FLEX LNG Ltd. (NYSE:FLNG) Q4 2023 Earnings Call Transcript

FLEX LNG Ltd. (NYSE:FLNG) Q4 2023 Earnings Call Transcript February 7, 2024

FLEX LNG Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Øystein Kalleklev: Hi, everybody and welcome to Flex LNG’s Fourth Quarter and Full Year 2023 Presentation. I’m Øystein Kalleklev, CEO of Flex LNG management and I will be joined later today by our CFO, Knut Traaholt, who will run you to the numbers. As usual, we will conclude with a Q&A session, where we have a gift as customary for the best question. This time, we have some nice beanies from almonds [ph] in various colors. And also a nice neck warmer to fit together with beanie. You can ask a question either by using the chat function in the webcast or you can also still send some e-mails to ir@flexlng.com and we will cover those questions in the end when we’re doing the Q&A session. Just a reminder before we begin the presentation about our disclaimer, we will provide some forward-looking statements.

There are some non-GAAP measures. And of course, there are limited how many details we can cover in the presentation so let’s kick off. Revenues for the quarter came in at $97.2 million. This was in line with the guidance provided for Q4 of around $97 million to $99 million. Net income and adjusted net income came in at $19.4 million and $37.8 million, respectively. Just a reminder, we have a rather big portfolio of interest rate derivatives, where we’ve hedged ourself against higher interest rate we are today experiencing. And in the adjusted numbers, we only include the realized gain and loss on derivatives while we take the change unrealized change in value are included in the net income numbers. But as Knut will tell you shortly, we have made rather big gains on derivatives during the last three years to a total of $116 million positive.

So this translates into our earnings per share and our adjusted earnings per share of $0.36 and $0.70, respectively. As we are now in February and heading out of the peak heating season, not surprisingly, rates are softening following the seasonal pattern where typically freight rates find the bottom at around March before starting to fire up again for the summer season. And I will cover more of the freight market in detail later in the presentation. As we have recently announced, we have got or received an extension of one of our ships, Flex Resolute. She has now been on our time charter for about two years. This time charter is for three years, where the charter — a super major has option to extend by two plus two years. And they have now declared the first option taking this vessel firm until at least the first quarter of 2027.

Then as we announced on January 8, we have redelivery of Flex Constellation either end of Q1 or in Q2. This ship has been on a three year time charter with the trading house and we will get back and we plan to carry out the dry docking of the ship before then marketer for spots, medium-term or longer-term time charters, depending a bit on the market conditions. For next quarter, Q1 which we are already way into, we expect rates to soften a bit, depending a bit on where the spot market is trading as we have one ship on a variable time charter, Flex Artemis so we expect time charter equivalent earnings of somewhere around $75,000 to $80,000 per day. Guiding also in terms of revenues and adjusted EBITDA around $90 million of revenues and $70 million of adjusted EBITDA, quite similar to the results achieved in Q1 last year.

We have two dockings scheduled for this year, last year, as some of you might recall, we were carrying out drydock in the first drydocking special survey of four ships altogether. This year, we only have two ships. It’s the Constellation which we will lock end of Q1 or Q2 depending when we get them back and then Courageous is scheduled for drydocking in the second quarter. With strong results, our very healthy backlog which I will cover shortly, we are pleased to once again pay out a dividend of $0.75 per share for the quarter. So this gives, in total, our dividend 2023, of $3 and $12.5 [ph] per share and that should give a yield of around 11%. Stock market here in Oslo is down today, our stock has recovered a bit, down 5.5%, driven a bit by the sentiment around Equinox Capital Markets Day, where they cut our dividend and Equinox is down 5%, 6% today.

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Q&A Session

And lagging on the energy sector. So hopefully, we can provide you some info and give on photon results of Flex LNG despite the kind of sell-off in the energy market here in Oslo today. So let’s review our guidance. So last year, we provided a fairly detailed guidance for the full year, given the fact we had 100% coverage for the year. So we guided on three key measures time charter equivalent which is the average rate we obtained on our ships. We guided at approximately $80,000 for the full year, delivered slightly better in Q4. That’s the peak season, $81,100 [ph] and average for the year, we ended up at $79,500, so very much in line with the guidance provided. Revenues, we guided approximately $170 million and I’m pleased to say we beat that by $1.371 million [ph] and then we guided the last measure was adjusted EBITDA of $290 million to $295 million.

We delivered $290 million and the reason why we didn’t meet the midpoint is we had some technical off-hire days last year. We have had extremely few technical days during the — yes, more than 5 years, we’ve been trading these ships but we had some last year and affected slightly on the adjusted EBITDA. Looking forward to Q1, as I said, it will be more or less similar to the numbers we delivered Q1 last year, depends a bit on the timing of the constellation docking and also how the spot market is performing but revenue so far $90 million, adjusted EBITDA of around $170 million and then our range share on the TCE achieved of $75,000 to $80,000 per day. During the last couple of years, we took delivery of the first ship Flex endeavor 9 January 2018 and then this is the ship [ph], 11 January 2018.

And then we’ve been building up the numbers of ships on the water. Last ship, we took delivery of was in, I believe it was May 30 to May 31, 2021, the Flex Vigilant. So from Q3 2021, we had all of fleet on the water generating earnings. And then we started off with most of our ships in the spot market. That really paid off in ’21 when the market was rolling a bit more challenging during COVID. And then from ’21, ’22 onwards, we’ve mostly locked in rather long charters on all of ships and stabilized both the revenues and then the adjusted EBITDA since basically all our costs are fixed. And as you can see, variability in adjusted EBITDA is very small. We had a bit of a dip in Q2 last year but that was mainly driven by the fact that we carried out talking of three ships in Q2 last year.

This year, as I mentioned, we only have docking of two ships. Looking at the fleet profile. So this backlog, I mentioned, is backed by high contract coverage. We have very limited open ships near term. This year, we are already 94% coverage on contracts. We have one ship, as I mentioned, the Flex Constellation coming back from a 3-year time charter opening up end of Q1, early Q2. And as I mentioned, we plan to dock her. That typically takes alone 20 days and then she will be available at a good period of time, I think, once we are out of the bottom of the market typically. So we also have one ship linked to the spot market by the factory has a variable time charter. It’s the Flex Artemis which is on a 5-year charter but where the charter has options to extend that contract by 5 years.

As mentioned, Flex Resolute, this extended to 2027, where there is a similar option for the sister ship Flex Courageous. So let’s see if we also add some more backlog here during the year. And then as you see, we have very limited open availability here near term. We will have a bit softer market in terms of volumes hitting in the market compared to ships for ’24, ’25. And then there’s a lot of new LNG coming to the market, ’26, ’27, ’28 and onwards. And actually, that’s a period now where contracting of ships are tailing off because of the very high ship prices. So we think we are well positioned, minimum 50 years of charter backlog. We think we will add some more charter backlog this year by a declaration of further options which could bring the total up to a total of 75 years.

And all these charters are blue-chip counterparties. Looking at dividends. So we have a stable business backed by a lot of first-class backlog and we are generating substantial cash flow. And as I’ve covered in the past, we are a very shareholder-oriented company where we do think that all these earnings belongs to shareholders and we are paying this out regularly on a quarterly basis, this quarter, we are paying out $0.75, slightly higher than the adjusted earnings, given the fact that we have our various sound financial position with $411 million of cash, no upcoming maturities, a lot of backlog and very limited CapEx liabilities since we have no ships under construction and CapEx liabilities are limited to dry dockings. And this year, we have the drydocking of two ships which should be in the range of $10 million altogether in CapEx for those two ships.

So very sound, stable business and last slide here before giving it over to Knut is, with this business, we have generated substantial returns. We listed this company almost five years ago now, June 2019 in New York at $11. We paid out almost the same amount, $9 in dividends, if you reinvested the dividends, you would do even better. And then on top of that, we have had a share price appreciation. Right now, the stock is down today. So it’s — the 280% [ph] is a bit less but still a very good return. And for those who are fan of Warren Buffett, he knows that the market in the short run, it’s a voting machine, in the long run, it’s a waiting machine and gravity tends to favor the good businesses. And as he says in this book, Snowball, Time is the friend of the wonderful business, the enemy of the mediocre.

So we certainly delivered on that philosophy. We are paying out the free cash flow. And in the Russell 2000, consisting of stocks in New York, we are in the top 2% of companies in terms of dividend payout with 11% — I haven’t calculated but probably 12% today with the stock price. So I think it’s a good time to be invested in Flex. And I will come back and give a bit more update on the market. First now, we will head over to Knut I hope you give him a warm welcome. Knut is 46 years today so it’s his birthday. So come Knut and I hope you can get yourself a beanie afterwards as well as a gift. Here you know typically, if you’re single, you go with a green beanie. If you’re not, you have red, if you undecided you have a white one. So I’m curious to see which kind of beanie you’re going to elect to have.

Last year, there was an LNG carrier which was scrapped at age of 46 years, your same age, the [indiscernible]. But he is still operating in the LNG business.

Knut Traaholt: Thank you, Øystein. I think we can hand over to the summary of the operational figures for the fourth quarter and for the full year. If you look at operating days in the second quarter, we had 77 days of hire related to the dry docking. And then we had, in the first three quarters, 19 days of technical off-hire. In the fourth quarter, we had 100% technical uptime. And that results in a technical uptime and commercial availability for the year of 99.6%. That’s a strong testament to our onshore technical and operations team and also for our crew members on board, keeping the propeller running. If we look at the time charter equivalent per day in the fourth quarter, we had $81,100. And then for the full year, $79,500 which is at par with our guiding.

OpEx for the fourth quarter is somewhat higher. That was guided on the Q3 presentation, another was mainly related to scheduled maintenance of our auxiliary engines. But however, as we guided on the total OpEx for the year, we end up at $14,400 versus the guidance of $14,500. For 2024, we guide an OpEx of $14,900 and that is mainly an increase in crew wages and some technical. That results in revenues of $97 million for the quarter and $371 million for the full year which is also as guided. An EBITDA of $76 million for the quarter and $290 million for the full year. That resulted in adjusted net income of $38 million for the quarter or $137 million for the year. And in the adjusted numbers, we adjust out unrealized gains and losses from our derivative portfolio.

And then, as you may recall from closing of our balance sheet optimization program in the first quarter, we also strip out the noncash write-off of debt issuance costs. So then looking into the more details and we’ve been through the revenues and the OpEx. Then the main differences are on the derivative portfolio. The paid interest is on par quarter-by-quarter. And then the difference is on this quarter a loss on the derivative portfolio of an unrealized loss of $18.7 million and then a realized gain of $7.1 million which is offsetting our interest cost. That gives us a net income of $19.4 million for the quarter. And if we then adjust out the noncash items, we have adjusted net income of $37.8 million or adjusted earnings per share of $0.70.

The balance sheet remains pretty much the same. We have the scheduled depreciation of our vessels and then $411 million of cash on the asset side. So we keep it very simple and that results in a book equity of $848 million of book equity ratio of 31%. And then as a reminder, these book values reflect that these vessels were ordered at a low point in the cycle and therefore, does not reflect the market value today. On the funding side, our debt portfolio, we did a complete refinancing of our fleet with the balance sheet optimization program, that was concluded in the first quarter this year or last year. And that gives us a flexible blending of both long-term leases up to 12 years for some of them. And then the traditional bank portfolio, where we have structured $400 million of our debt as a non-amortizing up to 6 years our revolving credit facility.

And when we have $410 million, $411 million of cash available that gives us a flexible tool for cash management, so we can repay the RCFs in between quarters. And then we reduced the interest rate cost and we pay 70 basis points in commitment fee. If we look at the debt maturity profile, our first maturity is in 2028 and that’s related to our bank financing. So we have a lot of headroom ahead of us and this is a very supportive financing position to be in the support of the business and our business case. We have, over the last three years, been quite active in the interest rate market. We entered into the market in with a lot of additions with long-term interest rate swap in 2021. As the interest rates have increased and we have also added more but also amended the duration profile to make use of the gains and reduce the tail end risk of this portfolio.

So today, we have a hedging of our interest to traditional interest rate swaps but also off-balance sheet items like fixed rate leases. For this year, we have an average net hedging ratio of about 65%. And then it tails off more or less equal, as you will see in the forward curve of the sofa rates going forward. We are monitoring the interest rate market pretty closely and we are looking into when to add more exposure on the tail and to increase our hedge ratio from ’25 and onwards. And that concludes the financial sector and back to you, Øystein.

Øystein Kalleklev: Okay. Thank you, Knut. So in terms of the interest rate hedging, where Jay Powell, he was on 60 minutes on Sunday and talked about the interest rate market and it seems like March will be a bit premature for cut but May is very likely and it doesn’t rule out bigger cuts down the road. So I think we have a profile of the hedging which is very much in line with a pivot from Fed within this year which we have expected and position ourselves for as inflation is starting at least to subdue a bit. In terms of the LNG market, we had another eventful year. It seems to be the case every year, ’22 was all about curtailment of Russian pipeline gas to Europe prior to the innovation and are subsequent to the innovation when we had the blow-up of the gas lines.

So this year has been a bit more calm, I would say. We have seen LNG prices migrating down to more normal levels. We did have a peak in spot LNG price last August of August 2022 of per $100 per million BTU equating to around $600 per barrel of oil. We are now down to more normal levels, $8, $9 now which means that LNG is cheap again. And when things are cheap, people tend to consume more of it. So we are now at a big discount to oil. More importantly also, we are at a huge discount to especially diesel. So this means that it’s firing up demand in new regions. And actually in longer term, it’s better to have a more sound price of the product. Otherwise, we will have demand destruction. In terms of the exporters and importers, we have a swap of the thrones.

We have China coming back, being the biggest LNG importer again after they became the biggest in ’21. They implemented Zero-COVID policies which resulted in China reducing its LNG import in ’22 of 20%. They are bouncing back in ’23 and retaking the throne as the biggest importer for the second time. Japan has traditionally been the biggest. But Japan is firing up the Nukes and also the coal power plants, they built, I believe, 40 of those since Tokushima; so we do see that Japan demand has been on the soft side. But as I will come back to, there are margination countries which is snapping up these cheaper cargoes. Last year was a year with limited new capacity being installed, although we did have a volume growth of around 3%, driven by U.S., particularly restart of Report contributed with a lot of new volumes this year.

Also [indiscernible] with fairly muted export capacity being implemented and there are some uncertainty about Arctic LNG 2. So 13 million tonnes, half of this is about Arctic LNG 2, the first train. This is operational, they are planning to commissioning it during Q1. So we’ll see how the Russians are managing to sell these cargoes, the experience from the crude markets, both oil and products seems to be the Russians are very good at finding loopholes and finding customers who are willing to buy this cargo. So this will be one of the key questions this year. But certainly, if they are moving the cargoes, they will be very mileage intensive. Fragile maritime supply chains has been a big factor. That sounds like something negative. For shipping, it doesn’t — isn’t necessarily a negative.

We thrive on efficiencies, inefficiencies means typically higher ton mileage and also maybe higher ton time. So it means you need more ships in order to shift cargoes. So we had a drought in Panama. We still have the drought in Panama, the water levels in Gatun Lake [ph]. The main freshwater supply for the canal. This is our water escalator which needs to be refilled with water all the time. The water levels are still at low level. There are still restrictions in the number of transits and this will stay in place until at least the summer when we will see whether there is a sufficient rain season in Panama to replenish those water resources. From end of the year, we had similar issues with the Suez Canal there. It’s not about water, it’s about war and Houthi rebels attacking the maritime traffic.

And today, there are no LNG carriers going through the Red Sea to utilize the Suez Canal. And of course, this has some effect on ton mileage, especially for the Qatari volumes going all the way to keep of good hope to enter European customers rather than going to shortcut through Suez. So let’s look at a bit on the export and import side. As mentioned, strong growth from U.S. actually grew 27% in Q4 and up 13% for the year, flat for Australia and Qatar the two other major exporters. Russia is the fourth biggest exporter, fairly flat volume export from Russia. There’s no sanction on LNG. There are some sanctioning by the U.S. and U.K. which are not allowing Russian cargoes. But for the remaining countries, they are happy to take this cargo and especially EU who have been boosting their imports of Russian LNG.

Malaysia, fairly flat. Algeria was one of the outliers last year, growing healthy through 2023. On the import side, as I mentioned, China bouncing back 16%, still a bit below the levels we’ve seen in 2021 prior to the COVID restriction. And now with the price of LNG being competitive, we expect China to grow quite healthy also in 2024. Japan is on a bit of a decline. And South Korea, Taiwan, fairly flat. The big other driver, if you follow macroeconomics. India has been enjoying a very long boom now. And with prices coming down to these levels, we see strong growth in India. If you look at the Q4 growth factor adding 15% for the year. So we expect this to continue. And rest of world, you see very strong growth in Q4 driven, as I said, by these low prices.

Europe, fairly flat and I will cover that in more detail shortly. So just to summarize, the big movers and shakers U.S. growing steady, Algeria, as I mentioned, Qatar are flat and Egypt, where there has been issues with feeds from Israel, given the contract in the area. They have not been — we have had shutdowns of feed gas [ph] from Israel to Egypt liquefaction plans. There’s also been domestic demand for this gas. So they’ve been exporting less than in the past. However, this is not that important for the shipping market. Egypt is very close to the main import nations in Europe. So it’s a very low ton mileage on these voyages. Heading back to Europe in Europe has been the lucky man the last two seasons. European LNG imports used to be at around 80 million, 85 million tonnes once the Russian started to reduce the flow of cargoes of gas to Europe, Europe had to turn around very quickly to get access to these LNG cargoes.

And this is mostly U.S. where you have flexible LNG cargoes. And they’ve been bidding up the price. And as I mentioned, they bid the price all the way up to $100 per million BTU, making LNG unaffordable for Emerging Asia [ph]. And — but with two winters in a row with fairly mild weather, the Europe has been able to fill up its inventories. This is also driven by what I will cover on the next slide. Demand subversion or demand destruction these kind of high prices is, of course, affecting behavior and use of LNG. So gas consumption in Europe has fallen off a cliff and it’s now shortly bouncing. But you can see on the right-hand side, inventory levels in Europe are quite healthy. We have some time still to go, usually, the kind of the heating season lasts until first of April.

So we will be drawing down this inventory. And then once we’re getting into the spring, Europe will need to fill up it’s inventory levels again in order to be prepared for the next winter. So as I mentioned on last slide, Europe has had a huge demand destruction on the gas side, driven by these high prices. Demand in ’22 was down 12%. It’s been weak in 2023 but we do see some green shoes there on the graph on the right-hand side, we have in European gas demand bouncing back, driven by the residential and commercial sector. also driven by industry. We haven’t really seen it on the power side yet. So this is something we will monitor and we do expect low prices will affect consumer behavior. Looking at Emerging Asia, as I mentioned, there is some region where we demand really bouncing back.

Japan import on the weak side, China is up but we do see some of these other countries as mentioned but not only India, Thailand, very strong growth last year. Bangladesh in Pakistan which has been forced out of the market by these high prices are now returning and buying up more cargoes. And then the big item which has been recently is the U.S. moratorium on more export licenses. So U.S. has gone to become the biggest LNG exporter in a very short time. And actually, while exports now are at around 85 million tonnes with the projects in the pipeline in U.S. U.S. is set to almost double its exports from existing projects regardless of this decision. However, it’s unfortunate that we have this situation. Europe is still in desperate need of getting access to more LNG to kind of fill the gap from the Russian curtailment.

And of course, the rest of the world is also reliant on LNG in order to force out coal. The coal consumption is huge. If we are to do something with this, of course, renewable is a solution but LNG is certainly a solution to reducing the coal consumption. So there are a couple of projects in U.S. which has been more or less ready for FID this year and we mentioned some of the big projects there, Calsius plus 2 [ph], the Sabine expansion, both auto expansion like Charles [ph] who had a license to export but which were not allowed to renew it or extend it, so they have to apply for a new one. Commonwealth, Delfin and Freeport [ph]. So all of these projects now are [indiscernible] as former U.S. politician said all politics is local, this was [indiscernible].

So this is driven by, of course, Biden, have to reach out to the votes on the green side or the left side of his party in order to secure the election coming up in November. But for this project, it’s unfortunate. We do think that they will come back again regardless of whether it’s Mr. Trump or Mr. Biden wins the election because these are huge projects which are very important for their the allies, it’s very important for economy, creating jobs and these projects are ready to go once they get this permit from the Department of Energy to export to the countries buying these cargoes. So let’s look at the maritime inefficiencies again. So yesterday, I found up a new word: Cannibalism. So this is related to the fact we have had these issues with, first, Panama Canal did what really driven down the number of transit of LNG ships going via Panama, other ships are going for a safe good cap of good hope as also the fees in order to skip the queue in Panama have reached new highs.

We were all the way to about $4 million to skip the queue last autumn or actually more winter than autumn. So this has driven ships to rather go we are cap of good hope where you also have certainty on your schedule. And then lastly, now the Suez Canal where all traffic has gone given the onshore security situation there. So this has driven up cape Routing which, of course, is good for the ton mileage and absorption [ph] of shipping capacity. A bit more details on the Suez Canal. Of course, flows in the LNG market is more or less that what is being produced in Asia is being consumed in Asia. So the Australian Projects are going typically to Southeast Asia. And so the swing factor tends to be the American volumes which are flexible in nature.

But there are still the Qatar. Qatar is a big player, Qatar is exporting about 80 million tonnes, they will grow a lot with the new expansion projects they have so they sell quite a few cargoes to Europe. And if you are going, we are — Suez, it’s a big shortcut rather than going to a Cape of Good Hope which is the case today. Let’s dig into the shipping market. So here, we have a graph of the headline rates assessment for a modern tonnage two stroke. We can see on this line, the gray one being the rates achieved last year and the dark blue the average the last couple of years and then the light blue being this year so far. So we have the seasonal softness. We have seen all the other years and then the dotted line being the future freight rate.

So we do expect to market to find the bottom. And then as usual, we will have a seasonal peak once we are getting into, I would say, August, September typically then you see we do think that we are well positioned with Constellation, doing docking in Q2 and being ready in the market once it’s ready for take-off later in the year. And we could also have some summer rallies held depending on the price structure of LNG. If there is a contango [ph] which is often the case, we will have more buildup of floating storage and constellation is partially [indiscernible] very well fitted for such a trait. Average distance I mentioned a lot of the U.S. cargo has been going to Europe. Given Europe’s desperate need to get access to LNG which has reduced the distance being sailed.

But with prices now low and more demand from Asia, also the inefficiencies since Suez, we could see a better picture on the ton-miles going forward. Newbuilding prices has gone up a lot. As Knut mentioned, we contracted ships when they were cheap. So we have been contracting ships back in ’17, ’18, paying about $185 million per ship. Ship price today have fallen a bit from $265 million to $262 million. But if you take that number, it’s an increase in the price of a ship of $80 million. We have 13 ships so that’s $1 billion in appreciation of the ships since we contracted them. So we have a book equity of $860 million or so. If you add that appreciation, you are at value adjusted equity of $1.65 billion and our market cap today is around $1.5 billion.

So we do still think we have a very good kind of net asset value, protecting all assets and also backed by the charter backlog I mentioned. So these kind of high prices on the Newbuilding side also means that you need to have a higher rate in order to defend such investment. Keep in mind, interest rates gone from zero to also stabilized now today at around 4% on long-term interest rate which means that in order to build a new ship, contract a new ship and give a rate for our long-term charter, we see that rates are at around $100,000 per day which is substantially higher than the approximate $80,000 we achieved last year. So we do think we will find good opportunities to recontract of tonnage once it come open at better rates. We have seen softness in the shorter-term rates and we actually now have a contango structure in the term rates where longer-term charters are more expensive than shorter term, reflecting the fact that we have a lot of ships for delivery this year with a bit muted volume growth on the export side but which should give us a lot of opportunities to recontract ships because, as I show on this next slide, contracting of ships is, of course, tailing off the high prices and of course, a rather big order book already means that very few people are contracting on speculation.

Out of this order book, of around 300 ships, 93% is contracted towards a long-term contract and we see a little of any speculative Newbuilding contracting at all. And we do see the number of ships for delivering tailing off which fits very well with also the export story where a lot of volumes are coming to the market from ’25, ’26, ’27 and onwards. And once we have this smart in the U.S., we have a lot of projects ready to the FID which I think will happen, where start-up of these volumes will come from ’27, ’28, 429, when we also do have quite a lot of ships open. So another thing I’ve been talking about now for, yes, close more than 6 years is the technology change. So when we contract the ships back in ’17, ’18, we contracted the new type of ships.

It’s a 2-stroke engine, it’s a super-efficient ships. It’s about 60% more fuel efficient than the old steam turbine generation of ships. Those ships were contracted typically in the 1990s into 2000 against a 20-year time charter. 20-year, maybe even 25-year time charter. And these ships are now rolling off those legacy contracts. And given the inefficiency of the ships, given the poor environmental profile of the ships. We see a few charters extending these ships. So we have about 24 steam turbine ships expected to be redelivered from a long-term contract this year, 25 next year 12 [ph]. So this replacement of old inefficient ships will result in more opportunities for modern tonnes in terms of fleet renewal by the charters. So as I mentioned, was 46-year-old ships being scrapped last year, 6 ships in total.

The year before, it was one, in ’21 when the market was super-hot, it was 7 ships. We will be into an age now where we will have double digits of scrapping of older tonnage because it’s overdue. The only reason it hasn’t happened is that these ships have been on long-term charters and not being in the spot market. And then let’s look at the export market I mentioned, a bit muted on the growth this year, given the uncertainty about Arctic LNG 2 and then from ’25, ’26, ’27 we will have a big growth of this export market. There are 70 million tonnes of ready projects also for FID, the Northfield Qatar project will, of course, go ahead regardless of what Biden is doing in the U.S. and I might even add further volumes. And then we do have this project in U.S. in limbo where we need to have a resolution on this moratorium before these projects can be greenlighted and adding further growth to the market.

So before concluding, we will come with our annual ESG report later, probably around April. So we have an annual report with a lot of measures. But we have also been part of the PA Carbon Disclosure Project, where we are filing for a lot of data and getting our score. We got our 23 results yesterday, February 6 and we’ve been ticked up from B- to B. So I think that’s a pretty good result for us, given the lean organization we have in terms of reporting on all these measures. So before we head for the Q&A session, I’m just going to repeat the main highlights. Revenues,$97.2 million, in line with guidance. We are delivering $37.8 million adjusted net income which is the most applicable number which gives our earnings per share adjusted of $0.70.

We are a bit in the softer market now which is no surprise. We will be ready for the spot market with Flex Constellation in the second quarter after we have been carried out the drydocking offer. We’re happy to have a 2-year extension of Resolute to ’27, adding further backlog to our fleet. And then we are guiding similar numbers for Q1 this year as last year, a bit softer because of the spot market affecting the variable higher time charter and then we might do some docking in Q1 or most of it, we do expect to take place in Q2. So with good numbers, healthy financial position, we are declaring a quarterly dividend, $0.75, bringing it up to $3.125 [ph] for the year and that should give a yield of, yes, it’s probably 12%, now. Okay. So Knut.

Let’s see if we have some questions.

A – Knut Traaholt: Yes. Thank you for the questions that you have sent in. And I think we start off again with Omar Nokta. And there’s a number of questions regarding the Red Sea and also Panama Canal. So from Omar, these restrictions, are they enough to offset the new building deliveries and lead to a tighter market?

Øystein Kalleklev: I think for the Red Sea, it’s mostly affect Qatar. Qatar they might get a bit short on shipping and need to relet in some ships in order to have sufficient capacity to move the Qatar volumes to Europe. So I think it depends a bit more on the trading pattern, who is going to be the major pool of cargoes this year. Is Europe going to be desperate to be the buyer of first and last sort or Europe going to stay a bit more back now and leave some more room for the Asian countries that will affect the market more. Panama. It’s never been that important for LNG. A lot of the LNG ships, the route we are — Cape of Good Hope anyway. So we’ve been frank about the fact that this year, we see a bit more ships than molecules.

But on the other hand, we also do expect that finally, we will have scrapping. Usually, people don’t scrap their ships in a good market. We have had very good markets, ’21, ’22, ’23. It doesn’t give a lot of incentives to scrap our ship but Keep in mind, when these ships are getting older and they’re already a bit outdated on the technology. Are you then willing to commit a lot of money to drydock those ships? And typically, you have to replace a lot of these older systems. So I think that will be a bit more important. I think also the price curve of gas will be important because if you have a contango structure in the price curve of gas or LNG, you will have floating storage which typically any year can take out 40, 50 ships of the fleet in kind of this contango trades.

So that I think is probably a more important driver.

Knut Traaholt: And following up on the Red Sea, the insurance rates have increased if you’re trading in that area. And also there may be other costs associated with being there. How is that affecting Flex?

Øystein Kalleklev: Yes. Right now, it’s not a single LNG ship in the Red Sea. But before everything blew up. We also had ships going through that area as the situation at that time was considered to be moderate risk for ships without a link to Israel. So — but that drove up the price of the insurance. So typically, you need a war risk insurance in order to go through that area the biggest provider of war risk is the Norwegian war risk fund. And the price we saw on the pricing of getting insurance to go through that area went up 10 times today, it’s probably a lot more but we haven’t asked for a quote because we haven’t had any instruction to go to that area. However, in our time charter, it’s basically — we are a private driver.

So we show up with our ship and crew and under the time charter, it’s the charter who is responsible for the routing and the instruction to the ships, where to trade. That also means that a charter is responsible for taking the cost associated with that trade. So if the charter elect to go to Suez, there will be a Suez tariff to pay which they will have to pocket and they will also have to cover the war risk associated with that. So that is something they will put into account when instructing the ship. The same goes with Panama if they go to Panama and they pay $3 million in order to skip the queue, we are not paying that. It’s their instruction how to trade a ship. They have to carry all the costs associated with that. And from this year, this also includes the EU ETS.

So it’s the emission trading system of European Union started to be implemented for the maritime sector this year which means that if we take a ship into Europe, we will need to buy carbon quotas for the emission associated with that trade. So typically, if you take a U.S. cargo to Europe, you will pay a carbon emission for 50% of the route because it’s one ballast leg and one laden leg. But again, this is a cost of the trade. We pass this cost to our charters as they are the one deciding where the ship goes. And of course, this has created us some issues in relation to the Red Sea because journalists, they typically ask you, how are you sending a ship to the Red Sea. But under a time charter and every single voyage in LNG shipping is a time charter.

Regardless if that’s a spot voyage or short voyage, a term charter, it’s a time charter. And under a time charter, charter is one instructing the ship. We will have to follow then those instructions. We have a contractual obligation to do so. However, in our standard time charter there is certain provision in relation to safety. So the master has to assess the situation together with us, whether it’s safe to comply with those instructions. If it’s not then, of course, we can reject. But that also opens you up to litigation. What is safe and what is not safe, it’s a bit of ambiguity and we rely on advice from outside advisers as well as the people writing the war risk insurance in order to make that assessment.

Knut Traaholt: And while we are at cost, there’s a question here on demand for crew with the big new order book and deliveries of new building in the coming years? How do you see demand for crew and the situation for Flex?

Øystein Kalleklev: It’s a very relevant question because top of my head, that was about 1.6 million seafarers in the world. A lot of this used to be Russian crew which these days, there are certain restrictions on those and a lot of that crew base where LNG offices so that means it’s — you need to replace, in some instances, that crew because you might not be able to pay them. So that has also created some issues. We have Ukrainians which is also a maritime nation, where a lot of Ukrainians have elected to rather stay at home and fight the war rather than being at sea. So yes, it’s not that easy. However, LNG business is maybe the most technical, sophisticated part of the shipping industry, maybe together with container ships.

So that means you will typically always be able to attract talent for this business which means basically, we need to poach people, the best people from the tanker space or the LPG space. So basically, you’re passing on the problems. And at the bottom of the sector, you typically have small by bulk. So the — you’re cascading the problem down and yes, it’s getting harder to get people. LNG will always be able to find people but these are sophisticated ships. You cannot let everybody just run these ships because there’s a lot of technology in these ships. So it’s getting harder. We are able to do it. We try to retain our crew. We try to be a good employer so that people want to sail with Flex LNG.

Knut Traaholt: And we have questions from BTIG and it’s related to Flex Constellation and the rechartering options and alternatives and what your preference?

Øystein Kalleklev: This is Greg?

Knut Traaholt: It’s Greg.

Øystein Kalleklev: Good to see you, Greg. Regarding chartering opportunities, let’s see. We need to get a kind of firm redelivery date and — but our plan is to — once we get that back to Docker and marketer, we already been around talking to people. We — if we have a contract, we would, of course, announce that. So given the nature of this business and the name of the company, we are flexible, we are open to do shorter, longer, medium term. We really need to see what is the economics? And then if it makes sense, we are open to fixed loan. But if we don’t get the numbers we want, we are happy to trade the ship back again in the spot market. We’ve been out of it for some time now. And we — I have to say, we missed action. But that we are super comfortable with that. We’re 94% coverage for this year. So we can afford to have our ship in the spot market. If we deem that to be more attractive than finding a term deal.

Knut Traaholt: Then there’s a number of questions on EU ETS [ph]. How are we prepared? How is that — is there any cost for us?

Øystein Kalleklev: Yes. I think I’ve already covered it, it’s part of the time charter logic. So the charter in structuring the — if they’re instructing the ship to go into EU, that is associated with cost of trade which is the EU ETS. So we have amended time charter to where kind of we will typically — either they will buy the carbon quota and surrender them to us and we will surrender them to hear or we buy them for the charter and send them a bill for those carbon emissions and then surrender to EU. For us, it’s not a cost, it’s a pass on to the charters. And of course, in the end, they need to pass that cost to somebody and that is miss of [ph] Consumer. So there’s no tax without any cost. So in the end of the day, it’s the consumer paying this tax, not us.

Knut Traaholt: Then we’re segueing over to business development and capital allocation. So maybe we’ll start with the growth questions, how do you plan to grow Flex LNG beyond the 13 vessels?

Øystein Kalleklev: We had this question now for some time. We’re looking at the market but we are stewards of the shareholders’ capital, if we contract the ship today, if we’re super lucky, maybe we get a ship in ’27. But the slots availability are now getting into ’28. So that means that we are spending, let’s say, $262 million today to get a ship in ’28. So we are not seeing that money for four years. It’s not the price, it’s not $262 million because we need to have supervision we might need to draw a loan a building loan with a bank which needs an interest rate. Interest rate is 4%. They might want a margin, 2%, so that’s 6%. So once you’re taking that into account, the cost of that ship is not $262 million, it’s maybe $285 million or so.

That means — is that a better use of cash than paying dividends? So far, we haven’t been convinced that it’s better to spend that much money on new ships. So we’re rather focused on the ships we have. We have one ship now we or open in Q2, we have Flex Ranger fully open in ’27, we might have some ships open in ’28, ’29. So why not focus on the ships we have open ’27, ’28 rather than slashing out all this money on new ships. So we are not there to pursue growth because Knut and I can be happy with having a bigger fleet. number 1, number 2 and number 3 focus is return on equity turn of that money to shareholders through dividends and we’re not going to pursue growth just to be big. We’d rather be big on dividends.

Knut Traaholt: And there’s a question related to that on paying dividends versus buying back our own share. How do you look at share buybacks?

Øystein Kalleklev: Yes, we have done it in the past. So we did this — was that end of 2020 into ’21? So we bought back about 1 million shares at that time. Of course, we deemed it very attractive and haven’t — have to check the stock price after the webcast and see. So we’re open to do that. If we feel the stock is getting too much suffering because of sentiment, we might elect to buy back some shares for sure. So we’re open to that could be an alternative, not ruling it out. But for this quarter, we are focused on paying our dividend and let’s see what happens. It really depends on where we see the best use of the company’s cash.

Knut Traaholt: And you mentioned growth for Newbuildings. Richard Diamond from Castowood [ph] Capital asks, is there any room for industry consolidation? And would you consider a nav-to-nav acquisition?

Øystein Kalleklev: Of course, we have said for many, many years, we are certainly open for consolidation. We think there is a lot of consolidation opportunities because it’s quite fragmented on the owner side, a lot of actually the vast majority of LNG shipping companies are private, very few in the public domain. So we think it could make sense to have a bigger public vehicle, make it more relevant and interesting for especially bigger institutional shareholders. But we don’t want to go to bed with strangers, we want to go to bed with people we share the same values, philosophy, ethics and also the fleet in terms of having a modern efficient fleet. We don’t see any value in merging with somebody who has a lot of tonnage [ph]. So we need to find all those parameters so that we can have a marriage rather than a night stand.

Knut Traaholt: And then a question on reinvestment in the existing fleet and then particularly on air lubrication system. Is it technical possible? Is it economically sensible to do that?

Øystein Kalleklev: Yes. Air Lubrication has been something that have been coming up the last couple of years. So just to give you a highlight of what that is. It’s basically you are putting a compressor on ship and you’re making small holes under the hull and that compressor is taking and compressing it and creating bubbles under the hull. So the theory behind this is these bubbles under the hull is going to reduce the draft when you are going through water. Of course, ships are going through water, it creates a lot of resistance and if you can reduce that drag, you could potentially then either say fuel or reduce or increase speed I think for our ships, they are very modern and efficient. So we looked at it when we contracted, we weren’t totally convinced and as far as we understand, we did the right choice because the first generation of air lubrication system has not lived up to the promises.

The makers of these systems are saying that the second generation is a lot better. Let’s see when we get the data. And a lot of ships today are being built with this system on our ships because the efficiency of the engine is like 50%, 52% terminal efficiency. That means that on a natural boiler speed, we still had a very high speed of 17.5 to 18 knots. So we don’t really need more speed. If you add this, it might go. And then — but you also need to utilize natural boiler speed. So putting this on and getting like a turbo from going from ’18 to ’19 doesn’t really make a lot of sense. On older ships, it could make sense as part of your strategy to improve your carbon emission indicator because your ship then, if you have a tri-fuel or so, if you have a speed of 15 knots and you need to force boil off in order to go quicker.

If you’re adding this, you get higher speed. So then it makes more sense to put it on an older ship However, on older ships, you might not want to invest that much money because it’s less technical efficient. But that said, we’ve seen this happening also on the retrofit side. It’s quite easy to retrofit the air lubrication system. We’ve seen it on our 10-year tri-fuel recently, where they put this on while she was doing a 10-year special survey. So it’s open but we are not considering at the moment. But down the road, the price of carbon is continuing to increase if the carbon emission system is worldwide, where you have to pay for it and you get a more monetary incentive to reduce emissions, then we might consider it. But certainly not before the ships are doing a 10-year special survey.

Knut Traaholt: I think we’ll round off with the last question and that’s more of the tips to retail investors that want to follow the daily development in the LNG spot rates. And the question is if the BLNG 2 [ph] on Baltics quoted on CME. If that is a good proxy for our open positions or other?

Øystein Kalleklev: Yes, it’s a bit of a problem is that there’s very limited data on freight rates for LNG. It’s a bit of a niche market. It’s a hell of a lot easier to follow the dry bulk in the tanker market because there’s a limited. There’s very many sources for that kind of spot data. I would say that you can go to the CME, either you get the freight derivatives. You can see the kind of the forward freight market for a couple of different routes. So the Baltic LNG is a good source. You also have Spark which is a provider I follow them on Twitter or X. So that’s also a good source to get the data on the spot market. Fernplus.com by Fernlea [ph] is also a good source for rates on several of the segments, Rival Tankers, VLGC, LNG, although they only quote on that page as far as I know, spot rates for high fuel ships which are a bit more inefficient than those ship.

So I would use all of those and if I come up with some better sources, I’ll come back to that and maybe we could even make a link on a page. But a good source is to follow Sparks on they are regularly giving an update on the rates.

Knut Traaholt: And that is for the two stroke? Or is that for?

Øystein Kalleklev: They have both for all the tri-fuel ships and the two strokes yes.

Knut Traaholt: That concludes the Q&A.

Øystein Kalleklev: Thank you, Knut. I hope you have a good birthday celebration today. And thank you, everybody, for listening in. We will be back in May with the Q1 numbers and give you an update on the company and our results in relation to the guidance provided. And if you are fond of dividends, don’t miss out on the advanced gas [ph] Valentine’s Q4 presentation, next Wednesday, 14th of February. Okay. Thank you, everybody.

Knut Traaholt: Thank you.