarter, it's going to be a bit odd quarter. For the first time ever, we are not going to guide Q4 numbers higher than Q3. And this is due to the soft spot market, which is affecting the one chip we had on index.
Speaker Change: She will be trading at the floor level for most of Q4 and thus...
Speaker Change: We expect revenues to be close to 90 million in Q4 rather than the 90.5 million we booked in Q3.
Speaker Change: EBITDA also are slightly less than during Q3. However, with a huge backlog, totalling over 50 years minimum, which may grow to 82 years.
Speaker Change: And even though we now are at $3 in trailing 12-month dividend down from 3.125 from last quarter, we still have a very attractive yield of 13%.
As I mentioned, we have one ship on index.
Speaker Change: expect slightly less income on that ship in Q4, dragging our numbers down a bit, but not much, which would be the case if we were fully spot exposed.
Speaker Change: Two recent extensions. As I mentioned, we have fixed those ships. We announced these ships on our charter in November 2021, where the charter took them on a 3 plus 2 plus 2 structure.
Speaker Change: from 2022 to 2029. They already declared the first option to 2027.
Speaker Change: And given this extension from 2029, we do also expect them to take the next option, Declarable Q126.
Speaker Change: and then with a new firm period to 2032 as we said in the statement when we issued the press release we have fixed here for longer period at higher rates than the prevailing rate for the 3 plus 2.
2, as lecture. The newest ractor is...
Speaker Change: the charter for a longer period, most likely to 2036, but it could be all the way to 2039. So another big addition to our backlog.
If we're looking then at our fleet portfolio...
Speaker Change: and then they will be firm to 2032, possibly all the way to 2039. We also have some other long charters, Flex Rainbow 2033.
Speaker Change: Endeavor 2032, we utilized that long-term charter on that ship to recently do our Japanese lease, which was executed on October 3, which Knut will tell you more about.
Speaker Change: Then Flex Constellation was on a 10-month charter delivery in May. We wanted to stay out of the spot market this year given the number of
Knut Traaholt
So with that
Speaker Change: Peklag 50 minum ästmenschen. It is also so spåting of dividend. Once again, 75 cents ord ner dividend.
Speaker Change: Special dividends during this period, so the total dividend is 569 million in 13 quarters, which is close to 45% of our market cap in just three quarters.
Speaker Change: Heltig. We are so right that it was about 85,000 dollars in the middle of August , which historians we have good rights, but the market relationship.
of a cliff.
starting in September.
Speaker Change: And we are now in a market which is pretty poor if you are looking at the spot market, but longer term as evidenced also by the new contracts we are announcing, the market for longer term demand is still very healthy and we have a light green on this. The rest of the items there are pretty straightforward. We have a good cash flow. We have a lot of backlog visibility cash.
Speaker Change: and Covenant and we don't really have any near-term debt maturities so with that I think Knut can go through the financials before I'm reverting with the market section.
Thank you, Hussain.
Knut: And if we look at the nine months, the revenues of $265 million. That translates into a time charter equivalent for the quarter of $75,400, or for the nine months, close to $75,000.
Knut: If we look at the OPEX, we are at budget at $14,900 per day.
Knut: and slightly improvement from last quarter. For the 9 months we are below budget at 14,700.
Knut: and today we guide that OPEX is around 15 000 for the full year and that's where we expect scheduled maintenance of some of our engines during the period and also we have experienced higher
Knut: Crude Change Cost, basically since we have less vessels going to Europe , so more of the crude changes I've done in Asia which is more expensive.
Knut: Adjusted EBITDA of $70 million for the quarter and $204 million for the nine months.
Knut: And as Einstein mentioned, in the adjusted numbers we take out non-cash items and primarily these are unrealized gains and losses from a derivative portfolio.
Knut: Our cash position, as already mentioned, performs a balance of 450 million.
27 million from schedule amortizations
and then we have completed the
Knut: Two financings. First, the 270 million facility that was closed in September. That refinanced all three vessels out of the old 375 million facility. And that was then leaving the Flex Endeavor debt-free at the quarter end.
Knut: And, as you can see, post-quarter, on the 3rd of October, we completed the lease financing, the Japanese Yolko, where we then received 160 million.
Knut: So then net of dividend payment of 40 million, quarter end was 290, but pro forma balance at 450 million.
Interest rate swaps fell about 50 basis points.
Knut: making it attractive to utilize some of our positive value in the existing portfolio.
and a man and an extent and thereby adding more durations.
Knut: So we see here a significant change and also improved in our hedge ratio, and we have now 635 million of swaps with a rated interest rate of close to 2% with a duration of about four years. That gives us a good hedge in this environment where there's a lot of fluctuations in the interest rates.
Knut: And as we also mentioned here, there is a combination of our interest rate swaps and fixed rate leases. And if we look at it a slightly different way,
Knut: Our net interest bearing debt also split in what is hedged through our swap portfolio, the 635 million, and what we have of fixed rate leases or fixed rate components in our Japanese leases.
That leaves us with a floating exposure of 552 million.
Knut: This is a reminder of our financial position, what we call the fortress balance sheet.
Knut: We have a large contract backlog which secures stable cash flow. We have refinanced and have 400 million in available cash.
Knut: Our RCF capacity is now increased to 414 million, which is a cost-effective way of managing this cash balance.
Knut: And with that, I hand it back to you, Einstein. Okay, thank you, Knut.
Let's look at the market.
Einstein: The growth in the market was COVID-19 2020 because the demand was low because of the shutdowns.
Einstein: Now, actually, it's a bit different, where 1% growth, but it's not really demand. Demand is strong.
Einstein: as evidence from the LNG prices, but it's really the supply which is the bottleneck.
Einstein: with projects coming on stream, some of them later this year and then into 2025 and 2026. So we see a wave of LNG coming next year with much higher growth factor for the export next year. We estimate around 6% growth next year. So this is also one of the explanations why the spot market is trading poorly. US, Australia, Qatar are the big exporters.
Einstein: pretty flat. We still see Russia, despite the conflict in Ukraine now, they are still managing to grow their exports.
Einstein: On the import side, Europe came out of the winter season with high storage levels.
Einstein: been able to source less LNG this year, which has opened up the market for other players like China, growing healthy 10%.
Einstein: The volumes are not utilizing the Panama Canal and not the Suez Canal, but still the number of ships being delivered is outpacing tonne mileage demand.
Einstein: Looking at Europe in a bit more detail, as you can see here, import levels are below last year, because storage levels have gone up with almost full storage levels going into the heating season.
Einstein: on New Year. So we will expect to see less Russian pipeline gas.
Einstein: to Europe from 1st of January. As you can see here, actually Russian pipeline gas have contributed positively to imports to Europe so far this year.
Einstein: and is contributing positively, and then LNG is the swing factor.
Einstein: So, depending a bit on how cold the winter will be in Europe, we expect storage levels to be lower when we come out of the winter season this season. And that's also why LNG prices are staying at a pretty high level down the curve.
Looking at Asia, it's a bit different picture.
Einstein: eager to buy, especially then the flexible US LNG. And you see here the mature market, Japan, Korea, Taiwan, pretty stable. China up, as I mentioned, 10%, and then pretty healthy growth from the South Central Asian nations being India, Pakistan, Bangladesh.
where we see higher growth.
We had a drought in Panama.
which produced Panama Transit.
Einstein: Water level in Panama is back to normal and operations is back to normal, but we see LNG shippers.
Einstein: And then the other canal being Suus Kanal. It seems here like Suus Kanal is coming back.
Einstein: which have turned from being an exporter to importer, and then Jordan. So these are not really regular transits via Suez Canal, it's rather that they're using the Suez Canal to supply Jordan and Egypt with LNGs.
So, in general, this is positive.
Einstein: Our LNG ship from US going to China via the Cape of Good Hope is about 15,500 nautical miles rather than around 10,000 nautical miles utilizing Panama Canal.
Einstein: But as I mentioned, it's not sufficient to add ton mileage compared to the numbers of ships for delivery this year.
Einstein: Then, our team, we have been touching upon the last two quarterly presentations, it's the emerging dark fleet of Russian LNG.
Einstein: We mentioned it earlier this year and since then the Russians been busy buying up second-hand pornage
Einstein: and actually loading also eight cargos from the Arctic LNG 2 project, which is up and running with the first of three trains.
Einstein: As far as we can tell, they have been loading six cargos.
Einstein: and taking these cargoes to their two huge FSUs, they have one in Murmansk and one in Tamshakta.
which can carry a lot of big size.
in terms of volumes.
Einstein: So we have seen these ships loading cargoes but not been able to sell the cargoes. So compared to crude oil and petroleum where the dark fleet and the dark trade is massive, we see that the sanctions from US
Einstein: People don't want higher oil prices, especially not prior an election.
Einstein: So, on the LNG side, the same rules doesn't really apply if these cargos are not entering the international market. It will not really affect the Henry Hub in the US.
So, and also this is a smaller market.
Einstein: which means that it's easier to get the visibility and to stop these ships from selling their cargoes.
Einstein: So this is something we are monitoring and as we put in here, it's the dark evader.
Einstein: which is a kind of a moniker for this kind of trade. It will be interesting to see now. We've seen that the Russians have been able to get a power station for the Arctic LNG-2 plant so they can start firing up the train too.
Einstein: But as far as we can see today, feed gas to the plant is shut down and they are not really producing cargoes now because they are not able to sell them in the international market.
Einstein: Let's turn to the spot market and as mentioned rates are softening and they are down to very low levels. Levels we have never really seen in the fourth quarter before and why is that? It's really about the numbers of ships.
Einstein: for delivery and we see this in the upper left hand side with this red dotted bubble where we see the number of ships available. So typically when you come to August, September
The market gets tighter.
Einstein: You might have floating storage if gas prices are in contango, meaning that they are higher later in the year than spot.
Einstein: which can typically drive up to 30-40 ships in floating storage.
Einstein: This year we have high gas prices, but they are not in contango.
Einstein: So it means you are disincentivized to do floating of the cargoes.
Einstein: So, number of available ships have been building up, also with the scheduled deliveries of ships.
Einstein: rates then, rather than picking up in September, they have been going down. Right now we're at around $25,000 for modern tonnage, which means tri-fuel tonnage is at $10,000 and all the steamships are basically being priced out of the market.
Einstein: With ample liquidity in the spot market in terms of number of ships, it's not surprising also to see the chargers.
Einstein: Voyages DCR compared to PVCR picking up a lot from 157
Kalleklev, Knut Traahlolt
Einstein: and then about 10 years ago, 8 years ago, the first
Einstein: modern dual fuel two-stroke ships came to the market. So we still have a lot of steam ships in the market. In total, the fleet is around 200 ships.
Einstein: So we've put the different ships there in the pie chart with the dinosaur. There actually are 21 different ships.
Einstein: Why are they still in the market? Because a lot of these steamships were fixed on 20-25 year charters.
and they are rolling off these charters.
In the coming, yes.
which is part of the IMO rules.
Einstein: to reduce greenhouse gas emissions for the shipping sector. And these ships are now technically and commercially obsolete and we do think scrapping activity will take up and which we do think will rebalance the market in the 2027. I will come back to that.
Einstein: In terms of new building prices, they are staying at a stable level, supported also by the flurry of container orders, which are still hitting the yard. So the yards are more or less packed to 2028.
Einstein: Prices are down a bit from peak, but still we see people still ordering at close to 260 million dollars for chips delivery typically in 2028.
Einstein: Which is also then together with the higher interest rate environment, keeping the long-term rate steady at $85,000 per day, which is what you need to have in a long-term rate in order to make these kind of investments.
Einstein: So, looking at the order book today, it's around 300 chips.
for Deliveroo.
What we see is that so very limited of.
Einstein: There's really no speculative ordering because these prices are discouraging such contracting.
Einstein: A lot of the chips are from Qatar. Qatar has a huge
Einstein: Looking at the supply side of the market, the export growth, we are in a period now with, as I mentioned, low export growth, but that will pick up from next year where we expect export growth to be 6% and then going forward in 2027-28.
Einstein: And as I will touch upon, we do expect a new wave of U.S. LNG once the LNG export moratorium in U.S. has been lifted, which we think will happen very early next year with Trump in the White House.
Einstein: Looking at then the kind of the supply side of the market and the demand side.
Demand-side hair being...
Einstein: export growth, and then the fleet. So these are numbers we have had from the Q3 LNG report from SSY, the broker.
But as mentioned with
All these steamships coming off charters.
Einstein: to be removed from the market. This could be more. If the market stays soft, it's very expensive to take a steamship through a 25-year special survey. But in general, we see that the market is balancing out. Twenty-seven, yeah.
Einstein: So last slide before concluding is something that a lot of people are asking us these days is the effect of our Trump win in the election. It was
Einstein: A landslide with 312 electoral college mandates for Trump, all the swing states turning red.
Einstein: He's been very vocal that regulation for the oil and gas industry will be eased.
It's about 90 million tons.
Einstein: of US project that has been put in legal limbo because of the moratorium. A lot of these are close to FID. They signed up a lot of offtake agreements for the volumes they intend to produce.
So we do expect a wave of FIDs.
for US LNG Projects.
Einstein: next year, which will support demand for shipping from 28-29 once these projects are starting to produce.
Einstein: There is, however, one risk here, which I think most people are aware of. Trump is not really a free-trading person. He has a bit different view to trade, where it's more a zero-sum game.
Einstein: And the last time he was in office, there was a trade war with China, where they eventually agreed in a trade war phase to be buying more goods from U.S. primarily than oil.
Einstein: LNG, soybeans and such, where this kind of increase in trade has not happened.
Einstein: The EU is also running a trade deficit, a trade surplus with the US.
Einstein: and where we've seen EU already now signaling that they are open to be buying more LNG from US in order to substitute a lot of this Russian gas that has disappeared from the European markets. So this is still uncertain how aggressive this
Fred
International Rules for Trade
Einstein: So, we could see some substitution effects there, Europe buying more LNG from US and then the jury is still out how this will evolve with China, which has become one of the big importers of US LNG.
Sol.
Einstein: Then, before concluding and heading into the Q&A session, I'm just going to remind you
Einstein: Earnings per share adjusted for the unrealized losses and gains 53 cents
Einstein: interest rate I've been picking up in Q4 so we expect a bigger reversal in the market to market losses in Q3.
Speaker Change: We have done some new charters and are now fixing all the way until 2039. We have a very robust financial position, as Knut mentioned, $450 million, 35% of our market cap in cash.
Speaker Change: And as mentioned with the backlog and the financial position we have, we can pay this dividend for a very long time to come. So with that, I think we head over for the questions.
Speaker Change: You mentioned lifting of the permitting moratorium and shipping demand in 2028. For these projects, when do you expect they will start ordering for long-term contracts?
Speaker Change: Of course, today there are already a lot of U.S. projects.
That's all.
Speaker Change: for the next wave of projects, some of these projects being expansion projects of existing infrastructure.
Speaker Change: New projects will just go into the market for existing tonnage, given the sticker price on new builds, and source ships, which will then be supportive of the shipping balance from, let's call it, 28 and onwards.
Speaker Change: And then we have a number of questions on the contracts, the one we have just announced for the for the Courageous and the Resolute.
Speaker Change: The Charter is fixing those ships pretty far in advance. So the question is, one, is this a specific project related? What are the motivations for the Charter to fix these ships now?
Speaker Change: Yeah, it's far in the future. It's not project specific, it's for a portfolio. It's a super major, so a super major typically have a lot of different projects and they can allocate the chips to those various projects they are involved in.
Speaker Change: Why are we fixing this fall into the future? It's a bit related to the fact that we have...
Speaker Change: on the ships, the technical support, the operation support. So I think there have been a satisfied customer and we have evidence this.
Speaker Change: Several times in the past we have existing charters that are extending ships with us.
So that's one factor. The other factor is also...
Speaker Change: When we started this company or started contracting ships for this company
Speaker Change: is we have had EU implementing carbon pricing, EU ETS, from 1st of January this year, which means that you have to pay for the CO2 emissions you have when trading into EU.
Speaker Change: when trading these ships. Then, 1st of January next year, we will have fuel EU maritime, which is another system EU loves to make rules.
Speaker Change: So if they can make more, they prefer that than making simple, easy rules.
So all this spaghetti off rules.
Speaker Change: surplus under the fuel EU maritime systems for at least 10 years to come. Which means that these are ships you want to keep in your portfolio if you are a satisfied charter.
Nils Thomasson is asking, what's the ideal strategy for her?
Nils Thomasson: Short-term pain until the market tightens or longer-term charts at the current market rates?
Speaker Change: such a strong balance sheet and liquidity position. So we will just do what is best for shareholders and look at, you know, okay, can we fix this on our long-term charter? We do think that the market will improve, as we've shown in the graph. Get the ship back in March 2025. We do expect two years in the future the market will look quite different. So then it's a question.
Speaker Change: This is of course also a bit more dynamic, so it's not like the spot market will be poor for two years and then it will be good and then term rates will go. People will see that the market is tightening, so you could see that maybe next year spot market.
Speaker Change: will be maybe not that attractive, but that we will see that improvement in the term rates as we are getting closer to that inflection point in the market supply balance.
Speaker Change: So, it's too early to say, we just got a notification that the option was not declared, and the option was not declared because it was out of the money, because rates have gone down, and the low spot rates are also pushing down, let's say, the 12-month term rates, so this option was for 12 months.
So let's see. Too early to tell.
Speaker Change: And then the two next vessels in line is the options for Aurora and Ranger. What's your view on those options? It's Aurora and volunteer. Ranger is fixed until March 27.
Speaker Change: So if the charters elect not to extend them, they will also lose the last option, and that option is from 27 then into 28, and as we have illustrated here on this.
Speaker Change: That is way too early to tell whether those options will be declared or not. In any case...
Speaker Change: Then we will get the ships back in 26. And we do think that the term market will firm up in 26 in anticipation of a tighter market from 27 onwards. So I'm not losing sleep on that.
Speaker Change: You mentioned a bit on MEGA and XCF technology and one of our bankers in ABN AMRO asked more your view on from a sustainability and cost efficiency there is the MEGA, the XCF
Speaker Change: which is the low pressure, and then you have the MEG, the high pressure.
Speaker Change: And if you look at the order book, there's likely more for the low pressures. So anything to say around? Yeah, I can maybe I can take a short recap of the history here, because we started there off with the Maggi ships. The first Maggi ship was end of 2015 and
They came full blast from 2016 onwards.
Speaker Change: Megaships are fantastic ships. You take the boil-off pressure, you put them into the boil-off and you put them into a high-pressure compressor and you push that pressurized boil-off gas into the combustion chamber of the two engines.
Speaker Change: and you get the almost perfect combustion, so it's both efficient in terms of the efficiency ratio or the thermal efficiency, but also in terms of...
Speaker Change: the combustion efficiency in terms of meat end slip. So Maggis today have a guaranteed meat end slip of 0.2 gram per kilowatt hours which is almost nothing.
Speaker Change: However, you know, it's a bit complicated. You have high pressure in the engine room, and these compressors are huge and very costly.
Speaker Change: Relic system, four ships with partial relic system where we have a big compressor, and then three ships with a full relic system where we have also have two compressors. And it's a huge investment, these compressors. So, some of the...
Speaker Change: Charters said okay couldn't we have a just a simpler system so rather than having 300 bar
Speaker Change: We are going to talk about pressure on the boil-off gas. Let's try to make a system with...
Speaker Change: More cappuccino pressure 15 bar which was the XTF produced by WinGD and a lot of people went for that system Because you don't need this pricey compressors and it's less complicated so What happened then is we had a switch to XTF
Speaker Change: And of course, there's really two engine manufacturers for these chips. It's MAN, which have the MAGI and the MEGA, and then it's WINDGD with the XDEV system. So MAN then also made a low-pressure system called the MEGA.
Speaker Change: in order to grow their market share. But what has happened since then is there's been a lot of more push for environmental regulation, pricing the CO2 emission. We'll start pricing the methane emission and also then giving subsidies.
Speaker Change: Mega and XTF is somewhere around 1-2 grams compared to 0.2 grams on the Megi.
Speaker Change: So that means that we've actually now seen owners going back to the Maggis, even though they are slightly more pricey, because they have a better combustion and a better environmental profile.
Speaker Change: Told the market they will discontinue making those engines and rather focus on the mega-ships and there we are very well positioned with 9 out of our 13 ships having that engine already today.
Dan, we have some questions on capital allocation.
Speaker Change: Dividend sustainability and share buybacks. Let's start with the dividend sustainability. We had a bit softer this quarter. We had 52 cents adjusted EPS. We had 56 I believe last quarter.
Speaker Change: 100% after 75 cent level. But we have 450 million dollars of cash.
Speaker Change: and they like to see you having some money on the account.
Speaker Change: So in terms of if there are some weaker markets you can burn some of that cash. That doesn't really apply to us because we make money every quarter given our kind of charter backlog. So in terms of the financial covenants today we need to have around 70 million dollars of cash. So just like a simple mathematics then so 400 million dollars.
Speaker Change: So even if we had made no money, which is unrealistic given the charter backlog, we could sustain that dividend for ten quarters.
10 quarters, then we are well into 2027.
Speaker Change: We believe that the market also wants improvement. So we want to be eating a bit of that cash surplus now to take us or bridge us to 2027-28, where we do think that.
Speaker Change: We can get better rates on some of the ships and also we have already seen some
Speaker Change: Interest cost. It is a major cost element. We have not increased it. We have started to get increases - raises because it was last year. In September . Initially, it always went to 75 basis points. It went to December and 25. It has gone to. Interest cost has gone to.
Speaker Change: Almost a percentage point from the peak, which falls with net depth of 1.4 billion dollars is...
Speaker Change: … $14 million a year in saved interest expenses also. So what we'd like to do here is just to keep that dividend. We can afford it. We have a good backlog. We have a good financial position. We do think interest – or we already see an interest rate coming down.
Speaker Change: which improves our cash and then we do see that rates
or the long-term rates.
Speaker Change: Down the road and hopefully then our adjusted apps and our dividend pressure will start to match a bit better than they are doing this quarter and the next quarter.
Speaker Change: reluctant to buy back shares but we have done it in the past so we're not ruling out doing it in the future and we also have a dividend reinvestment plan so if you guys as investors are not happy with the share price
Speaker Change: You are getting a 13% yield now, which you can put in our dividend reinvestment plan and utilize that to buy back the shares yourself, rather than us doing it for you.
Speaker Change: Then we'll round it off with two more of the market questions It's about the Panama Canal, which has been mentioned, but also Do you sleep, do you, are you losing sleep from possible peace in the Middle East?
Speaker Change: Remember, it's really about the Qatari volumes not being able to go via Suez to Europe, they have to go through Cape of Good Hope.
Speaker Change: Those volumes are not that huge, so it's not like if Suez Canal opens up, it's going to change everything, because it's not really that big effect.
Speaker Change: Panama Canal, we see it. Panama Canal is back to normal operations today. So it's really the inflexible booking system and the cheap shipping freight that means that people are avoiding it.
Speaker Change: Now I think it would be nice to have some peace in the Middle East.
Okay, that concludes the Q&A. Yeah.
Speaker Change: So from the questions list and also from a frequent participant... We have two gifts, so...
Speaker Change: That was Emil Karsten, wasn't it? Yes. So let's make his Christmas a bit better. So let's give him the...
Speaker Change: Heard money perfumes, so he can give it to his wife and become very popular.
Speaker Change: Maybe she gets a taste of dividend smell and he becomes a shareholder as well. And this, his money, perfume, we give to... Thomas Novotny. Okay, that's good. He has the UP LNG Index.
Speaker Change: So you should check that out as well. So thank you everybody, we will be back in February with Q4 numbers. I hope you will tune in then as well. Thank you.