Flex LNG Ltd. Q2 FY2021 Earnings Call

Thank you for joining today's Flex LNG webcast for our second quarter results. I’m Øystein Kalleklev, CEO of Flex LNG Management, and I’m here with our CFO, Knut Traaholt, who will go over the numbers in more detail later in the presentation before we open the floor for questions. If you have a question, feel free to ask via teleconference or in the chat. On the cover page, we feature a picture of our latest vessel, Flex Vigilant, our thirteenth and final ship for delivery. It was delivered as planned on May 31 and immediately started a three-year time charter with Cheniere. I will elaborate on that shortly. Before starting the presentation, I want to remind everyone about the disclaimer regarding forward-looking statements, non-GAAP measures, and completeness. Please read this presentation alongside today’s earnings report. Now, let’s move to Slide number 3. The LNG market is thriving, and currently, we believe the LNG prices are quite high. Asian spot LNG prices, known as JKM, are around $17 per million Btu, marking the highest seasonal price in nearly a decade, which corresponds to an oil energy equivalent price exceeding $100. For context, Brent oil averaged $99 per barrel back in 2014 when we saw similar LNG prices. LNG prices are considerably above oil prices at the moment. Meanwhile, European gas prices are at historic highs, with TTF exceeding $15, driven by high carbon and coal prices alongside low gas inventory levels. We have noted previously that low gas inventories would be a strong driver in the gas market this year. Therefore, with cargo prices ranging from $60 million to $70 million, there is substantial capacity to pay premium rates for freight. However, the second quarter is traditionally the weakest quarter of the year, and this year is no exception. This is due to the transition from winter, resulting in lower gas demand in Q2 when heating requirements decrease before cooling demand picks up. Additionally, we often see more newbuilding deliveries early in the year, which has been true this year. We have welcomed the last three of our newbuilds, with the final delivery, Flex Vigilant, taking place on May 31. We’ve completed an approximately $2.5 billion investment program and now operate 13 state-of-the-art LNG carriers, all generating revenue. In our first quarter presentation in May, we shared our strategy of utilizing a strong freight market to enhance employment visibility and reduce freight exposure risk. We recently secured favorable term contracts for six, possibly seven, of our vessels, ensuring about 20 years of minimum fixed hire employment for six of them. Despite the challenges related to the COVID-19 pandemic, especially concerning crew changes, inspections, and services, our operations have maintained excellent safety and performance. The Delta variant has posed additional operational challenges, particularly in Asia, where vaccination rates are lower than in the U.S. and Europe, making crew changes more difficult. Nevertheless, I’m pleased to report that we’re diligently working on minimizing overdue crew members, maintaining 98% of our crew on time, with no personnel exceeding 30 days overdue. I want to thank our seafarers and onshore staff for their outstanding work despite these challenges. Financially, we generated revenues of $65.8 million in the second quarter, consistent with our guidance of approximately $65 million. Our time charter equivalent earnings for Q2 were $57,800, and the year-to-date figure is $66,300, representing healthy earnings. In Q2, our adjusted net income, which accounts for changes in the value of our interest rate derivatives, stood at $15.7 million or $0.29 per share. This brings our adjusted net income for the first half of the year to around $50 million, which is about $10 million higher on a normal GAAP basis, a result we are quite satisfied with. Despite increasing our dividend to $0.40 in Q1, taking delivery of newbuilds, and repurchasing some stock during the quarter, our cash reserves grew by $5 million to $144 million at the end of the quarter. This is a liquidity position we find very comfortable, particularly given how we have mitigated business risk by building a profitable backlog. Therefore, the Board has decided to maintain a dividend of $0.40 for Q2, yielding slightly over 11% on an annualized basis, despite our stock trading lower today for reasons we find unclear, given our solid performance in line with guidance. Our stock continues to trade below both book value and replacement value, despite all vessels being operational, and we find it prudent to continue our buyback strategy. So far, we have repurchased 900,000 shares at an average price of $9.2 per share since initiating the buyback program last November. Given the recent improved outlook and backlog, we have increased our buyback threshold from $14 to $15 per share. Now, looking at our contract portfolio on Slide 4, we currently have three vessels under variable hire contracts, meaning their earnings are linked to the spot market. Flex Artemis is under a long-term TC with Gunvor until Q3 2025, with options for extensions. Flex Enterprise and Flex Amber are also on variable hire contracts, with Flex Amber recently extended by one year, with redelivery now expected in Q4 next year. Turning to our fixed hire time charters, Flex Freedom is under a shorter-term TC expiring in Q1 next year, but we have secured fixed contracts for our vessels with minimum periods of either three or five years. Flex Constellation was chartered to a trader in May for a minimum of three years, and Flex Endeavor, Flex Vigilant, and Flex Ranger are fixed to Cheniere for periods ranging from 3 to 3.8 years. All these vessels have now been delivered to Cheniere, which may also add more ships on a 3.5-year time charter next year, with the possibility of adding one additional ship, bringing the total to five. For illustrative purposes, we have assumed Flex Courageous and Flex Aurora will be vessels four and five for Cheniere, but we have the flexibility to nominate performing vessels. Flex Courageous was fixed on an 11-month short-term time charter in April, and we expect its return at the end of Q1 next year. Flex Aurora and Flex Resolute were recently extended for six months, with the charter rates for these optional periods significantly higher than during the initial firm period. Flex Rainbow was secured on a 12-month time charter starting in Q1 this year, with an option for the charterer to extend it later. Finally, we have Flex Volunteer operating in the spot market, which we believe will be attractive, as I will detail later in the presentation. With our comprehensive contract portfolio, our charter coverage for the year stands at 96%. However, as highlighted, earnings for four of our vessels are dependent on the spot market, meaning our earnings in the second half will be influenced by how the spot market performs. The graph shows that our charter coverage remains strong for the next couple of years, ensuring more stable earnings than in the past. On Slide 5, regarding guidance, revenue expectations remain similar to our previous presentation, with variations based on the four ships linked to the spot market. We’ve listened to analysts' requests for grid lines on the graph to aid their work. We anticipated revenues of around $65 million, down from $81.3 million in Q1, and actual revenue reached $65.8 million with time charter equivalent income at $64.9 million after deducting voyage-related expenses. As noted, Q2 tends to be our weakest quarter, and we expect revenues to rebound in Q3, projected to be around the same level as Q1, approximately $80 million. Q4 revenues will have more variability as predicting spot rate fluctuations in the winter is challenging. However, we anticipate Q4 will again be our strongest quarter, a typical trend in LNG shipping, save for this year’s Q1 due to prolonged cold weather, which pushed our TCE numbers slightly higher. As all our vessels are now operational with fixed costs around $45,000 per day, any $1 increase in revenue translates into a $1 increase in free cash flow, directly affecting our dividend capacity due to our substantial liquidity position. For a rough estimate, a $1,000 increase in charter rates would boost our annual cash flow by nearly $5 million. On Slide 6, discussing dividends, we have completed our investment program, and while future investments in new ships may occur, currently, we have no immediate plans. Over the past 3.5 years, we focused on delivering modern, large LNG carriers, representing an investment close to $2.5 billion. Our primary aim during this period has been to secure financing and attractive contracts for these vessels while assembling a skilled management team for in-house technical support. As we transition into the next phase, we intend to gradually increase our dividend in alignment with our cash flow growth. In November, we became optimistic about the prospects thanks to lesser COVID-19 concerns and a rebound in LNG demand, leading us to reinstate our $0.10 dividend and initiate a share buyback. Our outlook proved accurate, generating significant cash flow in Q4 with an adjusted EPS of $0.45, allowing us to raise the dividend to $0.30. This Q1 saw an adjusted EPS of $0.64, prompting another hike to $0.40, a level we aim to maintain for Q2. Therefore, our dividend coupled with the buyback equates to a payout ratio of 96% over this 12-month period, during which we have also taken delivery of seven newbuildings with associated capital expenses. Despite these developments, our cash balance has consistently increased, now totaling $144 million, our highest ever. As we projected, revenues are expected to climb in the second half of the year, and with fixed costs, this will significantly raise our free cash flow and dividend capacity. We do not operate under a formal dividend policy, such as paying out 50% of EPS or maintaining a minimum dividend level. Our dividend philosophy aligns with that of our affiliated shipping companies like Frontline, Golden Ocean, and SFL, which share a strong capital market track record. When evaluating the dividend level, we consider various factors, with earnings being the most straightforward. Our adjusted earnings serve as a solid proxy for free cash flow, although working capital adjustments may occur from quarter to quarter. Generally, our working capital needs are minimal, as charters pay hire in advance, resulting in a negative working capital position. Additionally, market outlook influences our dividend decisions, as does the confidence in our assessment. A stronger backlog allows for easier future predictions, and with 96% of our book covered and significant backlog secured for the next couple of years, this plays a crucial role in our dividend considerations. We also evaluate our financial position, with liquidity at an all-time high, exceeding twice the requirements of our financial covenants under bank loans. Our covenants are manageable, requiring book equity above 25% of total assets, which is currently around 34%. We must maintain liquidity above $25 million and comply with net debt requirements, so we easily meet these tests. Having completed our newbuilding deliveries and secured long-term financing for all vessels, debt maturities and capital expenditures are not a concern, particularly as we have not issued any bonds. Other considerations include potential market risks from major events, such as financial crises or pandemics. Currently, the Delta variant and its potential mutations are the primary concerns. We aim for steady growth, similar to author Matthew McConaughey’s journey in his book "Greenlight." We expect improved revenues and earnings in the latter half of the year, along with broader vaccine implementations, which will positively impact all parameters. Our approach to dividends is well-considered, ensuring alignment with our shareholders. We believe our free cash flow should benefit our shareholders, not be utilized for management expansion. With that, I believe it's a good time for Knut to delve into the financial details, and I will return shortly with a brief market update.

Thank you, Øystein. Let's move to Slide 7. Since the second quarter of last year, we have more than doubled our fleet because our newbuilding program is now complete. Flex Vigilant was delivered at the end of May, providing 30 days of availability during the second quarter; therefore, we reported earnings from 12.3 vessels in Q2. As a result, Q3 will be the first quarter where we fully utilize our fleet of 13 vessels. Now moving to Slide 8. As Øystein mentioned earlier, our time charter earnings for Q2 were $57,800 per day, down from $75,400 per day in Q1. This decrease is due to the usual seasonal dip in Q2, which affects our earnings from vessels trading in the spot market and those on variable hire contracts. Looking ahead to Q3 and beyond, we will start to integrate more long-term contracts that were established in Q2, thereby lessening the seasonal effects we saw in Q2. The time charter earnings for the first half of the year were strong at $66,340 per day, significantly higher than the same period last year. Our operating expenses were influenced by additional costs related to COVID-19, particularly concerning crew changes in Asia. Over the first six months, our operating expenses averaged $13,600 per day, with around $500 per day attributable to COVID-19. Thus, our underlying operating expenses remain within the targeted level of $13,000 per day. As Øystein noted, we are still facing difficulties with crew changes, particularly in Asia, along with increased lubricant prices and general supply chain issues affecting spare parts deliveries. Consequently, we anticipate some fluctuations in operating expenses in the upcoming quarters due to ongoing travel restrictions and quarantines impacting our operations. Gross revenues for the quarter reached $65.8 million, consistent with our quarterly guidance of $65 million. Adjusted EBITDA was $47 million, with an adjusted net income of $15.7 million and adjusted earnings per share of $0.29. These figures account for a $2.8 million loss on interest rate derivatives, including an unrealized loss of $1.1 million. Quarter-to-quarter, our results are down due to the seasonal impacts in the second quarter compared to a very strong first quarter. The figures from the first half reflect the financial effects of our increased fleet size and the potential earnings it represents. Regarding financing, interest expenses have slightly increased, reflecting a full quarter of interest on the debt associated with Flex Freedom and the loan related to the delivery of Flex Vigilant. Moving on to our balance sheet, which looks straightforward following the delivery of our most recent newbuilding. On the asset side, we have $144 million in cash and vessels valued at just under $2.4 billion. Changes in cash will be elaborated on in the next slide, and the increase in book value is due to the delivery of Flex Vigilant in May. On the liability side, we have around $1.6 billion in long-term debt from international banks and financial institutions. This increase in debt is associated with the previously mentioned loan drawn for the delivery of Flex Vigilant. Our book equity stands at $152 million, which is nearly $100 million more than our market cap, despite our vessels being valued much lower than current newbuilding prices. Now, let's look at Slide 9. Even in this seasonal low quarter, we achieved a positive cash flow of $5 million. This result stems from approximately $30 million in operations and $17.6 million from working capital adjustments. Since we primarily operate on a time charter basis, we receive charter hire in advance, which benefits our working capital. Debt amortizations were $13.2 million, with Q2 and Q4 showing lower amortizations due to our ECA financing having a semiannual repayment schedule. During this quarter, we distributed $21.3 million in dividends and invested about $400,000 in share buybacks under our program, acquiring 27,344 shares in total during Q2, resulting in a robust cash position of $144 million at the quarter's end. Now, let’s move to Slide 10. This slide is familiar from previous quarters but still relevant as we have secured attractive long-term financing for our vessels, with no maturities due until Q2 2024. Our debt consists of a diverse mixture of bank loans, ECA financing, revolving credit facilities, and leases, which provides us with a very stable funding situation. I will now hand it back to Øystein for an update on the market.

Thank you, Knut, for the financial overview. I hope life and shipping seem more positive than in banking. Looking at Slide 11, we reference the relationship between the U.S. and China, a term introduced by Harvard Professor Neil Ferguson. In our Q1 presentation from May, we began with an overview of the LNG market, noting how Asia was drawing cargoes away from Europe. This shift from European to Asian demand is beneficial for the freight market as it increases sailing distances, with many of the additional cargoes sourced from the Atlantic Basin, often from flexible U.S. shipments. This trend persisted into the second quarter. The U.S. led the growth in exports, while China, Japan, and South Korea were the top importers fueling demand. Additionally, we saw remarkable growth from South America, particularly Brazil and Argentina, this year, while European imports have decreased compared to last year. It’s fair to note that European imports were elevated last year due to buyers accumulating cargoes for storage following a decline in demand due to COVID-19. Overall, export volumes in the first half of 2021 increased by about 4% from last year. We anticipate a rise in oil activity in the latter half of 2021. The aftermath of COVID-19 caused gas prices to plummet, leading to approximately 180 U.S. cargo cancellations, most of which occurred in the third quarter of 2020. Consequently, the export volumes in the first half of 2021 are 8% higher than those in the latter half of 2020. With the current elevated gas prices, which I’ll discuss shortly, there have been no cargo cancellations this summer, and we don’t foresee any. We expect export volumes to grow by around 10% or more in the latter half of the year, summing to an annual growth of approximately 25 million tons, or about 7%. The consistent growth in the LNG market this year has caught many off guard; the volumes align closely with our market projections from our Q3 report last November. We believed that significantly higher gas prices, both spot and future, would lead to strong volume growth for 2021, as there would be limited incentives to repeat last year's cargo cancellations. Furthermore, we also predicted that Egypt would return as a significant LNG exporter, which it has, exporting 4 million tons this year versus only 1.5 million tons in 2020. Moving to Slide 12, which covers European inventories. European gas inventories have become a regular feature of our presentations. As we highlighted in our December 2020 presentation, the robust demand from Asia at the end of 2020 into 2021 has diverted cargoes from the Atlantic Basin and European buyers, causing rapid depletion of gas inventories in Europe. As shown on the last slide, this demand from Asia has continued into 2021, putting pressure on Europe at a time when gas demand is strong due to a long, cold winter, compounded by high coal and carbon prices prompting a switch from coal to gas. Additionally, Russia has chosen not to increase pipeline flows through Ukraine beyond the minimum agreed levels, and growth in Norwegian gas supplies has also faced setbacks due to deferred maintenance last year stemming from COVID-19. Consequently, European gas inventories remain low, and Europe is likely to enter the winter with significantly lower storage levels than in the past two winters. Recently, we’ve observed intense global competition for gas. During this period, European gas prices have served as the global benchmark, with a strong correlation between European and Asian gas prices, though Asian prices are slightly higher due to increased shipping costs. Low gas inventories have also heightened the likelihood of volatility in gas prices, especially if Europe experiences another cold winter that could rapidly deplete inventories. With a 70% probability of another La Nina winter, according to NOAA, we may face sharp fluctuations in gas prices this winter. Transitioning to Slide 13, discussing the freight spot market. The freight market surged at the beginning of the year with record high freight and LNG prices, although the situation softened from those elevated levels following a warmer February in Asia and significant new ship deliveries at the start of the year. As indicated in the graph on the right side, vessel availability surged in February, particularly in the Pacific, and somewhat in the Atlantic due to increased fees in the U.S., leading to temporary curtailments in LNG exports. However, the seasonal downturn was relatively mild, with the market rebounding by the end of April. We began to see signs of recovery in March, with ballast bonus sentiment hitting its lowest point in week 9 and rates starting to rise in week 11. Since our May report, freight rates have fluctuated between $70,000 to $90,000 per day for modern vessels. Major charters have generally taken long-term tonnage followings a wave of term business this spring and summer, resulting in many spot fixtures being released. However, this released tonnage is typically only available for a short duration, as charters prefer to retain control over ships during the peak winter season. We are now nearing the time of year when spot rates typically increase, and market expectations are for much higher rates, as indicated by the one-year time charter rate, which I will discuss on the next slide. In Slide 14, we look at the one-year time charter market. This rate, a good indicator of future spot market earnings, has remained consistent for the past four months. For most of 2020, the one-year time charter rate was about $60,000 per day, and held steady at the start of 2021 until a positive turn in market sentiment in April. Since then, the rate has nearly doubled, currently at $115,000 per day for modern tonnage as quoted by Fernley's. This reflects market participants' expectations for rising spot rates, showing a willingness to pay a premium for one-year spot risk, even more so for six-month periods. As LNG prices have increased, the benefits of large, fuel-efficient ships are becoming more pronounced. The difference in daily rate between MEGI XDF ships, with about 174,000 cubic meters of cargo capacity, and standard 160,000 cubic tri-fuel ships, has now reached $22,000. With current LNG prices, the savings from using modern tonnage with a higher cargo capacity could lead to even wider spreads. Additionally, the strong one-year time charter rate is pushing up longer-term charter rates, with both assets and affinity quoting three-year rates at $90,000 per day. This is not surprising considering that the lead time for LNG carriers is about three years. Meanwhile, newbuilding prices have steadily risen to around $210 million, necessitating higher rates than a year ago. To illustrate, if one were to replicate Flex LNG today with new builds, the expenditure would total around $2.7 billion in capital expenditure, with an additional $30 million for building supervision, assuming similar debt levels as Flex, about $1.5 billion net debt with approximately $20 million in financing fees. Building up the organization would also require raising about $1.3 billion in equity to fund the investment. If we maintain a share count similar to Flex LNG, this would translate to an acquired equity price of $24 per share. However, making this investment in our new Flex LNG at that price would yield no return before the delivery of ships, likely in 2024 and 2025, resulting in missed dividends that would be available if one were invested in Flex. Finally, shifting to Slide 15, gas prices have been on a bullish trend since bottoming out last summer. As mentioned earlier, we believe they are currently somewhat too high. The market has flipped from oversupply to undersupply within a year. LNG proved more resilient than other energy sources last year, being the only energy source, aside from renewables, that saw growth. With the recent surge in demand for gas, which complements renewables, there hasn't been enough supply, driving prices higher. At present, the Asian spot price, JKM, is around $17, while its European counterpart, TTF, is at approximately $15 per million BTU. The spread between European and Asian prices is favorable, further encouraging cargoes to flow to Asia and is expected to widen this winter, as we anticipate congestion in Panama creating longer voyages for shipments heading to Asia. While future prices have historically shown mixed success in predicting spot prices, current future prices indicate a strong market. Winter JKM prices have actually exceeded the levels we witnessed at the beginning of the year, when February contracts averaged around $18, peaking at $32.5. Therefore, expectations are for sustained high gas prices during winter, with a gradual return to normalcy by mid-2023, aligning towards typical oil-linked pricing at about a 25% discount to oil parity. This aligns with our expectation of significant new LNG export volumes ramping up from 2024 onward. Most importantly, we need LNG prices to remain high enough, with a positive spread between U.S. prices and the higher Asian prices compared to European prices, which is certainly the case today. Slide 16; the order book. As the term market has been very active recently, the number of available ships is declining; and today about 80% of the ships on order is linked to our long-term charter. And where we expect that more uncommitted ships will be tied up on term charter prior to delivery, if not already has such announcements are very often delayed. Newbuilding orders have picked up recently but with new building prices above $200 million, there are very few speculative newbuilding orders as illustrated ahead. We have discussed in great length in the past, the implication of new decarbonization rules for all ships or EEXI as it's called and there is undoubtedly a lot of new buildings set for delivery which will replace older tonnage, particularly the older inefficient steam generation of ships. With the EU deciding to add shipping to its carbon trading scheme will further put these ships at a disadvantage compared to new modern tonnage as the new generation MEGI-XTF ships have a carbon footprint or units of cargo of close to 60% less than the steam generation. However, keep in mind that Europe is only about 20% of the LNG import demand. Asia is the big import region where we also see more or less all the growth going forward. It could be that some of the less efficient ships are therefore doing short haul intra-Asia unless similar mechanisms are put in place in that region. The European carbon tax will be applicable for ships trading intra-Europe. If the ships are bringing imports from outside the European emission trading area, half the voyage will be applicable for carbon taxation in Europe. The carbon taxation will ramp up from 2023 when 20% of applicable emissions will be taxed. This level increases to 45% in 2024, 70% in 2025, and finally from 2026 and onwards, 100% of the applicable emissions will be taxed. Slide 17; COVID. Despite recent progress on COVID, this remains a big challenge for the shipping industry. While vaccination rollout has rapidly increased in Europe with Europe surpassing the U.S. in vaccination levels, vaccination levels in other parts of the world remain low, and there are questions whether all vaccines have similar efficiency against the Delta variant. Only about 20% of LNG cargoes end up in Europe as mentioned, while about 3/4 end up in Asia; so vaccination level and restriction in Asia is just of more importance to the LNG industry. Because of the lack of vaccine rollout in Asia, crew rotation remains very difficult to carry out in this region. We are, therefore, still meeting a lot of obstacles carving out true changes. Nevertheless, we walk out to minimize the share of seafarers, which our overview on the context. I think our onshore personnel and crew have done a remarkable job in this regard with 98% of our seafarers being on time. So once again, thanks for your hard work. Vaccination levels of seafarers are also mixed. Our big share of our crew are Filipinos, and for them to get access to vaccines is proving more difficult than in the West. With us trying to take every advantage of vaccination of crew whenever possible. And we are glad to see that the U.S. allows visiting seafarers to be vaccinated when calling U.S. ports and terminals. And this is something we have done for several of our ships now. Most recently, Flex Rainbow, where on August 4, we were able to vaccinate 19 of our crew members when we loaded our cargo at the Freeport terminal. By doing so, we increased our crew vaccinated to 23 out of 26 being fully vaccinated with one crew member being partly vaccinated. However, in order to organize vaccinations, we need to call ports where such vaccines are available, and we do hope more countries can make vaccines available to seafarers as seafarers are key workers. Without shipping, about 90% of good transportation will dry up and then everybody will feel the pain. So let's summarize today's presentation. Revenues of $65.8 million, in line with guidance. Coverage for 2021, the next couple of years is great, although we keep exposure to the spot market through four ships as mentioned. The dividend maintained at $0.40, but upside here in the second half of the year when we expect revenues to bounce back after the usual seasonal low point in Q2. All our ships are on the water and all of our ships are now on higher. We are positive to outlook, other term and long term. And finally, our balance sheet is in great shape with a big cash pile enabling us to do this with our free cash flow. So that's it, I'm happy to take some questions. So let's open up, operator.

Okay, we will now take our first question from Randy Givens at Jeffries. Your line is now open.

Hey gentlemen, how's it going?

Hi Randy, good you can make it. I was thinking maybe you were busy with some workouts.

Yes, yes, finished those earlier, but a long-time listener, first-time caller. I guess two questions. One, on the share repurchase minimum level or maximum level. The last couple of quarters, you increased it by $2 a share this quarter by $1. Kind of what was the thinking of that to $15? And where do you see your current NAV?

Yes, that's a great question. I've already addressed your inquiry about the NAV with my rough estimate of the cost to develop a new Flex LNG. It would likely require around $2.7 billion for the ships, plus additional costs, and if you had to issue stock at $24 while missing out on dividends. I believe the NAV is significantly higher than our book value of approximately $16. If you're investing $210 million in ships, the NAV should exceed $20. However, analysts may have varied estimates. From what I've seen from analysts today, their projections seem to align with that range. Regarding buybacks, the decision for a certain price level stems from our plans to secure financing for all the ships in November, which gave us confidence to initiate a buyback program. I've mentioned that our stock has been undervalued for a while, similar to Black Friday prices, prompting our action. At that time, the stock was trading around $7 or $8, so we set the buyback threshold at $10. As conditions improved and the share price rose, we adjusted it to $12 and then $14. Currently, the stock is trading close to $14, leading us to raise it to $15, allowing us to purchase shares during market downturns. It's important to note we have our primary shareholder, the John Fredrikson family, who holds about 47% of the stake, which limits our buyback aggressiveness. Nevertheless, we believe it's reasonable to raise the threshold to $15 for strategic buying opportunities when the stock performs poorly. Overall, while we prefer to pay dividends, we aim to balance both strategies and believe there may be an opportunity to increase the dividend in the latter half of the year.

Great. I know, very thorough answer there. And I guess, second and the last question, just around the Qatari tenders and maybe growth opportunities there. Is that something Flex is participating in? I mean what are your thoughts on those projects?

It's a fantastic project for Qatar. They will achieve a very competitive production price as it's an efficient field. They are set to produce 33 million tons initially and will likely need around 45 ships for that purpose. They currently have 25 steamships, which they plan to replace with 70 ships, plus they will probably require an additional 25 to 30 ships for Golden Pass, bringing the total to 100 ships. They also plan to add another 16 million tons, which will require 25 additional ships. We are involved in this and are actively considering it. Given our current stock price, which is significantly below replacement CapEx, we are not fully positioned, but we are committed to growth if it's beneficial for us. With the current stock price and the implied valuation per ship, our focus is on dividends and buybacks, and we will only pursue growth opportunities if they are accretive to our shareholders.

Got it. Well, thanks again for having me. Good catching up.

Good to hear from you, Randy.

Okay, we will now take our next question from Greg Lewis at BTIG. Your line is open.

Thank you and good afternoon, everyone. Øystein, I appreciate the presentation; it's always very informative. I was hoping to get some additional details about Slide 14, where it’s clear that there has been a nice increase in charter rates due to the counter-seasonal spot market. Since you secured the five-year contract, I have a couple of questions. First, in terms of that multi-year contract, how competitive was the bidding process? Did Flex face any other competitors? I’m curious about the level of competition in that regard. Additionally, as we consider the one-year time charter market, it’s evident that rates are higher. How would you compare the current market conditions to the previous months or quarters?

Yes. I will attempt to provide some answers. As you mentioned, we have experienced a significant backlog over the past few months. In April, we completed four or possibly five ships with Cheniere. All these processes are competitive, and charters always seek the best terms, as do we as owners. However, there aren't many owners available who can provide five new modern ships in the market. It's not a large tender with many participants since there are really only one or two exceptions able to offer that many ships at once. I don’t think anyone else could have met the delivery slots we had. We have been in dialogue with them and managed to reach a deal that benefits us. We started the year with a substantial backlog, having 9 of our 13 ships linked to the spot market. This strategy allowed us to reduce risk in our portfolio while achieving a reasonable return on our equity. Additionally, this approach improved market sentiment as the number of available ships decreased, coupled with a significant rise in gas prices from a low of $5.5 in March to $17 today, which also boosted the willingness to pay for freight. In May, we secured two more time charters, one for pump delivery with Flex Constellation, achieving a very favorable rate. Since we have limited ships available for 2021, we were able to fix a ship for delivery in Q1 next year, which puts us in a strong position during this typically softer time of the year. We are also securing ships for three to five years at what we consider attractive returns. While there has been competition, we previously mentioned that developing in-house ship management was a strategy to capitalize on such opportunities. In 2019 and 2020, it was challenging to secure similar contracts, but the market in 2021 has been robust, showing significant term interest. We have acted on these opportunities to de-risk our charter position and ensure more stability, allowing us to pay appealing dividends. The one-year time charter rate has been fairly active lately, with considerable term interest and a declining number of available ships contributing to increasing LNG rates monthly. Our one-year time charter rates have risen substantially, indicating a promising winter season with projections now reflecting six to seven months at $130,000. Personally, I expect rates to climb even higher, but we will see. Ultimately, our focus has been on finding strong charters that yield good returns, reduce risk to our business, and enable us to provide substantial dividends.

Okay, he got disconnected, Sir. Okay, we will now take our next question. Our next question comes from the line of J. Mintzmyer from Value Investor's Edge.

Hey, good afternoon Øystein. Congrats on an excellent quarter.

Good to hear from you, J. So what do you think?

Yes, absolutely. Well, I'm very happy. You reported results exactly within your guidance, but apparently, the market cannot read your Q1 slides. So that's kind of entertaining. But anyways, you have an all-time record high in cash balances, you have no CapEx required, you don't really want to bid on the Qatari vessels or at least that's what I read between the lines. So how much cash do you think you need? Because right now, I think it was $144 million. How much do you think is a responsible amount of cash versus how much is available for repurchases or whatnot?

We currently have a significant amount of cash, reaching a record high. In previous discussions, I mentioned that some of our bank loans require a minimum cash balance of $70 million, which applies to ship financing and these loans, but not all leases. Ideally, it's wise to maintain a buffer above this minimum. However, due to the risk management steps we've taken, our required cushion is likely smaller than it has been in the past. Previously, I indicated that having $100 million in cash is a comfortable position for us, and right now, we are actually sitting 44% above that amount. This gives us ample cash on hand, enabling us to consider increased distributions to our shareholders through dividends and buybacks. In short, we have far more cash than necessary.

Yes, it certainly seems that way. You got about $40 million of extra cash, as you kind of alluded to there. Look, you increased your repurchase authorization to $15 a share. Right now in the U.S. markets, I know you had to convert to Oslo and whatnot but it trades about $14.20. So I was just curious you have 3 million more shares authorized to repurchase. Is there any appetite for something like, say, a $15 tender offer, you could do 3 million shares at $15 for $45 million. But that would take care of your cash balance, and it would also add extreme value to shareholders. Any thoughts on that?

It's something we have considered in the past. When we chose this program back in November, there were a couple of approaches we could take. At that time, we noticed that the volatility in the stock price was causing a lot of concern among investors. By entering the market under this buyback program, we are allowed to purchase up to 25% of the applicable volume, which is based on the daily trading volume calculated over the past month. This strategy helps to stabilize the share price to some extent. Additionally, it allows us to gather more information along the way. In November, many analysts were worried about the 54 ships scheduled for delivery in 2021. However, we were more optimistic because we were confident about volume increases. With 25 million tons anticipated to be added in 2021, we initially approached the situation cautiously, not wanting to alarm investors about potential spending. We have used this program incrementally and have raised the buyback threshold as conditions improved, resulting in the repurchase of 900,000 shares so far. There are limitations to consider, as we also have a significant shareholder, the John Frederick family, who holds 47% of the company. If that shareholder's stake exceeds 50%, there could be implications we want to avoid. For now, we've opted to buy back shares in the market rather than raise dividends. However, if we observe a divergence, we would not dismiss the possibility of taking further action beyond just purchasing in the market. Currently, the stock price in America closed at $15.84 last night, indicating significant volatility.

Yes. Certainly a good explanation, Øystein. And I think some new investors maybe just didn't read the previous guidance but I'm sure they'll be happy with Q3 and they're going to be really happy with Q4. Always good talking to you.

Yes. Good to talk to you as well.

Okay, we will now take our next question, and it comes from the line of Joe Frieder, shareholder. Your line is now open.

Great, thank you. I'm a private investor. I've been with you since the U.S. IPO. Thanks again for meeting your goals and being very transparent. A lot of us here, we're really confident in you all. And thank you so much for having grid lines on Slide 5. So now we're up-to-date.

Okay. We will keep that in mind for future.

So my question is around your forecast. Last quarter, you gave a three-month forecast. This quarter, you've only given two. So my question is when you look at Slide 4, your backlog. When you look at Q4 and 1Q, you're about the same. So what's different in 1Q other than a quarter further that you're not giving that forecast for Q1?

It's a good question. Historically, we have only provided guidance for the next quarter. When we secured contracts in April and May, we were significantly linked to our backlog. To help everyone understand the economic rationale and financial implications, we decided to provide guidance for the entire year, not just Q2 but also Q3 and Q4. Today, we are reaffirming that guidance. We have narrowed the variability on revenues a bit, but overall, they remain the same. We haven't established a new approach to guiding for the next three quarters. This is a valid point, and we can consider offering more guidance for 2022 when we report again in November. However, it's important to note that we have ships on variable hire contracts, and spot rates that influence these indexes can fluctuate significantly. As we move further down the line, the variability in revenues will likely increase. Additionally, we have some ships coming off charter in Q1 next year, and the state of the market will depend on winter conditions. The likelihood of a warm winter seems low given the 70% probability of La Nina. As we look far into the future, the variability in revenue guidance becomes more significant, making it less valuable to provide. Nevertheless, we can assess the situation and perhaps share some numbers regarding the number of days booked for 2022. As shown in our fleet overview, the coverage for 2022, 2023, and even into 2024 is quite strong.

So, I'm not suggesting that you do three quarters or more every time. I was just curious to see what was different, and I think you've answered that. So thank you.

Yes. Okay, thanks.

We can examine the value provided, though it may decrease slightly. We could share some figures regarding the number of days booked for 2022. As indicated by the fleet overview, the coverage for 2022, 2023, and even into 2024 is quite substantial. Thank you for your questions; I believe I've addressed your curiosity regarding the differences.

We received a question about our dry dock schedule. Generally, we dry dock a ship every five years. We delivered four ships in 2018, so they will need dry docking in 2023. Two ships from 2019 will be due for docking in 2024, four ships from 2020 in 2025, and three ships from 2021 in 2026. Typically, dry docking takes about 15 to 20 days and costs between $2.5 million and $3 million, depending on maintenance during operations. I hope that answered your question. If there are no further inquiries, we'll conclude today's presentation. Thank you for joining us, and we look forward to sharing our Q3 numbers, which we expect to be higher, around mid-November. We hope to see you then. Thank you.

Okay. That does conclude our conference for today. Thank you for participating. You may all disconnect.