FLEX LNG Ltd. (FLNG) Earnings Call Transcript

Welcome back to FLEX LNG's third quarter results presentation. My name is Marius Foss. I'm the CEO of FLEX LNG. And today, I'm joined by our CFO, Knut Traaholt, who will take you through the financials later in the presentation. Today, we will cover Q3 results given an update on the LNG market, and as always, conclude the earnings presentation with a Q&A session. If you would like to ask a question, please shoot the chat function in the webcast or send questions to e-mail -- by e-mail to ir@flexlng.com. And before we begin, a quick attention to our disclaimer.

Today, we will be using some non-GAAP measures such as TCE, adjusted EDA and adjusted net income. These are supplements to the earnings report reported in accordance with U.S. GAAP and reconciliations of these are available in the report. As there a limitation to the completeness of today's presentation, we encourage you to read the quarterly report, together with the presentation. And with that, over to you, Marius. .

Thank you, Knut. Let's begin with the highlights of the quarter. We are happy to present our stronger third quarter results ever. We sailed in revenues of $97 million or $95 million, excluding the EUA. The fleet average TCE during the quarter ended up to close to $79,000 per day. Net income for the third quarter came in at $42.8 million, implying an earnings per share at $0.79. Adjusting for the analyzed gain of interest rate swaps and FX, we ended up with an adjusted net income of $35 million or adjusted earnings per share of $0.65. FLEX Artemis and FLEX Volunteer continue to contribute our solid quarter results with strong spot market earnings. Today, we are pleased to announce a new financing and amended terms under existing financing for 2 our vessels. The lease financing of the FLEX Artemis and the FLEX Amber have been amended by reducing the margins and extending the repayment profiles. For the FLEX Enterprise, we announced today that we have signed a new sale and leaseback financing at very attractive terms. Our CFO will provide more details on this financing later in the presentation. We maintain our full year guidance from the previous quarter end and based on the strong third quarter results, solid financial position and contract backlog, the Board has declared another dividend of $0.75 per share. This is the 21st consecutive dividend of $0.75 per share, and we have now distributed over $900 million since 2021, including special dividends. Our last 12 months dividend is $3 per share, implying a dividend yield of around 11.5%. Looking at our total contract coverage, we have 48 years of minimum firm backlog, which may grow to 75 years if all options are declared. In the near term, we have Flex Volunteer in the spot market into Q1 next year. While the FLEX Artemis remain available. In addition, the 2 vessels trading the spot market, we expect to have the FLEX rangeship back in Q1 next year. We are marketing these vessels for both spot and new contract terms. The current charter of the FLEX Freedom has the option to extend beyond the firm period. This option is due later in the quarter. Our full year guidance presented earlier this year was revenues between $345 million to $370 million at TCE between $73,000 and $78,000 per day and adjusted EBITDA between $255 million and $280 million. With 1.5 months left of the year and the current spot market, we expect the full year results to come in to the mid to the lower end of our guidance. Let's have a look at the dividend and decision factors. On the back of the strong quarter results, the Board has declared a dividend of $0.75 per share for the third quarter. The event will be paid out 10th of December for shareholders on record of 27th of November. On the decision factors, we maintain the orange level for market outlook. This reflects a soft spot market and heavy schedule of new building deliveries during the next year to come. Confidence in the long-term structural demand story remaining full, supported by the third wave of U.S. L and export capacity currently under construction. We have changed backlog and visibility to orange level due to having 2 vessels in the spot market and potentially more spot exposure from next year. We keep other considerations in orange given the continued elevated geopolitic risk. This is still uncertainty around the duration of the conflicts in the Middle East and the timing of normalization of the Qatar supply. With this, over to Knut for the financial results.

Thank you, Marius. And let's have a look at the key financial highlights for the quarter. Third quarter revenues are our strongest ever. The revenues for the quarter were $97.4 million or $95.2 million, excluding EIS. The decrease compared to the second quarter was mainly related to the FLEX Volunteer which traded on a higher spot rate for the majority of the previous quarter. That decrease was partly offset by no a days related to the dry dockings in the quarter. On the cost side, OpEx for the quarter was $19.5 million, equivalent to OpEx per day of about $16,300. The average OpEx per day for the first 9 months is close to $16,200. And our previous full year guidance was $16,000 per day. Today, we update the full year OpEx guidance per day to $16,200. The increase is driven by, among others, higher costs related to travel and crew changes following the conflict in the Middle East. On a quarterly basis, the interest rate expenses is fairly stable. However, compared with the first 9 months of the year, we now see significant reductions reflecting our refinancing initiatives and active management of our RCF facilities. We booked $10.2 million in gains on our interest rate derivatives of which $2.4 million was realized gains and $7.7 million was unrealized gains. Net income came in at $42.8 million or $0.79 per share and adjusting for noncash items like unrealized gains from the interest rate derivative portfolio, the adjusted net income was $35 million and adjusted earnings per share of $0.65. Overall, this was a very strong quarter, impacted by higher revenues from the spot market activity, no off-hire days and continued cost control and improved financing efficiencies. During the quarter, we generated strong cash flow from operations of $56 million, down from $63 million in the second quarter. The decrease was mainly driven by lower revenues, as I explained on the previous slide. And this includes $13 million in negative change in working capital. The increase in receivables during the quarter was related to the timing of advanced charter hire payments. We repaid $28 million in scheduled debt installments and distributed $41 million to our shareholders. In sum, that left us with $371 million of cash at the end of the quarter. Looking at our balance sheet. We maintain a robust and clean balance sheet with mainly ships and approximately $370 million in cash. Our debt finance income prices a combination of bank loans, which gives us flexibility and attractive long-term leases. Our interest rate swap portfolio is unchanged and was valued at $30 million at the end of the third quarter. The notional value of the portfolio is $775 million, with an average fixed rate of 2.46%. We expect to maintain a net hedge ratio of around 70% to 75% into mid-next year. The book equity ratio is robust to 28%. And as noted before, our book values reflect historical costs adjusted by regular depreciation. Today, we are also pleased to announce the refinancing of FLEX Enterprise with the new jollies and amendment of the lease financing for the flagotomis and the FLEX Amber with these transactions, we continue to optimize our funding and reduce the cost of debt. We expect to free up approximately $34 million in liquidity from the Nujolco, and the transaction is expected to be closed in the fourth quarter. The new lease comes with a very attractive blended cost of debt of so far plus 25 basis points and addresses 1 of the 2029 debt maturities. On the FLEX Artemis and the FLEX Amber lease, we are cutting the margin significantly from 250 basis points, 240 to 140 basis points. Furthermore, we extend the repayment profile and reduced the quarterly repayments for the 2 ships from $4.3 million to $3.5 million per quarter. We are grateful for the trust and support from our financing partners, both the new incoming and the ones that have provided previous refinancing for the FLEX Enterprise. And with that, I hand it back to you, Marius, for the market section.

Thank you very much, Knut. And congratulations for the new financing. Let's have a look at the markets. Global LNG trade volumes are close to flat this year, down only 2% compared to same period last year. On the supply side, the key development remains the significant reduction of the Qatar exports, down around 45 million tons or close to 65%. This shortfall has a large extent been offset by strong growth and high utilization from the U.S., where exports are up 20% or close to 80 million tons. We continue to see growth from both Australia and Russia. And in addition, other exporters have contributed strongly and are up 30 million tons from last year. This includes LNG Canada, but also West Africa exporters such as Algeria. On the demand side, Far East cutback on LNG imports as JKM spiked. BRP are down compared to last year, and storage levels remain very, very low. At the same time, India and other important markets, such as Egypt, has continued to grow. Egypt is now 1 of the largest importers of U.S. LNG. The key takeaway is that despite a significant reduction from 1 of the world's largest LNG exporter, Qatar, global trade volumes have remained resilient. And more importantly, for shipping, this growing share of U.S. supply means more LNG coming from the Atlantic Basin. This will likely have a positive ton mile effect if these volumes move into Asia. Let's look closer to the supply side. The reduction of Middle East volumes has been significant. Combined exports from Qatar and the EUA are currently down around 65% compared to normal levels. As you can see on the left, exports dropped very sharply early in the year. And while volumes have started to recover, they remain far below historical levels. Today's volumes, we see export intrabasin and exiting Vas rate ours to go outside to Oman for a ship-to-ship transfer. At the same time, the U.S. have continued to ramp up the LNG production. U.S. liquefaction capacity is up around 18 million tons so far this year or 20%, supported by the ramp-up of new capacity, particularly from Plaquemines. In addition, we see that Golden Pass volumes are slowly but steady entering the market. This strong U.S. growth continued to mitigate the loss of volumes from the Middle East. Let us have a look at the demand side and the competition between Europe and the Asia for U.S. exports. Europe, gas inventories have remained low through the year and are today at 73% full, the lowest level in almost 15 years and below the EU thresholds. This increase Europe's reliance of LNG supplies to meet peak seasonal demand and could leave the region particularly exposed for cold snaps and supply disruptions. U.S. LND is highly flexible and can move between Europe and Asia, depending on the relative pricing. Looking at the chart to the left, there has been historical seasonal competition of U.S. export between the 2 regions. So far this year, Asia have attractive additional U.S. volumes, while Europe has stayed close to flat compared to 2025. This is reflected in the low European storage levels. We are now facing the tug war between Asia and Europe for U.S. volumes during the upcoming winter. The tight supply -- this is evident in the current high natural gases. Let us move on to the gas to the spot market for the modern 2-stroke tonnage. In the third quarter, we saw increasing vessel availability, both in West and East of Suez, and that is now putting pressure on the spot market. As we move into the winter season, we have started the syndications of seasonal tightening with few vessels available and a gentle increase in the spot rates. However, the historical seasonal winter market has not yet materialized. We have 1 vessel trading in the spot market, which are exposed to the positive and negatives from the near-term shipping markets. The soft spot market comes at a time when the LNG fleet is growing. As we can see in the chart on the left side, the order book remains material with around 290 vessels to be delivered going forward, equivalent to roughly 35% of the existing fleet. This year, we had a substantial deals to the fleet, and we expect next year to be impacted by new building deliveries. However, most of the vessels are already tied up by Qatar and other long-term projects. During the summer, we passed the milestone where then more than half of the existing fleet today are now modern 2-stroke vessels. Despite Korean newbuilding prices at around $245 million per ship term rates at moderate levels, ordering of new buildings remain strong. We have seen 77 new buildings being contracted so far this year. A number of these vessels are now contracted respectively, The speculative orders tell us that the significant confidence in the long-term LNG shipping market going forward. This year, orders are well above the last year figure of 35 vessels in total. At the same time, high newbuilding prices continue to provide support for the value of modern existing tonnage, including our fleet. On the next slide, we will highlight some of the most significant LNG export volumes expected to come into the market next year. From next year, we will finally see some first material U.S. export capacity ramping up. Golden Pass has already started exporting volumes from Train 1 and Train 2 and 3 are coming on stream next year. Note that 70% of these volumes are contracted by Qatar Energy and is likely to be transported on their own ships. In the second half of the year, we expect to see a significant ramp-up of the 3 major projects for darter Theo Grande and Venture Global CP2 are expected to be nameplate capacity for close to 40 million tons per year in production. We expect these volumes to gradually ramp up, and I will add additional requirements for tonnage. In addition to these volumes, we have new LNG coming from Australia, Nigeria and Canada, also expected to enter the market next year. Also dependent on the reopening of this strait of Hormuz, it's also worth mentioning that the first rein in Qatar's North field East project is expected first half next year. All this 2027 and 2028 volumes entering the market support future LNG shipping. With that, let's turn over to the Q&A session.

Thank you, Marius. And thank you all for submitting questions to the webcast and our IR e-mail. And let's kick off with the topic on the market. We have a couple of questions regarding Q4 and also 2027. We are highlighting here the projects that come on stream, in particular for the second half of the year. But there are more questions on other factors that you see can impact more shipping demand in Q4 and next year. Thank you.