FLEX LNG Ltd.

Hi, welcome everybody to FlexLNG's first quarter results presentation. I'm Øystein Carle Kleve, CEO of FlexLNG Management, and I will be joined by our CFO, Knut Råholt, who will walk you through the numbers a bit later in this webcast. As usual, we will conclude with our Q&A session, where the best question can win a Flex on the Beach summer kit, which I will be presenting a bit later in the presentation. Please use the chat function. to post a question, or you can also send an email to ir at flexlng.com. So before we start, just a friendly reminder about our disclaimer in the presentation. We will be giving some forward-looking statements, and there are also limitations to the completeness of details we can provide in such a presentation. So with that, let's review the highlights for the quarter. Revenues came in at 92.5 million, which was in line with our guidance of 90 to 93 million. Average time charter equivalent earnings for the ships were slightly above $80,000 per day, also in line with the guidance for the year of about 80,000. This resulted in strong numbers with adjusted net income of 35.2 million for the quarter, translating into 66 cents per share. During the quarter, we completed the balance sheet optimization program where we have refinanced all the 13 ships in our fleet with attractive long-term financing. Through this process, we have also released $387 million of cash proceeds in total, and this boosted our cash balance at quarter end to $475 million, an all-time high, which translates into about $9 per share in cash. We have also recently carried out the first two dry dockings of Flex Endeavor and Flex Enterprise, both according to schedule and budget. During Q2, we will do another two dockings, so in total three dry dockings for Q2, and this results in revenues for this quarter being guided at 85 to 90 million. Once we have completed the dry docking program in June, our quarterly revenues will pick up in Q3 and Q4 with quarterly revenues of around 90 to 100 million. for these two quarters. So, we are also reaffirming our revenue guidance of 370 million for the year, which should translate into an expected adjusted EBITDA of around 290 to 295 million. So, with a very strong financial position and minimum 57 years of contractual backlog, our board has decided to once again pay out a quarterly ordinary dividend of 75 cents per share. During the last three months, we have just paid out $3.75 per share in dividends, and this has given our investors an attractive yield of around 11%. So that's the highlight. Let's continue. So as I mentioned, we are reaffirming our revenue guidance of $370 million for the full year 2023. As you can see here in the graph, Q1 revenues this year was significantly stronger than last year as we had limit or spot exposure to one ship on variable higher time charter and actually spot market was pretty firm during Q1. For Q2 as I mentioned, we have three ships which will be doing dry docking during this quarter and Q2 is also usually the softest spot market and this will affect the one ship we have on variable TC. Once we are done with June, and getting into Q3 and Q4, all these 13 ships will be in operation, and usually we will see the seasonal uptick in charter rates during Q3 and Q4, which is also evident from the forward prices, and those revenues will grow to closer to 100 million for those quarters. So, as I mentioned, dry docking, we have been doing our first dry docking. The two first ships, Flex Enterprise and Endeavour, was delivered early 2020, and we are now due for the five-year special survey. Flex Enterprise carried out this in March, while our sister ship, Flex Endeavour, carried out her five-year special docking in April, both in Singapore. In our last presentation, we guided that in total, these four dry dockings would take out 80 to 90 days of operations, or 20 to 22 and a half days, On average, we have managed to do this within 18 days, so we are slightly below time, and we are also on the low side of the budget. CapEx in total for each ship, $4.5 million, versus guided $4.5 to $5 million. So in Q2, as I mentioned, Ranger and Rainbow will also be docked, and these are to be completed within June, and the ships will then be in operation for the full Q3 and Q4. So as I mentioned, high contract coverage, 57 years of minimum contractual backlog. This slide is the same as we had in our Q4 presentation. During last year, we did extend the contractual backlog backlog on several ships, as you can see here with Rainbow being extended 10 years, Endeavour, Vigilant, Amber, Enterprise, and Ranger. All these ships were extended for longer durations, and the first fully open ships we have today is Flex Ranger, early post of 2027, and Flex Constellation, middle 2027, if the charter is electing to extend her for the three years which they have an option to do. so I think in terms of these durations we have a good coverage now in their term when export growth is to be expected to be muted and then we have open shifts from 2027 once a lot of new LNG is coming on stream and where we are also competing against new buildings at very high prices as I will come back to in the market section of the presentation and once again our dividend Decision factors, as you can see here, for this quarter, we are paying out the $0.75 of ordinary dividend per share. We have paid out two special dividends the last year, $0.50 for Q2, $0.25 for Q4. So in total, the last three months, we have paid out $3.75 of dividend, which gives a yield of 11%, 12%, depending on where the share price is. So we think this should give our investors an attractive yield. All the parameters here are green. We have good earnings. Market outlook is good. We have this big contractual coverage. Liquidity at $475 million is super strong, and then we don't really have any debt maturities before 2028 as the earliest. Other considerations, right now I think most people are a bit focused on the aggressive Fed. ramping up interest rates on the short-term side, where we do have a very inverted yield curve. And Knut will discuss a bit what kind of opportunities this has given us in the swap market. So with that, Knut, I hand it over to you too. Thank you.

Thank you, Sten. And as already mentioned, revenues for the quarter came in at 92.5 million. That gives us a time-cutter earnings average for the fleet of close to 80,200. OPEX, another strong quarter where we maintain the OPEX control, where we have OPEX per day of 13,400. If we look more into the details on the revenues, we have 5.5 million lower than last quarter, and that is driven by lower seasonal earnings on the variable hire contract and the off-hire days related to dry docking of the flex enterprise. Then we have some more non-cash item on the income statement. The net loss on derivatives is 2.8 million. As you can see in the notes on the side, it's 7.8 million in unrealized market-to-market loss from the derivatives. And then we have realized gains of 5 million from the swap portfolio. which is sort of our carry cost. With the completion of the balance sheet optimization program, we have exit cost of our debt is 8.8 million of write-off of debt issuance cost and then a termination fee of 1.4 million. That gives us a net income for the quarter of 16.5 million or earnings per share of 31 cents. Adjusted for the non-cash items, we have adjusted net income of 35.2 million and then resulting in adjusted earnings per share of 66 cents per share. So let's have a look at the details on the adjustments that we have made to arrive at the adjusted net income. If we look at the quarter-and-quarter differences on the net income, operating income is $6 million lower. driven by the off-hire in connection with the dry docking of Flex Enterprise and the seasonal lower revenues under the variable higher contract for the Flex Artemis. Quarter-and-quarter adaptation cost is 8.5 million, which is basically driven by the completion of the refinancing under the balance sheet optimization program. And then derivatives, where we had a mark-to-market loss, were here on a quarter-on-a-quarter basis, 7.7 million. With the smaller order effects, we arrive at a net income of 16.5 million. And when we then reconcile to adjusted net income, we add back the non-cash items, which are the debt issuance cost, write-off, In total, together with the termination fee of 10.2 million. And then we have the unrealized market loss on the derivatives of 7.9 million. And then a smaller FX effect on our NOC portfolio. So in total, we adjust them back and arrive at an adjusted net income of 35.2 million. The balance sheet remains robust and clean with an all-time high cash position of 475 million. And we have an equity of 871. That gives us an equity ratio of 31%. If we look at the cash movements for the quarter, we increased the cash balance by 143 million, which is mainly driven by the completion of the balance sheet optimization program, where we have a net proceed of 196 million. And then net of the dividends paid last quarter, 54 million, we end up with the all-time high of 475 million. During the quarter, we have been active with our hedging portfolio. We have utilized the market when the interest rates have been high to lock in the market value on some of our swaps. Here we have, for those who recall, we had a two and a half year $181 million swap where we are paying fixed 0.9%. When the market rate was high at 4.8, we locked in that market value by doing a so-called mirror swap. where we will receive 4.8 fixed and pay the 0.9% to the bank. And that locks in 15 million of market value, which will be distributed back to us over the remaining period of that swap. We have also increased our hedging portfolio. When the short-term interest rate dropped in total, we increased with $260 million. And then we also added $50 million of 10-year swaps. That gives us a total swap portfolio of $820 million. And as you see, at very attractive rates. And in combination with the fixed rate elements of our leases of in total here $205 million, we have a net hedge ratio of 62% and then remaining there around 60 to 65% for the coming quarters. So this is net of the 400 million dollar RCF capacity we have. So by increasing the RCF capacity we have also effectively increased our hedge ratio. So if we look at our financings, we completed the refinancing exercise last quarter with in total six vessels. That gives us now a debt funding portfolio where about 50% are long-term leases and then 441 million of amortized term loans. And then we have the RCF of 400 million, which is a bullet for the full tenor of the loans. And by that, we have pushed out the debt maturity profile. So it's already mentioned by Einstein, first maturity is in 2028. And if we utilize an extension option at no cost for two of our leases, the latest one are then to be refinanced in 2035. So with that, I hand it back to Øystein.

Okay, let's have a look at the market. LNG export change in the first four months of the year, the period January to end of April, we saw about 5% growth in the market. And for the first time in a long time, actually the biggest driver was not America because of the The outage on the Freeport export terminal in the US, so the growth came from Qatar and Australia, the two big other players in the LNG export market, and then actually Norway as well, where we had the Hammerfest plant running now for the full quarter. Other countries contributed by about 2.5 million tons. On the import side, we do see the same trend we saw last year, where Europe is really gobbling up spot cargoes in order to replace the lost volumes from Russian pipeline gas. And in Asia, it's been a bit slow start for China. Growth was flat during January and February. And then we did see that growth in the Chinese market started to fire up from March and onwards. They have been lessening or basically scrapping the COVID policies they've had in place for some time now. If we look at the gas prices, it's been a very volatile ride. During the summer of COVID, European gas prices was as low as a dollar per million BTU, translating into, let's call it, six dollars per barrel of oil. After the Russian invasion of Ukraine, really, we saw a big rally in in the global LNG prices, where Europe bought up a lot of spot cargoes, and we saw a peak of European gas prices at about $100. So we had a run from $1 to $100 on the gas prices. This equates to about $600 per million for a barrel of oil. But now we have had a big slump in gas prices. We have had a mild winter. here in Europe, and we have also seen the high prices have really incentivized people to cut down consumption, and prices have now balanced down to around $10, $11 per million BTU, where actually LNG becomes competitive towards oil. Basically, we are now being traded at, let's call it $60 per barrel of oil equivalent, And that is also feeding up demand from Asia, where we've seen more interest now to buy LNG in the spot market, as prices have come down. Henry Hub is basically flatlined. It's also been quite volatile, but now the prices have really come down in America, which means that it's still with $10, $11 for the spot prices. It's immensely profitable to sell these cargoes into the global market. from the U.S. market. So, in terms of America, we do see here the growth in exports. We had during COVID, of course, we had a lot of voluntary cancellations. We had some cancellations during the big freeze in February 2021. And now, last summer, when you had the explosion at the Freeport terminal in U.S., we have had significant Downtime on the plant, it's now bounced back. But in total, 128 cargoes assumed by S&P Global that has been cancelled, or 9.5 million tons. But now exports are ramping up again. And we do see and expect that U.S. will become the biggest exporter of LNG in 2023, with pretty healthy growth, 14% according to EIA for the year. The other big player in the LNG market is, of course, China. China became the biggest importer in 2021, so passing Japan at about 80 million tons, equivalent of imports, which is basically the production of US last year. So far, this is something we follow closely to see how the reopening of China is affecting demand, and I guess it's a big million-dollar question for most investors these days. We saw flat growth in January and February, as I mentioned, but then we saw LNG demand picking up March and April, which have, you know, on average, 17% growth. for those two months. So it's a bit too early to conclude, but there are some positive sentiments towards Chinese imports, and especially when prices are at these kind of levels. EIA and energy aspect expect Chinese energy demand to grow 10-15% this year, which will then result in China going from about 64 million tons of exports last year to about 70 million tons But this is still 10 million tons below the imports of 2021. So we do expect to see continued growth of the Chinese market. And the Chinese buyers are signing up to a lot of SPAs. China has contracted LNG volumes of around 70 million tons, but they are big buyers of new volumes as well. So the story about the Chinese LNG import growth is far from over. As I mentioned, European gas market has had a lot of focus with the situation in Ukraine and with the Russian pipeline gas flows tapering off. We have in Europe this year been incredibly lucky. It's been a very mild winter, and this together with the high prices have resulted in a lot less gas demand in Europe, which have then resulted in storage levels keeping up at a pretty good level. We have seen storage levels above historical range. The injection season now is a bit slow, so we are getting into the customary range for development of the gas storage level. So, you know, the big question this year is how strong will the imported man be from Asia? How fierce will the competition be in terms of prices? Will Europe then be able to get these inventories levels up to a satisfactory level before winter? And as I mentioned, again, the drivers here in the market is the competition between Asian and European gas demand. Let's see. Spot rates or the freight market, we are not really that exposed to the spot freight market any longer. 12 or 13 ships are on long-term charters with a fixed rate. We have one ship which has been on a variable higher TC, or which is on a variable higher TC, Flex Artemis. Q1, pretty good levels there. You can see on the light blue line on the left-hand side that the market during Q1 was pretty good, but has followed the seasonal norm where usually rates come down to earth during the spring. Right now, we are basically on average level for the last couple of years. And then this dotted line is where the future market is. So as I mentioned, when we have been guiding our revenues for Q3 and Q4, we do expect that reality will follow this path where rates are expected to be in the $200,000 plus at the end of the year. Another thing to note, we have mentioned this also in the past, is the fact that A lot of the big players here, they have chartered in ships on longer-term contracts, and there's really few independent owners left in the spot market, which means that most of the fixtures, which there are fewer of, but the ones being concluded is mostly of relets, where people with, or players, traders, portfolio players with the gap in the program are subletting out ships for shorter duration voyages, while while the independent owners are very limited involvement in the spot market these days. So another reason why we are upbeat about the long-term outlook is new building prices, which have just keep on moving upwards. We are at around $260 million for new building prices for LNG carrier today. You are quite lucky if you manage to get still a ship for 2027. The window is now closing in on 2028 deliveries. So these ships that have this price tag for delivery 2027, 2028, those are the ones we are competing with. And in order to get a reasonable return on your capital when making such a big investment, you need higher rates. And that's where rates have gone. The five-year time charter rate has stabilized at a very attractive level of around $135,000. But actually, to be fair, most people who are ordering ships at 260 million, they are not looking for five-year time charters. They are looking for time charters of 10 years plus. So that's the one we are competing with, and that makes us upbeat about being able to extend our ships for longer duration at higher rates eventually when they come open, as we have demonstrated our ability to do also in the past. So if you look at the order book, it's huge, and it's been keep on growing. We have seen some slower activity now on ordering, given the lack of available slots and given where prices have been going. But a positive sign is at least that there's not a lot of speculative orders. Most of the ships, about 90% of the ships under construction, are committed to long-term contracts. And as I mentioned here, you can see that the order book for 2028 now is already filling up. So if we look at the product markets, the installed capacity of LNG export at the end of March was about 465 million tons. We are not utilizing the full capacity. We do expect total export for 2023 to be around 415 to 420 million tons, so there are some downtime on installed capacity. There is also a lot of capacity being constructed, especially in North America, and then of course in Qatar, where they have a huge expansion So if you look at projects being under construction and coming on stream near term, this volume goes up to 621 million, and we do expect more projects still to be sanctioned. So we are looking here at the market of, let's call it around 770 million tons in 2030, and this growth of liquefaction capacity together with the phase out of older steam tonnage is what is affecting demand for modern ships like we have in our portfolio. So that's it. I think we can then conclude by going through the highlights just shortly. Mention revenues in line with our guidance, 92.5 million. average time charter equivalent earnings of about 80,000 also in line with our guidance this resulted in adjusted net income of 35.2 million or 66 cents per share we have completed the balance sheet optimization program it's been a process now going on for about one half year where we refinance all the 13 ships and boosting our cash balance as I mentioned at 475 million of cash at hand at quarter end or nine dollars per ship we have started our dry docking schedule everything is going well both two first ships have been been completed according to schedule and budget and we are now planning for the two last dry dockings for the year we're expecting to take place in June We are reaffirming our revenue guidance for the year, 370 million. Revenues next quarter will be a bit softer because of these dry dockings, but all ships will be in operation again, full capacity from Q3, where revenues are expected to pick up again. So with good financial position and our big charter backlog, we are pleased to once again pay out 75 cents per share in dividends. or $3.75 per share the last 12 months, which I hope give our investors an attractive yield investing in Flex. So with that, I think we take a short break before we come back with our Q&A session, where, as I mentioned, you can win our Flex on the Beach summer kit. Thank you. Okay Knut, I think before we start with the questions, maybe we can show the gift we have this time. This time we have our summer team, as I mentioned. Flex on the beach, beach towel. Together, of course, you need some protection with Flex on the beach, sunscreen or cap, of course. You have to include the I Love Dividends t-shirt this time as well. And lastly, sunglasses so let's see who will win the this nice summer package and I think we have a lot of questions today yes thanks a lot for the questions coming in there's a lot of questions and we'll try to take them in in order and sequence and