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spk00: Thank you and welcome everybody to today's Flex LNG webcast. I'm Øystein Kalle Klev, CEO of Flex LNG Management, and I will once again be joined by our CFO, Knut Roholt, who will talk you through the numbers a bit later in the presentation. As always, we will conclude with a Q&A session. Before we start the presentation, I will remind you of the disclaimer, as we will provide some forward-looking statements, use some non-GAAP measures, And there are limitations to the completeness of detail we can provide in this webcast. So we recommend that you also review our earnings report. Okay, let's kick off with the highlights and a short summary of them. It's fair to say that while the first quarter has been a fantastic period for cargo owners, given the global energy shortage with elevated energy prices worldwide. It has not been as good for ship owners with ships in the spot market. The spot freight market has been challenging due to the rather rapid shift in trade pattern. The shift in trade pattern started in late 2021, well ahead of the war in Ukraine, and occurred as European buyers started to mop up the spot cargoes to ensure adequate supply given the low gas inventory levels. The pull to Europe instead of Asia resulted in a sharp drop in sailing distances and thus freeing up more ships in the market. With significant lower activity in the spot market, this adversely affected earnings on the three index ships as well as approximately one and a half ship which we traded in the spot or short-term easy market during the first quarter. In any case, despite a challenging spot market, we were able to deliver revenues of 74.6 million in line with our guidance presented in February. Revenues were thus about 40 million lower than in Q4 last year, but it's fair to say that Q4 was exceptionally good given the all-time high spot rates. About half of the decrease in revenues were due to lower earnings on the three ships on variable higher contracts, while the remaining half was due to spot exposure in Q1 for the 1.5 ships mentioned. Despite softer market, net income came in at a cool $55.8 million, or $1.05 per share. A big chunk of the earnings was admittedly related to our portfolio of interest rate derivatives. Prior to the interest rates going on a bull run, Due to Fed tightening, we secured the majority of our debt against higher interest rates through interest rate swaps. And Knut will give some more details about our hedging strategy a bit later in the presentation. Adjusted for the big gains on interest rate swaps, earnings per share came in at 45 cents per share. As we guided in our February presentation and are repeating today, we do expect to deliver sequential quarterly improvements in our revenues. which will beef up our cash flow. We have a strong backlog with 98% contract coverage for the next three quarters, so our earnings variability is related to the three ships with variable higher rates. Being exposed to the spot market is, however, affected now, given the recovery in spot rates. Dividend for the quarter is 75 cents per share, which gives our shareholders an attractive yield of about 12%, Lastly, as I will explain, we are also well positioned with three ships coming fully open over the next 22 months. And with strong term market interest, we are upbeat about the prospect of re-contracting these ships. Turning to page four and our fleet status. As you can see from the slide, we are more or less fully covered for the year. The only possible open position is Flex Amber, which could possibly be re-delivered end of October unless the charter utilizes their last one-year extension option. Firm charter coverage for Q2 to Q4 is just 98%, as explained. During Q1, we had a couple of ships coming off shorter-term time charters and commencing longer-time charters. In January and February, Flex Courageous and Flex Resolute was delivered from shorter-term contracts, and following re-delivery, the two ships commenced time charters with a supermajor. The period for the new time charters are minimum three years, with two plus two optional years, bringing the period to seven years in total for each ship. Due to the structure of the time charter for these ships, and contracts, we do expect that the charter will eventually declare the full seven-year period. In February, Flex Freedom was re-delivered from a short-term 10-month time charter. After re-delivery, she was delivered in direct continuation to a supermajor for a period of five years, where the charter has the option to extend the period to also seven years in total. In February, we also got Flex Aurora re-delivered from a 17-month time charter, and we fixed her on a short-term flexible time charter of five to seven months, also with a supermajor, and this duration matched exactly with the delivery window for the 10-year contract commencing in Q3. Flex Voluntair, which made a killing in the spot market last year, especially in the fourth quarter, had a very weak first quarter as there were very few spot requirements at the start of the year, which resulted in significant wasting time for the ship during this quarter. We were, however, able to eventually fix the ship for a short spot voyage and thereafter agree with Chenier for early delivery of the ship to them about two months ahead of the original schedule in Q3. Hence, Flex Volunteer thus became the fourth ship to Chenier with a duration of about 3.7 years rather than the original 3.5 years. As Chenier has also utilized the option to add a fifth ship, Flex Aurora will thus be the fifth ship going to Chenier during Q3 with a minimum period of three and a half years. Flex Rainbow is the first ship that will be fully open in January 2023. In our view, this is a fantastic position as there are very few modern large ships available prior to 2025. As I will also touch upon later, the term market is very strong as charters are willing to pay up to secure fuel-efficient tonnage given the elevated LNG prices and the introduction of EEXI and the European Emission Trading Scheme for shipping next year. Lastly, we have three ships on variable hire contracts, as mentioned, this being Flex Artemis on a minimum five-year variable hire contract with Gunvor, as well as Flex Amber and Flex Enterprise. The charter of Flex Amber and Flex Enterprise has one additional extension option for each of these two ships, so if the charter utilizes this extension option, which we think is very likely, the ships will come open during Q4 2023 and Q1 2024. As mentioned with regards to Flex Rainbow, we think this provides us with very attractive marketing windows for these chips. As I've already covered our contract portfolio extensively on the previous slide, I just want to highlight the development in the charter coverage over the next couple of years. Most of the backlog is now fixed higher, but we also maintain variable higher backlog on the pre-chips. which gives us exposure to the spot market, which is usually reducing the earnings when we are approaching the winter season. We also do have some ships coming open in this period, as mentioned, and we look at this more often as an opportunity than a challenge, given the very strong term markets. Slide 6 is our revenue guidance for the year, and the numbers are here the same as we presented in February, with the only difference being that the Q1 numbers are now actual rather than a guidance. As you can see, we delivered according to the guidance provided, and we are now also guiding about 80 million of revenues in Q2, right in the middle of previous guidance of between 75 and 85 million. As mentioned, Q1 revenues are on the weak side due to a soft spot market. However, the spot market has bounced back, so we expect to generate higher revenues going forward. We have also covered the gap periods for both Flex Voluntair and Flex Aurora, and we are therefore expecting gradually improved revenues in the next couple of quarters. In aggregate, this means we... Still expect revenues for the year to be broadly in line with what we delivered in 2021, despite a bit slow start. Turning to slide seven, dividends. Given our previous communication, it should not come as a big surprise that we are sticking to our dividend of 75 cents per share. As we have highlighted in the past, we prefer having a stable dividend level rather than adjusting up and down every quarter. This means that we sometimes pay out more and sometimes less than earnings. But over the longer term, this nets out, and we aim to pay out our full earnings over this cycle, as we have also been doing in the past, as you can see from this slide. Additionally, given our forward backlog, we also do expect less volatility in earnings than what we have seen in the past. As we covered in detail in previous webcasts, we apply a balanced scorecard to assess the appropriate dividend level. For Q1, the earnings only receive a yellow light, but with a large backlog, strong outlook, and very sound financial position, we expect all the lights to turn green again shortly. So with that, Knut, we'll now go through the financials before I return with our market update.
spk02: Thank you, Esten, and let's turn to slide 8 and the financial highlights. We delivered revenues just shy of 75 million and within the revenue guidance of 72.5 to 80 million. This translates into a time chart equivalent of 63,000 per day. The quarter-on-quarter lower revenues is due to the weaker spot market in the first quarter, impacting our three investors on variable higher contracts. and the performance of Flex Voluntär and Flex Aurora, as explained by Einstein. The background for the software market will be covered more in detail later in the presentation. The operating expenses was 14.4 million or 12,300 per day in OPEX. For Q1, we have made a one-off accounting adjustment relating to previous periods, and this is explained more in detail in the earnings report. The adjustment had a positive effect of 2.9 million on the operating expenses. Except for this adjustment, the operating expenses were higher quarter on quarter due to higher number of crew rotations and handovers in Q1 versus Q4. Crew rotations for the vessels trading in the Pacific are more costly due to the continued severe COVID restrictions and quarantine requirements. In addition, ordering of spares, supplies, associated services for the full year were expensed in the first quarter. Thus, this should result in lower operating expenses for the rest of the year. A main change this quarter is the gain on derivatives of 31.9 million, which relates to our interest rate derivative portfolio. As a result of increased long-term interest rates, this portfolio has continued to develop positively for us. I will come back and cover more on our interest hedging and derivative portfolio later in the presentation. In conclusion, net income for the quarter was 56 million, and adjusting for the gain on derivatives, the adjusted net income was 24 million. This results in Earnings per share of $1.05 or adjusted earnings per share of 45 cents. On the next slide for the balance sheet, for the quarter there are no material changes on the balance sheet. The total assets is about 2.6 billion consisting of our fleet of 13 state-of-the-art LNG vessels with an average age of 2.5 years. and with a book value of 2.3 billion, in addition to a cash balance of a solid 175 million. As covered on the next slide, the cash balance will further grow with the completions of the balance sheet optimization program scheduled for Q2. On the liability side, the vessels are financed by a diversified mix of leases, ECA financing, and traditional bank debt. with the first maturity due in 2025. We updated our balance sheet optimization program in the fourth quarter earnings presentation in February, and today we announced that the six-year $375 million bank facility was signed in April and utilized to refinance the Flex Ranger and the Flex Rainbow in April. The aggregate $320 million financing for the two 10-year leases for Flex Constellation and Flex Graces were also signed in April and is scheduled to be concluded tomorrow. This leaves us with a $905 million in book equity and a robust equity ratio of 36%. On the next slide, We see the cash flow for the quarter, and our cash balance at the end of the quarter ended up at 175 million. This is 27 million lower than last quarter, primarily driven by lower cash flow from operations, as explained earlier. Also note that we pay higher amortizations in Q1 compared to Q4 due to the semi-annual repayments under the 629 million ECA facilities. This quarter we did not have any proceeds from financing, thus the net of 40 million paid in dividends, the cash balance came in at a solid 175 million. As shown in the graph, the cash balance will grow substantially in Q2 as we finalize the last phase of the balance sheet optimization program. $111 million will be freed up following the conclusion of the Ranger, Rainbow, Consolation and Courageous financing. And in Q3, we will refinance the existing lease for the Flex Endeavor with her being the third vessel under the 375 million bank facility. As the banked up amount for this vessel is slightly lower than the existing lease, the net effect is negative 12 million, resulting in net cash of 100 million being released under the balance sheet optimization program, which should be concluded materially tomorrow. The growing cash balance then further adds to our already clean and robust balance sheet. So turning to the next slide and more on our interest hedging. With the increase in interest rate, we thought it would be good to also provide some insight in our interest rate hedging portfolio. Over the last couple of years, we have built up a derivative portfolio with an aggregate notional amount of $876 million of plain vanilla interest rate swap. It hedges the floating interest rate risk under our debt financing. With the soaring long-term interest rates and the new financing added to our debt funding, We utilized a big drop in the long-term interest rates during the first week of March and secured interest rate swaps of $200 million with tenors up to 10 years at an average rate about 1.7%. In Q1, the derivative portfolio gained about $32 million, and we also informed that during April it gained an additional $16 million due to the rising interest rates. In addition to the interest rate swap portfolio, the interest rate risk is further hedged through our fixed rate leases, in particular for Flex Endeavour, Flex Enterprise and Flex Volunteer. Despite that the lease for Endeavour is scheduled to be refinanced in Q3, the two remaining leases provide us with about 290 million of balance sheet hedge through the fixed rate lease. There's no mark-to-market of the interest on the P&L for these leases. However, the 10-year 160 million lease for Flex Volunteer, which was done in December last year, carry an all-in interest of 4% and provide a very good hedge against rising interest rates. Our hedge ratio, including the fixed rate leases, thus gives us a hedge ratio of 70% over the next years. With an average duration of 4.6 years and an average fixed interest of 1.25%, compared to about 3% for a similar period today, our hedge portfolio gives us a good coverage for expected high interest environment in the period ahead. So in conclusion, we're quite pleased to see that our conservative interest rate hedging policy now pays off. contributes to maintain the cash flow visibility from our time-shutter backlog. And with that, I hand it back to you, Esten.
spk00: Thank you, Knut. I mentioned the fight against inflation here with a higher interest rate, and as Knut has explained, we are well protected against higher interest rates through our derivatives and fixed-rate leases. When it comes to inflation, keep in mind our asset base consists of 13 ultra-modern LNG carriers. With higher raw material prices like steel, aluminum, nickel and energy, scarce yard capacity and increasing wage costs, it should not come as a big surprise that the cost of building a modern LNG carrier has increased a lot. We bought 11 LNG carriers at the bottom of the new building cycle in 2017 and 2018, which we have now taken delivery of. Similar vessels today are quoted at 225 million by Clarkson's. And there have also been reported new building at closer to 230 million. In addition, you would have to cover new building supervision costs and broker costs. Keep in mind these prices are for ship's delivery in 2026, as most of the 2025 slots have now been filled. So if you are making this investment, you will have zero income for the next four years. And to replicate our fleet, you will have to spend about $3 billion. If you then deduct our net debt of around $1.4 billion, you end up with an equity requirement of close to $1.6 billion, and this equity will be yielding zero for the next four years or so. So not only are we well hedged against higher interest rates, but our assets also provide our investors with good inflation protection. So, okay, then finally turning to the market. In our market section in our February presentation, we illustrated the high growth of U.S. LNG exports, with U.S. exports growing 23 million tons in 2021, representing 120% of the global market growth that year. The U.S. LNG export growth continued unabated in the first quarter, with 4.4 million tons increase, or slightly above 20% growth. Despite the war in Ukraine, Russia has not had any problem finding buyer for their LNG cargoes and managed to grow their exports by 1 million tons. LNG exports from Russia is not sanctioned by US and EU, nor is Russian pipe and gas as Europe is heavily reliant on Russian gas. But as I will explain shortly, several European countries are now rapidly expanding LNG import capacity to make them less dependent on Russian pipeline gas, and this will create additional long-term LNG demand. This is positive for the LNG shipping market, even if more cargoes are going to Europe, as LNG export capacity will also have to be expanded to meet this incremental, unexpected growth of the LNG market. Speaking of LNG demand, on the demand side, as I have touched upon in the highlights, we saw a big pull of cargoes to Europe in the first quarter, and this was the main reason for the soft spot market as tonne mileage plummeted. While the market grew about 5 million tonnes, or 5% in Q1, the LNG import in Europe grew by a staggering 13 million tonnes in the first quarter compared to last year. The strong demand from European buyers drove European prices above Asian prices and resulted in less LNG available for the markets. Consequently, Asia decreased their import by 6 million tonnes in the first quarter. Given the high cost of LNG or spot LNG, Asian utilities swapped out spot LNG cargoes by importing more coal as the carbon emissions are substantially less in Asia than in Europe, if any cost at all. This is certainly not good news for the environment, as the Asians were not alone in firing up more coal plants. We have also seen a rapid increase in coal consumption in Europe, with detrimental effects on the local air quality as well as global warming. Slide forward in and let's drill down into the US LNG exports. The US LNG exports continue to grow, and by end of April, exports were up 21% compared to last year. It's fair to say that almost half of this growth was due to the big freeze in the US in February 2021, where exports were curtailed at several liquefaction trains for a short period. This was a freak of nature incident, which happily did not occur this year because then LNG prices would have gone even more ballistic. Hence, February exports this year were about 2 million tons higher than last year. The high export growth in the U.S. is set to continue during 2022 as two new liquefaction plants with a combined capacity of 15 million tons started exports in the first quarter and will thus contribute with further growth. In our February presentation, we argued that high LNG prices would incentivize exporters to squeeze out every single methane molecule through their liquefaction plants. And this was very much the message communicated by Chenier in the recent earnings call. In our February presentation, we estimated that the U.S. would increase their LNG exports by 12 million tons this year, or 17%. Given the price picture, this estimate is probably a bit too conservative, as the U.S. Energy Information Administration forecast 25% growth in U.S. exports this year in the recent short-term energy outlook. This means U.S. is set to become the world's largest LNG exporter in 2022. Turning to slide 15, where we break down where the U.S. cargoes are heading. We also shown the development cargoes destination in our February presentation, where we illustrated that the European market share for U.S. cargoes increased from 15% in July to 75% by January. This trend has continued, and Europe has so far this year maintained 73% market share of U.S. LNG export, which is very high compared to the past. Such European pull is, however, not entirely unprecedented. In 2019, after a warm El Nino winter, coupled with the outbreak of trade war between US and China, resulting in a cool down of the Chinese economy, we also saw European LNG imports spiking, with the European market acting like a sink. During the first four months of 2019, European LNG imports almost doubled. However, the European LNG pull was then due to an LNG glut, while we are now experiencing scarcity of LNG with high pricing. Back in 2019, European imports were also from a broader set of suppliers, with the share of U.S. cargoes going to Europe only at 40 percent, significantly less than today. In the summer of 2020, following the COVID-19 outbreak, European buyers also gobbled up a lot of cheap LNG, but again, this was due to low demand and not high demand as we see today. Slide 16, and a closer look at the impact the shift in trade pattern has had on the freight market. In general, the longer the ships sail, the better for the freight market, as the market will then require more ships to ship the cargoes. As Atlantic cargoes have been predominantly shipped to Europe rather than Asia, at least so far this year, the average sailing distance of the LNG fleet has dropped considerably. From Q4 to Q1, the average distance is down by 15%, which is a really big drop in such a short period. Last year, we saw a big pull to Asia throughout the year with sailing distances improving during the year, starting off at about 4,550 nautical miles, and closing in close to 5,000 nautical miles on average by the end of the year. And this goes a long way to explain why the spot market was so tight last year, despite all the new buildings being delivered. With the pull to Europe, average sailing distance dropped to 4,200 nautical miles in the first quarter of this year. This is exactly the same as in the first quarter of 2019, when we also experienced a big pull to Europe, as I just explained. With cargo pricing still favoring Europe, we do expect sailing distances to stay lower than last year. But we would expect the trajectory of the average sailing distance to follow the path from 2019, with gradual increase of sailing distance during the year. There is one difference between 2022 and 2019. In 2019, LNG exports grew by about 35 million tons, while we expect around 25 million tons this year. Energy aspects are more bullish on growth and forecast LNG export growth of around 30 million tons in 2022. In 2022, there are, however, significantly fewer ships for delivery than in 2019. In 2019, 41 ships were delivered, while the number this year is only 27 ships. So the ratio of LNG cargoes to new building deliveries are more favorable this year. Hence, we do expect the LNG freight market to become gradually tighter, which is also evident from the term market, which I will cover a bit later in the presentation. Another factor is that in 2019, as I mentioned, LNG was cheap due to a glut of LNG. Today, LNG is very costly. So this significantly increased the premium which charters can pay for modern ships compared to older ships. the market has become much more bifurcated than back in 2019. And keep in mind, this is prior to decarbonization rules like EXXI and CIA taking effect next year together with the European Emission Trading Scheme for shipping. Slide 17 and returning to Europe. European LNG imports grew a whopping 52% from January to end of April this year. As Europe is trying to cope with its energy crisis, we do see a broad increase in imports in all major markets, as you can see on the right-hand side here, with the key import nation increasing its LNG imports by 43 to 85 percent. Italy is the outlier, with a growth of only 20 percent, but this is due to Italy now importing very close to their import capacity of around 11 million tons a year. This is also why we do see the Italians planning to ramp up their import capacity quickly by adding two SSRUs in addition to expanding the capacity of our onshore rigas terminal. Italy is very dependent on Russian pipeline gas imports and have in the past been hesitant to criticize Kremlin. But Italian Prime Minister Mario Draghi is now signaling a sharp shift in Italian energy policies something he shares with the German Chancellor Olaf Scholz. And the Italians are not alone in expanding import capacity. Most European countries are now planning to swiftly add LNG import capacity to wean themselves off reliance on Russian pipeline gas, as I will cover on the next slide. Slide 18. With the war in Ukraine and the global energy crunch, energy security has staged a comeback. Most European countries are now planning for a future where they will significantly reduce the pipeline gas imports from Russia. Some are even talking about banning it altogether. Hence, European countries are therefore planning to substitute these energy imports with increased LNG as well as expansion of renewable capacity. In our February presentation, we also touched upon this point, highlighting that the biggest gas consumer in Europe, Germany, does not have a single LNG import terminal. Well, not for long. Germany has now woken up to a new energy landscape and are rapidly moving forward with plans to add two or possibly three large LNG import terminals. And they have already chartered in four F-SRUs, with the first import capacity planned to be in operation by early next year. If Germany wants to replace the gas import from Nord Stream 2, which now seems to be dead in the water, with LNG, they will need to import about 40 million tons of LNG. 40 million tons are about half of the total European LNG import last year, so we are talking big numbers. If EU is to replace all Russian pipeline gas, with LNG, this would equate to around 110 million tons. This number does not include Turkey, which was also a big natural gas importer. Replacing such a large volume is, however, not realistic in the short term, but could be achievable by the end of this decade if sufficient new LNG is brought to the market. According to a recent Rystad study, replacing 72 million tons of LNG equivalent volume should be feasible by 2030. Needless to say, there are several LNG projects today competing to fill this gap. In any case, the expected growth in European LNG imports require a lot of new regressification capacity, i.e. import terminals to be constructed. And this is now happening on an unprecedented scale where European utilities and energy companies are soaking up more or less all available FSRUs in order to fast-track import projects. The FSRU market has been extremely challenging the last five years or so, which has resulted in a lot of FSRUs instead trading as LNG carriers in order to find employment. By putting the FSRUs to good use, As import terminals, these units are taken out of the shipping market and thus adding to shipping demand rather than competing for cargoes. Slide 19 gives an overview of the contractual obligation that Europe has toward Russia in terms of pipeline gas contracts. These contracts are usually structured as long-term off-take agreements with minimum volumes. In the past, Russia has also sold natural gas to European buyers in the spot market through their electronic sales platform, although spot volume last year were very muted. In any case, Europe, including Turkey, have contractual obligation to take around 180 bcm of Russian gas. Of this, Turkey's import from Russia was last year close to 30 bcm. If we leave all Turkey, this means 150 bcm, or around 180 10 million tons of LNG equivalent, as I mentioned. Some of the existing contracts will expire naturally through roll-offs, and chances today are slim for renewal of these contracts unless the political landscape changes dramatically. There is also a risk that Russia's insistence on ruble payment can cause disruption to the Russian imports. This we have already seen happening in Poland and Bulgaria, where flows have been halted by Russia as they have not been able to agree on ruble payments for the gas. We have also today seen the disruption of Russian pipeline gas through Ukraine, and the risk of sanctions could potentially lead to swifter replacement of Russian gas than what is being illustrated in this graph. In any case, this is good for the LNG market. So where will all this LNG come from? In our February webcast, we illustrated all the export plans now being built, and there is a lot of them. But more will be needed now, and since February, two projects have suddenly popped up and been sanctioned with startup already next year. We've already seen projects being brought to the market at record time, like Calcius Pass, which started to export cargoes 29 months after receiving FID, which is less time than it typically takes to build an LNG carrier. The first LNG project in the U.S. and the Congo LNG project run by ENI is, however, bringing the lead time of export projects down to an unprecedented new level with time to market of around a year or so. There are currently several projects in North America where we expect final investment decision to be imminent. These are brownfield expansion of Freeport and Corpus Christi, as well as the greenfield project, driftwood and wood fiber. Driftwood is a mega project of 27 million tons, but we have included phase one of 10.4 million tons as highly likely. There are also projects in Middle East and Africa where the front end engineering and design or feed has already been completed. So these projects are ready to be sanctioned quickly. There are also several more projects doing marketing of offtake agreements or where the equity partners are discussing whether to go ahead. with the investment, and this selection of projects could add close to 200 million tons of new capacity. Please note that it's not a complete list of all the projects, but just a list of the most likely contenders in our view. So then let's head into a snapshot of the LNG product market. As already covered, European spot prices have been trading at a premium to Asian spot prices. And this is still the case today. Despite Henry Hub being on a bull run this year, arbitrage spread to Europe and Asia are still massive. Most of the Asian buyers are, however, well covered with contracted LNG. For the most part, these volumes are linked to oil, but also some linked to Henry Hub. Hence, Asian buyers in the big import nations like China, Japan, and South Korea are not feeling the pinch to a similar extent as European buyers which are more exposed to spot LNG prices. The big pull of LNG cargoes to Europe has, however, started to create logistical issues. In the past, the DEF NWE price, which means the delivered price ex-ship in northwest Europe for LNG, has been trading very close to the natural gas hub price in the Netherlands, the TTF. Typically, they have been trading within 20 to 50 cent spread, representing the cost of regasification of the LNG cargo at import terminals. However, with the armada of LNG ships heading to Europe this year, import terminals have been clogging up, and these prices have started to deviate substantially, and are now at an all-time high level of around $8 per million BTU spread annually. with these quotations ranging from $6 to $11 per million BTU. Hence, if the pull to Europe continues, this spread might very well endure for some time and thus incentivizing either floating storage of cargoes outside of Europe and or that more cargoes will be heading to other regions like Asia where e-gas capacity is ample. We see a somewhat similar picture in the UK, where prices are much lower than in continental Europe. The UK's problem is not really re-gas capacity, but a lack of storage capacity, after the politicians had the great idea of closing down the ROG underground gas storage site in 2017, which was the biggest storage site in the country. UK does have a lot less storage capacity than other European pairs, and also lack gas and power connectivity to continental Europe. While Asian spot prices are lower than in Europe, there is still a substantial arbitrage to be made on shipping cargo to this market, and with prices coming down from the top sea level at the end of 2021 and early 2022, we expect to see increased demand from this region. A quick glance on the forward prices for LNG. Given the tight market prices, prices have stayed elevated and prices have also been volatile, responding quickly to news flow relating to Russian pipeline flows, as evident with news about shutdowns of pipelines in Ukraine the last day or so. With European prices at par or premium to Asian prices, cargo owners have been incentivized to ship Atlantic cargoes the shortest route to Europe. The market expects the European premium to endure for some time. But as mentioned on previous slides, the congestion in Europe is creating some bottlenecks. For illustrative purpose, we have therefore added a red dotted line to the chart where we have put in an $8 spread between TTF and the delivered price for LNG into Europe and assume that this spread lasts for the next 12 months as ramping up import capacity in Europe will take time even for the Germans. Whether this spread will be $4, $8, $4 or $10 is hard to predict but at least it illustrates that cargoes might be moving to other places like Asia. If the $8 bottleneck spread stays in place, JKM might very well be priced at premium to deliver price of LNG in Europe, and this is also one of the reasons we think sailing distances will gradually increase throughout the year. We could also see increased floating storage of ships in Europe. This will not affect the ton mileage, but will positively affect ton time, and thus have a similar effect for the shipping market, i.e. higher freight demand. The market expects LNG prices to stay elevated for the foreseeable future. Even in December 24 and December 25, TTF is at $19 and $16, respectively, while JKM is trading at a $1 premium at $20 and $17 for same periods. These are levels way above the contracted LNG price, which is converging towards $10. So about 65% of the market will still receive LNG at a discount to oil, and you find these buyers mostly in Asia. So with that background on the market, we have in a roundabout way arrived to the crux of the shipping business, freight rates. Let's start reviewing the spot rates. We came from a red hot market in Q4, but with the pull to Europe, the freight market started to soften in early December and then plummeted at the start of the year. These charter rates are headline rates, and as mentioned in the past, it masks the development in balance bonus conditions, which vary with the market sentiment. Right now, this is not an issue, as balance bonus conditions started to improve in late February and were back to full round-trip economics by April, where headline rates are then thus at a similar level as the time charter equivalent earnings. Since end of February, we have seen gradual improvement in the spot market. Vessel availability also peaked during end of February, and spot rates are now well above decisional average as we bottomed out about a month earlier than in the past. One thing worth noting is that most of the ships which have been available in the spot market have been relays, available only for shorter periods rather than fully open for longer duration. This means it's harder to find a ship for longer periods, and this is also one of the reasons for the firmness of the term market. As of today, spot rates are hovering at around $80,000 per day, which is pretty decent for this time of the year. The spread between modern two-stroke ships and older four-stroke diesel-electric ships or tri-fuels which they are often called, is today at around $30,000 per day, reflecting that the new ship can carry more cargo while at the same time consuming considerably less fuel. Not surprisingly, this spread is a lot wider to inefficient steamships. If we apply this $30,000 spread between tri-fuels and modern tonnage and plot in the forward freight rate for tri-fuels, we do see that the freight market is expected to continue to firm up and follow its seasonal pattern. For us, this means higher earnings for our three ships on variable higher contracts. You could argue this Maggie XDS spread should be higher than $30,000 as LNG prices are in contango with higher future prices at the end of the year than today, which should increase the spread. Then let's jump to slide 24, covering the spot market liquidity. The spot market liquidity in 2019 and 2020 and until summer of 2021 was pretty good, with an increasing number of spot fixtures being done. However, with the rush by charters to secure ships on term deals last year, the big charters, i.e. the traders and portfolio players, have been controlling a greater share of the fleet, and this has impacted the spot market significantly. with fewer fixtures recently, and very few fixtures concluded by independent owners like ourselves, as the vast majority of fixtures has involved relets, i.e. chips that charters control and are re-letting out to other charters. This was also one of the reasons for the soft spot market in the first quarter of the year, a general lack of liquidity in the market. With the spot market now firming up, liquidity has also improved. Then the final market slide for the day. With the improvement in the market and expectation for the rest of the year, the term market has continued to firm up after a small dip at the start of the year. One-year time charter rate for modern tonnage is now assessed by Fernlis to be $138,000 per day, while Clarkson is quoting as high as $150,000. The three-year time charter rate is quoted at $118,250 by Affinity, while Clarkson is quoting $110,000. This is pretty solid levels, which is also why we are upbeat about fixing our two ships coming open next year and the one ship coming fully open in 2024. So with that upbeat message, I think we can conclude the market section. And I just have one more slide before concluding today's presentation. I'm pleased that we today have also published our fourth annual ESG report. ESG is an integrated part of our business. Our business is to replace dirty coal by clean, burning natural gas. which is not only good for global warming, but even more so for the local air quality. We have made a substantial investment in 13 state-of-the-art LNG carriers, which is consuming about half the fuel of our older steamship, but which also have a larger cargo capacity, thus reducing the carbon footprint for each cargo by close to 60%. And we will continue to develop our business with the aim to further bring down emissions. Like in the past, our ESG report is presented according to the Sustainability Accounting Standard Board's guideline, where we are applying the Marine Transportation Standard as industry framework. In the report, you will find useful data about the most relevant ESG factors affecting our business. Last year, we also included data for Global Reporting Initiative, and we are this year also providing a separate GRI index. In addition, we will also add the CDP framework to report on climate-related risk to benchmark our effort and performance against relevant pairs. When talking about ESG, the focus is very often mostly on the E, the environment, but we also have an S, energy. The social aspect I think we cover well in our report and is related to how we act towards our employees and our business practices. What is often ignored is is the G, the governance aspect. Shipping is a fiercely competitive industry. We compete globally for freight, financing, and striking the best new building contracts. Shipping is one of the most international businesses where free enterprise and entrepreneurship take center stage. However, there are still listed shipping companies that are eager to participate in the shipping competition, but who wants to opt out of the competition for corporate control. Typically, you see insider which have captured corporate control through lawyers and bylaws rather than skin in the game. It is not uncommon to see friendly boss pay generously and where appointment is for long period with staggered election in order to limit shareholder democracy. Additionally, these companies might use unfair business practices like poison pills and other procedural tactics in order to insulate management from shareholder influence. In FlexLNG, we have none of this. Every shareholder is treated fair and equal. Everyone matters. There are no staggered boards, no voting limitation, no poison pills, and every shareholder can raise an issue at AGM or EGM as we care deeply about shareholder rights. Yes, we do have a large shareholder in our company with about 46% ownership, but Mr. Fredriksen has the best track record in the industry, not only in relation to shareholder returns, but also when it comes to fair and equal treatment of all shareholders. Additionally, rest assured, our major shareholders also keep us on our edge and have an excellent track record in changing out management teams which are not delivering satisfactory results for its shareholders. So with that, let's summarize the key takeaways from today's presentation. Revenues, as mentioned, 74.6 million in line with guidance. Spot market has bounced back, and term market remains very firm. We have three attractive ships, which we are marketing for 2023 and 2024, where we are pleased about the earnings potential. We are 98% covered for the year, so we expect incremental better revenue numbers the next couple of quarters. Dividends, 75 cents, which gives our shareholders an effective yield. And we have a big cash position, $175 million, which we will grow by another $99 million from our balance sheet optimization program. So with that, I think we conclude the presentation and open up for some questions. Nadia, maybe you can check if we have some questions on the teleconference before we check whether there are some chat questions.
spk03: Thank you. Dear participants, we will now begin the question and answer session. As a reminder, if you wish to ask a question over the phone, please press star and one on your telephone keypad and wait for a name to be announced. Alternatively, you can submit questions via the webcast. We have the first question comes from the phone from Clement Mullins from Value Investors Edge. Please ask your question.
spk01: Good morning, gentlemen, and thank you for this comprehensive presentation. Strength in gas pricing has exacerbated the difference in realized rates between modern XDF or MAGI engines relative to TFDs and especially to steamers. Could you provide some commentary on whether you see the current spread in performance given prevailing market conditions?
spk00: Yeah, thank you for the question. And I guess you are working with Jay Mintzmeier, also in Value Investor Fedge. I think we touched upon it. We have a graph here on the spot market where we are showing the rate for modern tonnage quoted slightly above 80,000 in the spot market, around 30,000 spread to tri-fuels. And the spread is due to you're consuming less fuel. And under a time charter, fuel is a cost. for the charters account as you are consuming part of the cargo as fuel. And with the high prices today, of course, the fuel spread is higher. And then additionally, you can carry more cargo, and the cargo is pretty valuable today. So we do see this $30,000 spread. Don't just steam it even more. It's more than $50,000. And if you were to calculate on this theoretically, on like a desktop exercise, their spread would probably be even higher. So this spread is a bit dependent on the price of fuel. More efficient ships, you have a lower unit freight cost for those ships when you're taking into account the cargo size and the fuel cost. I hope maybe that's explained.
spk01: Indeed, that's helpful. Turning to your balance sheet, you have now completed the balance sheet optimization program, which further solidifies your already strong balance sheet position. In past conference calls, you provided some commentary regarding where you could potentially allocate these funds. Could you provide an update? And if you were to acquire vessels, which vintage would you go for? What kind of vessel would you expect to generate the highest returns?
spk00: It's a good question. We get a lot of questions about why are we piling up such a big chunk of cash. And to be frank, it's about also we're getting, you know, as we have the risk of portfolio through a lot of these longer time charters, the terms we are getting from financiers have improved. So then it makes financial sense to lock in new financing at better terms for longer durations but what we are incorporating in one of the you know the bank financing here is to have some more added financial flexibility by adding a 250 million dollar bullet revolver so this enable us to not having to to to lend all the money at all time we can repay the loan and draw it back and this saves us for a lot of financial costs when we are Utilizing the revolver, we're only paying a 0.75% commitment fee per annum to having that liquidity available. So we can kind of improve our cash management profile. We certainly do have more cash than we need to have. I think this is also to evidence that people can sleep good at night, that our dividend is stable given our backlog and our financial resources available. We also like to not necessarily have a lot of cash available because I do think if we find transactions that could be accretive, we don't mind using the market to kind of vet those transactions by raising capital if needed. So, yes, we are a bit long cash right now. Given how the financial markets are today, quite wobbly and volatile, I feel that's a good position to have. And our aim is to return all the cash to shareholders, as we have done in the past. We paid, as I showed on the dividend graph, we have been returning all the earnings as dividends. Actually, a bit more than that, because we also had some capex last year. In terms of acquisitions, yeah, we are looking all the time to find accretive deals. I think it's hard to run to the art these days, ordering at 225, 230, waiting for four years, having dead capital on the balance sheet. So I think you need to find some good deals in order for it to make sense. It's also a bit dependent on where our stock is being priced. Recently, we are trading above $30. I think we are below $25 today. So the share price also matters in relation to the accretiveness of acquisitions. When it comes to asset type, we prefer the new ships because we do think a lot of the older ships will not be efficient and they will not be able to meet the future regulation in terms of carbon emissions. So we certainly are not looking for older ships anymore. when we are looking at potential acquisitions.
spk01: That's very helpful. And certainly having additional flexibility is definitely a positive. As you mentioned in the presentation... Sorry, go on.
spk00: Yeah, our corporate name is FlexLNG.
spk01: As you mentioned in the presentation, you have a very little number of vessels coming open through the end of 2023, assuming extension options are exercised. Given current market strength, is it a fair assumption to assume these options will effectively be exercised? And if so, would that be at a higher rate?
spk00: I think, you know, we have the two ships coming open. Near term is two ships where there are a variable higher time charter. So that variable higher time charter is linked to the spot rates. So that's why we're also saying that we think it's likely there will be exercise because the charters is basically going to pay what they will pay in the spot market. So the rates for such extension would be that you are taking another year with market exposure, which we are happy with given the state of the spot market and the outlook.
spk01: All right. Thank you for taking my questions. That's all from me.
spk03: Thank you. The speakers, they don't know for the questions over the phone.
spk00: Okay. I think we have some, maybe you can say you have your glasses on.
spk02: We have two questions from the web. Can you comment on the decreasing OPEX before COVID-19? They used to be around 15,000 per day, and now they are much lower.
spk00: Yeah, it's... Actually, you know, we have guided in the past OPEX level $13,000 per day. We have delivered on that. Actually, we've been delivering OPEX slightly below that prior to COVID. Last year when we have this COVID challenges and also in 2020, they have been slightly higher. Correct me if I'm wrong, Knut. I believe the OPEX last year was $13,300. So, you know, we are delivering OPEX at the level which we have guided, 13,000. They are slightly higher in Q1 because we have quite a lot of Russian and Ukraine crew. It has been difficult to do crew rotations. Zero tolerance policies for COVID in China is causing a lot more testing and requirements and longer quarantine of crew for crew rotations. So kind of the COVID challenges two years, no more than two years since we had this problem are still something we have to deal with every day. But in general we are guiding our OPEX to be at that 13,000 level.
spk02: Then we have a question on China and reopening and how that might increase current income expectations for FLEX. I assume that would be rate levels and revenues.
spk00: Yeah, China, of course. China, they, you know, China don't need to buy any spot cargo this year. China has signed up a lot of new LNG off-take agreements than they did so last year, and most of these are linked to oil prices. They're also signing up quite a few agreements now in the U.S. linked to more Henry Hub bases, so China will be able to source LNG rather cheaply and also to cover all their needs. So that's why we've also seen some Chinese buyers trying to sell cargoes in the market to the Europeans or people in Latin America. So we're not really dependent, of course, if China comes back, roaring back, you know, I wouldn't rule out that after some COVID quarantines that... China will follow the path of U.S. and Europe, stimulating their economy with a lot of fiscal stimuli and then also maybe monetary stimuli. And that usually results in demand picking up. And when demand picking up, you need more energy to fuel that demand. So once China comes back, I would expect that to be on steroids. And then probably they will be sourcing spot cargoes again and might drive up ton mileage and spot rates. But again, three or four ships are now linked to the spot market. The rest are on fixed rates higher. So it doesn't have a huge impact. But of course, China is the biggest LNG importer. So we hope that China... will be able to solve their issues with COVID, go back a bit more to normality like we have done in Europe and US, and return to normality also means growing their LNG demand, which they have grown quite a lot the last 10 years or so. So that concludes the questions on the web. I think there's one question here. It's the same question. It's what are we going to do with all the cash? And I think that was the headline of the Pareto research note this morning. I can tell you one thing. We're not going to do stupid things with the cash. Right now, we're just going to finish the balance sheet optimization program, get this other $99 million on the account. We're going to use the revolvers to optimize our cash management. not paying too much interest to the banks. And then we will just continue returning very juicy dividends to our shareholders. And, you know, we are still looking for opportunities to grow the company, but we won't do stupid acquisition just because we have too much money. We'd rather pay dividends than buying assets at too high prices. So I think that's it. Okay. Thank you, everybody, for joining today. And we will be back in August with the second quarter.
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