FLEX LNG Ltd.

Hi everybody, I'm Hyslop Karle-Klev, CEO of FlexLNG. Today we are presenting our third quarter numbers. I will be joined later in the presentation by our CFO Knut Tråholt, who will walk you through the numbers. Just to remind you, we also will conclude with our Q&A session, and the best question for today's question will win a gift. The Flex LNG thermers minimize boil-off. And Abini, which is nice when the winter season is approaching. This is for the Norwegian brand Amundsen, named after the Norwegian explorer who were the first guy on salt pole with a nice Flex logo. So please send in questions on the chat function or by email to ir.flexlng.com and we will cover as many questions as we can at the end of the presentation. So before we begin, just let me remind you about our disclaimer. We will be giving some forward-looking statements. There are limits to how much details we can cover. So I would also recommend you to review the earnings release we presented also today. So let's start with the highlights. Revenues came in at 94.6 million for the quarter. In the high end of our guidance, 90 to 95 million. That resulted in strong earnings, net income 45.1 million, translating into earnings per share of 84 cents. Adjusted numbers, where we are eliminating gains on derivatives, came in at 36.1 million of adjusted net income, translating into 67 cents per share. During the quarter, we had all 13 LNG carriers back in operation. We completed the dry docking program in the first half of the year with one ship in docking the first quarter, and then we took out three ships during Q2 for the five-year special survey. That means we are done for the year and we only have two ships for dry docking next year. So with all the ships back in operation and a stronger spot market positively impacting Flex Artemis, which is on a variable higher, that is the key reason for revenues growing from the second quarter to the third quarter. The overall LNG market, both freight and product, is balanced with high inventories of gas in Europe prior to the winter season. So that has also resulted in gas prices coming down to a more normalized level from the very high levels we saw last season. With the stronger spot market, we do expect revenues to pick up slightly in Q4, with revenues about 97 to 99 million, also in the high end of the guidance. So with the strong numbers in Q3 and the strong guidance for Q4, we are well on track to meet the financial guidance for the year, 370 million of revenues and adjusted EBITDA of 290 to 295 million. So with good numbers, a very strong financial position, a completed dry docking program, the board has decided to pay a special dividend of 12.5 cents on top of the regular 75 cents of dividend. This gives an attractive yield of 87.5 cents per share. And if you look at the dividend over the last 12 months, it should give a yield of about 11%, $3.37.5 in total during the last 12 months. So let's look at the guidance. So we are walking the talk when it comes to our guidance. We are spot on delivering the guidance we provided in Q4 when we reported in February. Revenues are expected to come in at around 370 million in line with guidance. Adjusted EBITDA also in line with guidance. And we have also guided the time charter equivalent rate for the year. We have guided about 80,000 and we do expect time charter equivalent earnings on average to come in at about $80,000. As you might recall, we also did a guidance on docking. We expected 80 to 100 days of fire in relation to the four dry dockings. We delivered that on 77 days. And then we also guided on the capex for the docking, 18 to 20 million. We did it at 20 million. So also those parameters exactly on the guidance provided. So, let's look at the portfolio of chips. We have 13 chips in the portfolio, as I mentioned, all back in operation, 12 of the chips on fixed higher rate, and then, as I mentioned, Flex Artemis on a variable higher, linked to the spot market rates. First, fully open ships we have is 2027. We do have Flex Ranger fully open end of Q1 2027. Flex Freedom, there is an option for the charters to keep that ship to 2029. Flex Aurora and Voluntair are firm until 2026, but the charters has an option to extend those to 2028, which we think is fairly likely. Flex courageous and resolute, we do expect the charter to exercise those options and bring those ships into 2029. So the only ships where we see a potential of getting back in the near term is Flex Constellation. That ship is fixed until Q2 next year. The charter has an option to extend that ship by three to one year. If they declare the three year option, she will be fully open 2027. Let's see. We will know when we are presenting of Q4 numbers in February, whether this ship has been extended or not. Flex Artemis, as I mentioned, is on a variable time charter with a minimum period until Q3 2025, but also where the charter has the option to extend that ship well into 2030. And as I will come back to in the market section, we do think these positions are very attractive when comparing to the overall fleet supply and demand and also where new building prices have been heading. So before handing over to Knut, let's review the dividend. 67 cents of adjusted earnings for this quarter, slightly higher for normalized or normal basic earnings. We are paying then a special dividend on top of the regular 75 cents, giving our total dividend for the quarter of 87.5 cents, which gives in total this dividend I mentioned $3.37.5 last 12 months. And of course, the decision factors we use in order to determine the appropriate dividend level, we have been covering well in the past. Earnings and cash flow is back to dark green. Market outlook, we have downgraded to light green, and this is just a reflection of the fact that Next year, 2024, there are more ships than molecules hitting the water, which has softened the term rates the last six months or so. So with that, I hand it over to Knut, and then I will revert with a market update. Thank you.

Thank you, Øystein. Let's look at the key financial highlights for the quarter. On the revenue side, all 13 vessels were in full operations and combined with the increased earnings under the variable index charter for the Flex Artemis, the revenues increased by approximately 8 million to 94.6 million. Operating expenses slightly lower this quarter at close to 17 million or 13,100 per day. As we have explained before, the OPEX is a bit bumpy between the quarters. And we have guided OPEX for the full year at 14,500. And we have some expenses that will come in Q4. So we're guiding towards the OPEX per day for the full year of 14,500. Net interest expenses, which includes 6.7 million in realized gains from our derivative portfolio, came in at close to 21 million and equal to last quarter. And then long-term interest continued to increase in the quarter, and we book unrealized gains of 9 million, which then results into a net income of 45.1 million for the quarter. That gives earnings per share of 84 cents. And then adjusting for the unrealized gains, we have adjusted net income of 36.1 million or adjusted earnings per share of 67 cents. Looking at the balance sheet, it remains clean and simple. On the asset side, we have cash of 429 million, and then we have our 13 vessels, more or less sister vessels, with an age of close to four years, at a book value of 2.2 million. And as a reminder, these assets are acquired at the low point in the cycle, so they are much lower than the asset values in the market today and the current new building prices. And that gives us a book equity of 875 million or 32%. If we look at our funding portfolio, about 50% of that is from long-term leases and 50% is term loans and RCF from traditional banks. And netting out the cash we have on balance sheet, we end up with a net deposition of 1.4 billion. And if we look at the debt maturity profile, our first maturity is then in 2028. And the combination of this financing gives us a very attractive funding portfolio. And we have this 400 million in RCF, which we can repay in between quarters and save interest rate cost. At the same time, it gives us the optionality to act if there are opportunities in the market. This quarter we deep dive a little bit more into our balance sheet and show here the difference between the debt and our book values and how the debt is repaid much faster than the book values are depreciated. On the balance sheet, we depreciate over 35 years down to a conservative scrap value. And as you see on the right hand side, the recent retirements of LNG carriers is closer to 40 years on average. So even the book values are depreciating faster than the economic life of these vessels. And at the same time, the book values are low compared to the current market. However, our funding portfolio, and that is particularly from the leasing houses and the traditional banks, they are more conservative, so our debt is then repaid over approximately an age-adjusted repayment profile of 21 years, and that gives that we repay our debt 1.7 times faster than the book values are depreciated. So we are then saving up about 40 million dollars per year. Our interest rate portfolio now consists of a portfolio of 720 million combined, which net of utilization of the RCF gives us a hedge ratio of about 65% for the next quarters. As you know, we've been quite actively managing this portfolio and that gives us now a book value on balance sheet of 67.5 million. If we look at the period from January 2021, we have realized and unrealized gains from this portfolio of 128 million. So we're quite pleased with the exposure we have today and believe that should protect us in this current high interest rate environment. And that concludes the financing, and back to you, Einstein. Thank you, Knut. Very efficient.

So let's look at the overall market. Volume growth is fairly muted this year. In the past, LNG export growth has been typically 7-8%, but we are in a period now with lower export growth. I will come back to this a bit later in the presentation. About 3% growth year to date through October. Not surprisingly, maybe the US is the big contributor to the growth, growing 6.7 million tonnes out of the 8 million tonnes and thus becoming the biggest exporter again, 70 million tonnes, slightly ahead of Australia and Qatar, the two other big export nations. Russia, despite the war in Ukraine, they are exporting healthy levels, 26 million tons, slightly below the levels last year. One outlier this year has been Algeria, which has been growing their export rapidly, both pipeline and LNG, up close to 40% with 11 million tons year to date. And then it's about 100 million tons for the rest of the producers. On the import side, European demand this year has been fairly flat. There has been less gas demand in Europe this year compared to previous years. We've seen an uptick in gas demand in Europe in October. First time in a long time we have seen European gas demand picking up. But European demand is quite strong because a lot of Russian pipeline gas which has been curtailed need to be replaced with LNG and European demand year to date is 103 million tonnes similar to last year. So actually overall it's China growing their imports up 12% year to date with 6 million tonnes more imported while Japan which is firing up their nukes has reduced their demand by about 10% leaving room for the Europeans. I already touched upon, it's been a lot of supply events the last couple of years. We had the war in Ukraine, of course, which started to curtail Russian pipeline gas to Europe, especially this happened when we had the explosion of the Nord Stream pipeline. We also had an explosion on a big US export plant, the Freeport. which sent these two events, sent prices of LNG all the way up to $100 per million BTU, which equates to close to $600 per barrel of oil. Since then, prices have come down a lot. And during the summer, we actually saw the lowest prices on spot LNG that we have seen since summer of 2021, as reported here by Wall Street Journal. Then during the summer, when prices hit kind of parity with the contracted LNG which is typically being sold 20-25% discount to oil. This dotted line called Brent 13%. Then during the summer we saw bigger outages in Norway. We had a deferred maintenance season for Norwegian gas exports to Europe. First, this was deferred during COVID because of difficulties of maintenance during 2020 and 2021. And then last year during the energy crisis, Norwegian maintenance season was deferred again. So the maintenance season for Norwegian pipeline gas export has been very long this year. And we had a big bounce back in Norwegian pipeline gas exports to Europe in October after hitting a four-year low in September. So with the Norwegian outages and the fear of threats or fear of strike in Australia curtailing LNG exports, LNG prices have rallied through the autumn. and are now at around $15, a pretty good premium to the contracted price of LNG. And if you look forward, prices seem to be stabilizing at this kind of level. So if you look at the overall market in terms of prices, gas is still very cheap in the US. This is the Henry Hub. You do find places like West Texas where gas is much cheaper than three dollars as well. But you know this gives very good economics of exporting gas by liquefying it and shipping it to international markets. A big parcel of LNG has a cargo value of 13 million in the US. If you put the liquefaction cost or the tolling fee as sunk and then you can make 40-50 million shipping that cargo either to Europe or to Asia, which is a longer route, which then entails more shipping costs. So even though prices for LNG has come down to more normal levels, they are still elevated, reflecting the tight product market. LNG today at around $15, which is the average of the European and the Asian prices, is equivalent to about $87 per barrel of oil, still a $4 premium to oil price. About two-thirds of the volumes being shipped are linked to oil prices at a discount, and these contract volumes typically shift hands for about $10 to $12 per million BTU at a discount to the oil prices. If we look at, drill down to some of the market, as I mentioned, China has been bouncing back in terms of demand after they scrapped their zero COVID policies. But levels are still below the levels we've seen in 2021, but above the levels we've seen last year at 58 million tons so far. So there are room for further growth in the Chinese demand. but the Chinese demand is typically more price sensitive and the economic recovery have been somewhat muted compared to maybe expectations. Then on the other big Northeast Asian market, Japan, Korea, Taiwan, it's mostly Japan dragging down demand. The other two key markets, Korea and Taiwan, are fairly flat, but with the startup of more nuclear power in Japan, they can shy away from buying quite expensive LNG. Looking at Europe, which has been the big buyer of spot LNG the last couple of years, we are at a level similar to last year, but well ahead of the levels we saw in 2021 prior to the curtailment of Russian pipeline gas to Europe. But with muted gas demand in Europe, we have seen inventory levels hitting about 99.5% full before now we're really starting the big consumption season during the winter season. It's worth noting that also Ukraine has allowed European buyers to utilize about half of the gas storage levels in Europe. in Ukraine, 15 billion cubic meters. So far only a fraction of this has been utilized, so there is still room to store more gas in Europe if the Ukraine storage levels are utilized. Looking at floating storage, typically when you have tank tops or where you have a situation where gas is more expensive in the future than today, we do see a build-up of floating storage on ships and this has become quite usual during the early winter season. And we actually saw it this season as well, a rapid build-up in floating storage with the prompt prices reacting positively. You know, prompt prices going up because of the Norwegian maintenance season and the fair of our a strike in Australia, the economics of floating storage have gone down and we have now seen a reduction in the numbers of ships floating with cargoes. And of course, this is also releasing more ships to the market. So when we have seen this dip in floating storage, we also seen a dip in the spot prices, but they have bounced back and the spot rates are at very good levels. We are talking spot rates for modern tonnage at around $200,000 per day, and they are acting in accordance with the seasonal pattern where you have higher rates in the winter season. We have made this scale on the left hand side in logarithmic scale, so it seems like it's not far away from the numbers we've seen last year, but actually they are about half the levels as we saw record rates last season with rates hitting about half a million dollars per day. the forward line or the dotted line is the forward prices for freight for the rest of the year. So we do expect rates to stay at this elevated level for the remainder of the year. Despite the fact that we have seen fairly low ton mileage this year on the right hand side on the top graph here you do see the average sailing distance which is you know fairly low you know reflecting the fact that Europe is buying a lot of the spot cargoes compared to 2021. Also worth noting fixture activity has gone down the term market has been active a lot of the charters have been fixing ships on term contracts in order to take advantage of the incredible cargo economics, which are still attractive today, even though spot LNG prices have come down. And with all the charters being fairly long shipping, there are less spot fixtures in the market, as you can see here on the graph on the right-hand side in the bottom. And also maybe worth mentioning also that a lot of the fixtures or actually most of the fixtures being done are being done by charters, not independent owners as the independent owners have more or less left the spot market today. So let's look at the more the term market where we are exposed as new building prices have been picking up and now stabilizing at very high levels, about 265 million dollars for a new building today. This has also pushed up the term rates. in tandem with higher interest rates. With higher interest rates and higher investment in order to build a new ship, you need higher term rates, and 10-year term rates have stabilized at around $100,000 per day. As I mentioned earlier in the presentation, we have guided $80,000 for this year, so we do think that there are opportunities to fix our ships when they are coming off-charter at higher levels. The five-year rate is about $115,000 per day. So look at the outlook for the product market. We are in a period now, as I also mentioned in the beginning, with muted export growth. We had a wave of volumes coming to the market from 2016 to 2019, predominantly big projects in Australia and big projects in the U.S., enabled by the shale revolution. Then with the trade war breaking out between US and China, and then once that was resolved, more or less in January 2020, we had COVID for an extended period and that has impacted people's ability to sanction new volumes. So once we came out of COVID, we have seen a flurry of new projects and this project typically takes some time to come to market. So we do expect the new wave of LNG export growth to start from about next year, 2024, but the real growth we are not really seeing before 2025, 2026 and onwards when a lot of new volumes including US volumes and including the big expansion in Qatar is coming to the market and that will drive a lot of demand for shipping, which is the next topic and the last topic I will cover. So if we look at where are we in terms of supply and demand, this is always a very difficult calculation. We have made our own model, but this model here is based on a recent model from Affinity. There is about 300 ships under construction today. It's a massive number. But as I showed on the last graph, there's also a massive amount of new LNG coming to the market, especially from 2025-2026 onwards. So how will this market balance out? We do see Next year, volume growth in terms of exports are quite muted, while there will be a lot of ships in the market. There's more export growth coming to the market in 2025, but there's also a lot of ships. In addition, it's worth noting that About 200 of the ships in the fleet today are old steam turbine propelled ships, which are too small and very inefficient. As we have shown in our presentation in the past, about 100 steam ships are coming off charters by 2027. So these are ships that have been fixed typically 20-25 year contracts, and once they are rolling off those contracts, the charters will typically not extend those ships because of the inefficiency of the ships. So this means that we have a line here, the blue top upper line, which is the shipping balance if all ships continue to trade. Then it's reasonable to assume that some of the steamships will leave the market. It's because they are coming off charter. It's also because of the decarbonisation rules, which have come in force. And there are also new decarbonisation rules coming into force from January next year, which is the EU ETS, which is a carbon tax for shipping. So all of these drivers will drive scrapping up. And then it's a question how much scrapping will pick up. As Knut shown in his graph earlier today, average scrapping age is 40. We do think that number will come down a bit. So the dotted line here is that eventually you'd scrap 25% of the steam fleet, but eventually by 2030, I think most of the steamships have left the market. So the green line is basically reducing the 100 ships coming off charter by 2027. And then, of course, you do see that this market is starting to balancing in 2026 and then becoming tight from 2027. And if you look at our portfolio of ships, we have two ships fully open in 2027, Q1 and Q2. And then the last next two ships coming fully open is Q2 2028. And when you look at the shipping balance, the export growth, the numbers of ships and then adjust for sailing distance and scrapping, we do see that this market will be a bit loose. the 24, 25 and then starting to tighten in 26 and becoming increasingly tight from 27 and 28, which I think will give us a good opportunity to fix chips for longer contract duration at higher levels than we have today as evident from the term rates. So with that, I think we conclude with a summary of the highlights. Revenues, as I mentioned, came in high end of the guidance, 94.6 million, giving us 45.1 million of net income or 84 cents adjusted numbers where we adjust all these unrealized gains on derivatives Knut talked about, 36.1 million or 67 cents per share. As I mentioned again, all our ships are back in operation. We will only have two ships for dry docking next year. The stronger spot market will impact Flex Artemis positively, not only in Q3, but also in Q4. So we are guiding even stronger numbers for Q4 with revenues of 97 to 99 million. which means that we are well positioned to deliver on our guidance and then we will provide you with a new guidance when we are reporting Q4 numbers in February and with a good financial position, strong numbers, we are glad to once again provide a special dividend of 12.5 cents on top of the regular 75 cents, which I hope give you a very attractive return being invested in FlexLNG. So with that, I think we conclude the presentation and we pick up with some questions, Knut. So let's see what we have of questions from the audience. Thank you. Okay, let's see what we have of question, Knut.