FLEX LNG Ltd.

Hi everybody, I'm Øystein-Karle Klev, CEO of Flex LNG and today we are presenting our second quarter numbers. I will be joined today by our CFO Knut Tråholt who will walk you through the financials a bit later in the presentation. Before we begin I would just also mention we do have our Q&A session at the end of the presentation where you can send in your questions either using the chat function or sending an email to ir at flexlng.com and if you have the best question for today we do have some gifts for you. So gift number one is our FlexLNG Boiler Suit. We just completed the docking of four of our ships. So, and you know, these are very nice when you do some improvements or maintenance, so you can have it while doing some home improvements. We also have the new Just Flex It running t-shirt, which we will be using in Oslo Marathon next month. And lastly, we have a new edition of our Flex LNG sunglasses. So I hope you do send in some good questions. It's always the most fun part of these presentations. So before I begin, I will also highlight our disclaimer. We will be providing some forward-looking statements in this presentation. We will be using some non-gap measures as TC and adjusted numbers. And of course, we cannot cover everything in detail during this short presentation, so we I would also like you to highlight the fact you can read our earnings release, which we also presented today. So let's kick off with the highlights. So let's begin with the highlight. Revenues for the quarter came in at 86.7 million in line with our guidance of 85 to 90 million. This resulted in strong earnings, 39 million, translating into 73 cents per share. adjusted net income where we only include the realized gains on our derivatives, not the unrealized gains, came in at 28.2 million or 53 cents per share. During the quarter we carried out dry docking of three ships according to time and budget and that means we have completed the dry docking schedule for the year with four ships being dry docked in the first half of the year. These three dry dockings in the second quarter was then the main reason why we have lower revenues in Q2 compared to Q1. But with all ships back in operation from the second half of the year, we are reaffirming our revenue guidance of 90 to 95 million in the third quarter and somewhat higher expectation in Q4, 90 to 100 million, depending a bit on how strong the spot market will be for the ship we have on variable higher time charter. So with that, we are reaffirming also the revenue guidance for the year, 270 million, and adjusted the EBITDA of somewhere between 290 to 295 million. We are also today pleased to announce that Chenier has, as expected, extended the FlexVigilance time charter from end of 2030 into middle of 2031. As some of you might recall, we did the extension of three ships with Chenier last year, where they had this early option to extend that ship by 200 days and then get the option to extend her a further two years. So in total today we have 55 years of minimum firm backlog which can be extended up to 8 years if charters are utilizing all their extension options. So with a very healthy backlog, a strong financial position with 450 million of cash and no debt maturities prior to 2028 after all the refinancing we just carried out. We therefore should come as no surprise that the board is declaring a dividend of 75 cents per share for the second quarter. This brings the dividend the last 12 months to $3.25 per share or an yield of about 10%. So, as I mentioned, we've been busy doing the dry dockings this year. We docked Flex Endeavour in March, Singapore. We did our sister ship, Flex Enterprise, in Singapore in April. And then we had two ships, the sister ships Ranger and Rainbow, docking in June, Ranger in Denmark and Rainbow in Singapore. We guided in our Q4 presentation that we expected these dry dockings to take somewhere between 80 to 90 days and we ended up at 77 days so we are slightly ahead of our guidance on time. CapEx also in line with estimate about 20 million of CapEx associated with these four dry dockings and with that we don't have any more dry dockings for the remainder of the year as mentioned we will have two dry dockings Next year, probably four in 2025, three in 2026, and then we have a holiday in 2027 with zero dry docking schedule for that year. So this slide is the same slide you saw last quarter. We are just reaffirming the guidance of the air, 370 million of expected revenues. We had 92 and a half or so in Q1, slightly lower here in Q2 because of the three dry dockings and also because somewhat softer spot market impacting the ship we have on variable higher time charter. With all ships back in operation, we expect revenues to jump in Q3. somewhere between 90 to 95 and then a bit more variability on Q4 as spot market can really take off especially when we look at the winter coverage fixtures being done recently. So we expect somewhere between 90 to 100 million of revenues in Q4 and that in total should be around 370 million. And you also see that revenues are higher than last year, where we recorded about 348 million of revenues. And that's despite the fact that we are taking four ships during dry docking this year, and it's driven by the fact that we have repriced the portfolio of ships and expect the time chart equivalent earnings this year to be around 80,000, which is higher than last year. So looking at the portfolio of backlog, as mentioned, Flex Vigilant extended from end of 2030 to the middle of 2031. And as you can see, we have substantial backlog with 54 year of minimum contract backlog. We have these two stars. That's the first fully open ships, Flex Ranger, which was recently docked. She's open in... Q2 2027 and the flex constellation in the middle of 2027. I will come back to this later in the presentation. These are very attractive positions when you are comparing to the term rates and new billing prices for ships for delivery at 2027 and onwards. So once we have finalized marketing of these ships, we will move forward to the next open position, which is Flex Aurora and Flex Voluntair, which are fixed to Chenier with re-delivery early 2028 if they exercised the options for these ships, which we do expect them to do. We do in general think that a lot of these options here will be declared, given where the term rates are heading. As you can see, we also have on the bottom here, Flex Artemis, the only ship that's on a variable higher time charter, where the rate is adjusted according to the conditions of the spot market. And the spot market looks very strong for the second half of the year, and that's why we have a bit bigger range in expected revenues in Q4 compared to Q3. Looking at this slide, we have used this a couple of times, just looking at where our adjusted earnings per share is, 53 cents for this quarter. Last trend models, it's been about $3 per share, ordinary dividends been $3, and then we have paid out a couple of special dividends here, given the very strong financial position of the company. last 12 months and we are down from the 3.75 dollars per share of running dividend to 3.25 but still a comfortable level and giving your investors a 10% running yield. The decision factors we also covered in great details in the past Q2 is of course usually the softest quarter in terms of the earnings on the spot chips but you know as you can see most of these colors are green, as I explained the reasons for already. So with that, we will jump into the key financial highlights, Knut.

Thank you, Stein. Let's have a look at the key financial highlights for the quarter. Revenues came in at 86.7 million and was impacted by the 57 days of scheduled dry dock of the three vessels in the second quarter. It's also impacted by seasonal lower earnings of the variable hire contract for the Flex Artemis. On the operating expenses we see a slight increase this quarter to 17.3 million and this is explained by timing effects of space and maintenance. Last quarter we were a bit below budget and this quarter we have paid some of those OPEXs. So OPEX per day is 14,600. But if you look at the first half of the year, the average OPEX per day is at 14,000. Interest rates continue to increase, so we have an increase of interest expenses to 27.2 million, however this is offset by our gain on derivatives of 17.1 million. Included in that is realized gains of 6.2 million versus 5 million in the first quarter. And if we look at the comments on this slide, we also then compare with the first half of the year. So we see we have realized gains of 11.2 million versus a loss of 2.4 million last year. So despite the rapid increase in interest rates, we see the positive effect of our hedging strategy where the net paid interest is only 10 million higher despite the rapid increase in the interest rate levels. Last quarter we completed the balance sheet optimization program and therefore also booked the write-off of debt issuance cost of 10 million. So that's no longer applicable this quarter. So for the second quarter we end up with a net income of 39 million or 73 cents per share. And adjusting for the unrealized gains on derivatives, we end up with an adjusted net income of 28.2 million. And that results in adjusted earnings per share of 53 cents. Looking at the balance sheet, it's still robust and clean. There are two main components. It's cash of $450 million and our vessels, the 13 vessels with an average age of 3.6 years with a book value of about $2.3 billion. That gives an equity of $870 million or a solid equity ratio of 31%. If we look at the cash flow statement for the quarter, we have 47.5 million in cash flow from operations and 9 million in change in working capital. We had 16 million in dry dock expenses and then amortized about 26 million dollars. We paid out last quarter the 75 cents per share in dividend resulting in 40 million dollars and we end up then with a solid cash position of 450 million dollars. Having a deeper look into our interest rate portfolio, we have made no changes to the derivatives during the quarter. So we maintain a high hedge ratio of 62 to 65% in the coming quarters. It's a mix of SOFA-based interest rate swaps and LIBOR-based swaps. As LIBOR has ceased to be quoted, these LIBOR swaps will transition into SOFR swaps during the third quarter. If we look at the components here, we have 820 million of swaps and then we also have 201 million of fixed rate leases in the portfolio. So on the interest rate swaps, these are valued today at 58.7 million on our balance sheet and provides a solid hedge in the coming quarters and also cost visibility. Looking at our funding portfolio in Q1, we concluded the balance sheet optimization program. The funding portfolio is then consisting of about 50% of long-term leases and 50% of debt which is split in term loans and a $400 million non-amortizing revolving credit facility. The revolver gives us flexibility for cash management when we have a cash position of $450 million, which means that we can repay the RCF at any point in time and therefore also reduce interest rate costs. The maturity profile is pushed out. First maturity is in 2028 and as you see here it's spread out with the last maturity in 2035, subject that we exercise in a two-year extension option on that financing. This portfolio is provided by a diverse and strong and supporting group of banks. It's split out in various regions. So we have banks from the US, from Europe, and then also increased our exposure in Asia. So this gives us a rock solid foundation to support the company coming further. And with that I hand it over to Øystein for an update on the market.

Okay, thank you Knut. So let's have a look at the market starting with the volumes. So these are the volumes from January to end of July. In that period we see that the export growth is about 3%. U.S. was flat in Q1 due to the shutdown of Freeport, but with Freeport up and running again, U.S. volumes are increasing and are the main contributor to volume growth. We have also had shutdowns in Norway, where Norway is back exporting, so they are also adding 1.6 million, same as Algeria. On the import side, we continue to see strong growth in Europe, adding 5 million tons in those seven months. We've seen less demand for Japan with nuclear restarts, but China bouncing back. China, after they loosened up the COVID restrictions, we did see Chinese demand rebounding from March. And in the second quarter, Chinese import growth was about 20%. So then looking at the gas prices, they have been incredibly volatile the last couple of years, driven mostly by supply events as well as, of course, COVID. So looking back the last one and a half years or so, of course, we saw high gas prices coming out after the invasion of Ukraine and also the strong demand in end of 21. We had the Freeport shutdown middle of last year, which started to bring prices up. And then, of course, we had the Nord Stream explosion, which cut off a lot of Russian pipeline gas to Europe and actually sending the price of gas as high as $100 per million BTU. For those who are not too familiar with million BTU, there's 5.8 million BTU in a barrel of gas. So that means that we are talking here about gas prices equivalent to about $600 per barrel of oil. And of course, when prices are going to these kind of levels, demand goes down because of the high prices and switching to coal. or propane or oil products. So with the spike in price we've seen a lot of demand subversion in Europe especially which are more reliant on the spot market and we saw gas prices basically falling from a high of $100 per million BTU in August last winter to about $10 and we actually then a level where natural gas is actually very competitive towards oil. You see the dotted line here. It's LNG being sold at oil price with about 20% discount. And of course, when prices go down again, we can see more demand. And now lately, the last week or so, we have had the situation where Australian workers are contemplating strikes which could cut off almost 50% of Australian volumes or 10% of global volumes. So these are really big numbers. When we look at the Freeport explosion which cut off that plant, we were talking about 3.5% of global volumes. So these are almost 2.5 times bigger volumes. And I will come back to the situation in Australia. And with that, of course, we've seen a rally in European gas prices the last week or so, and we do expect gas prices to head upwards in line with the future curves here, as there will be more demand when we're going into the winter. So let's have a look at the situation in Australia. There are several mega projects in Australia, as you can see here on the map. The uncertainty today is around three different projects, which last year exported about 41 million tons, close to 50% of all Australian volumes. So here we are talking about industrial actions where workers are contemplating a strike which will affect the Northwest Shelf plant operated by Woodside, the Gorgon and Wheatstone projects operated by Chevron. So these projects are mostly selling all of their volumes to Asian buyers, given the short distance to these big markets, with Japan, China, South Korea taking the vast majorities of these cargoes. So if there is a shutdown, it will really create a supply crunch, where Asian buyers will have to compete for Atlantic Basin cargoes, mostly U.S., and drive prices up. Well, we have seen already that the fear of this happening are driving up prices. Of course, we don't expect shutdowns at a similar period of time as we have seen when we had the Freeport explosion, which is more a technical issue. But that said, we have seen similar actions happening on the pollute project in Australia last year, where industrial action closed down exports from June the 10th to August 25 last year. So this is still unresolved, but it's something to keep an eye on. Another interesting topic is the supply of Russian gas. So what we are putting in here with the Drake meme is that Europe has really said they don't want to have Russian pipeline gas. And also with the Nord Stream pipeline exploded, it's not feasible to move those volumes. So the share of Russian pipeline gas in European Union's natural gas demand has been on a sharp fall. And of course, this gas has been replaced primarily by LNG. Europe's been incredibly lucky. First, we have had the COVID shutdowns in China, and then we've seen the economic growth of China probably being on the slower side of expectation, which has resulted in Europe being able to source a lot of volumes from the spot market. and US cargoes, especially the flexible US cargoes going to Europe. But not only the US cargoes, actually when we look at Russian LNG, it's very welcome in Europe and actually Russian LNG into Europe has just kept on growing. As we can see on this graph on the right hand side, Russian LNG to EU, 37% of the cargoes went to EU in 2021. It actually grew to 47% last year. And so far this year, 51% of Russian LNG is going to European countries. And why? It's because the European buyers can't really afford to not take the Russian LNG given the tightness of the LNG market. So looking at the European gas market, which has been front and center the last couple of years, European gas inventories now are at a very high level. We are very close to the 90% threshold that the EU was targeting for November 1 already today. But again, the winter is not started and of course once you are getting into the winter, European consumers will start to utilize the storage level and deplete it. as is the seasonal pattern. So I had some scenario analysis of how vulnerable Europe is to supply crunches, and we have four different scenarios here. So it might be a bit confusing here on the right hand side, but we look at, you know, once the heating season start, which is first of October, what is the level of inventory levels there? And you will see as you get to November, December, January, February, March, this storage level will be declining as we are using from the storage levels. So how much they are declining really depends on a couple of factors. The biggest factor is whether the winter will be cold or not. And then it will also be about how much gas will Europe be able to source from the LNG market. And that's why we've seen the rally in the gas prices last week or so, because if in the event Asian buyers are competing for marginal spot cargoes, LNG supply will be more restrictive. And in such a situation where you have a cold winter and restrictive LNG supply, Europe could end up with very low level of gas coming out of the winter this season despite the high storage level today. So looking at the market we are operating in, it's the freight market. The spot market's been acting as usual. We have had the spot market cooling down as you're getting out of the winter. And once we're getting closer to winter, spot rates are going up. And following the seasonal pattern, today we are already above $100,000 per day for modern tonnage. And if you look at the future curves on the left-hand side, which is the dotted blue line, we see that the future curves are pricing ships for the winter in excess of $200,000 per day, in line also with what we have seen in the past. But keep in mind, There's been a lot of the traders and the portfolio players, they have been taking chips on longer term charters. So the numbers of fixtures in the spot market has gone down and also the spot fixtures being done today are primarily relets where charters are fixing chips to each other, not independent owners. Looking at more term rates, where we are more active, of course, term rates are driven by, of course, supply and demand, but they're also driven by new building prices and interest rates levels. So we've seen new building prices picking up about 30% the last two years. And of course, when people are doing a tender for new buildings, Those people investing this amount of money in a ship, they need a higher break-even level in order to defend such an investment, also when interest rates are picking up. So today, new building prices are at around 265 million, with a couple of more ships available for delivery at 27 before we are starting to... have only yard slots open for 2028. So today the 10-year rates, as you can see here in the light blue line, is hovering above $100,000 and then at about $115,000 for the five-year time charter rate. So this is one of the reasons why we are also very optimistic about recontracting our ships. We have two ships open in 2027 competing with these ships. and then two ships also in 28 where we do think that once we are recontracting ships we will be doing that at higher levels which we have also done and evidenced in the past. Looking at the order book, we had a lot of contracting of new bills last year. With these higher prices, we have seen fewer contracting these days. But the order book is big and it's also reflecting of the fact that we have a lot of new volumes coming to the market. And it's reflecting the fact that still we have a lot of steam propulsion on water with 35% of the fleet consisting of steamships and we do see more and more of these ships leaving the shipping market and have to be replaced by more modern fuel efficient tonnage driven by economics, driven by regulation and also from next year actually carbon taxation in the European Union. If we look at the order book today, most of the ships are committed to long-term charters. Only about 10% of the ships in the order book are uncommitted so far. Looking at what you could call the cargo market, the LNG supply, we've seen continued FID projects taking the final investment decision. Latest one being next decade's Rio Grande, which announced they're going ahead with the Rio Grande project. And we've also seen two other projects in U.S. this year, Venture Global's Pacaminos Phase 2 and Port Arthur also earlier this year. So we have about 100 million tons of projects in North America under construction or where they have taken the final investment decision, and then 73 million rest of the world. And there are still a lot of projects chasing FID. The project we deem probable or highly probable to do so is about 85 million tons in North America, 68 million tons of the rest of the world. So we do see a very strong growth in the market. The nameplate capacity today is 465 million tons. We do expect LNG supply this year to be about 420 million tons. We are not able to to have 100% utilization on these projects. And then if you add all the projects under construction, you are getting to 634. But there are still projects trying to get FID. And if you put in all the highly probable, you are ending up at a very big number, 788. So that is one of the drivers for all this contracting of new LNG chips. So with that, I think we conclude today's presentation. I'm just going to run through the highlights quickly. Revenues for the quarter in line with our guidance. We have strong earnings, 39 million or 28.2 if you adjust out the unrealized gains on our derivatives, giving our earnings per share of 73 cents or 53 cents respectively. We have completed our dry docking program of the four ships on time and budget. We just recently had an extension of our 10-year time charter for Flex Vigilant bringing that ship into 2031. Revenues for the second half of the year will pick up as we have completed the dockings and as we do see a stronger spot market and we are confirming the guidance we already provided in February. 370 million of revenues for the year, adjusted EBITDA of 290 to 295 million, driven by higher earnings in Q3 and Q4. So with that, we are happy to declare another dividend of 75 cents, bringing the dividend the last 12 months to 3.25, giving, as I mentioned, 10% yield. And we can do that easily, given our high backlog and strong financial position. So with that, I thank you for joining the presentation. We will then gather in some questions and do a Q&A session. Thank you. Okay, let's start the Q&A session, Knut, and I think we have received quite a lot of questions today as well, even though I think most of the analyst reports coming out this morning was, this is boring stuff, no news, everything as expected, but... You know, we'd rather be boring and profitable than funny and losing a lot of money. So let's see.