Flex LNG Ltd. Q2 FY2022 Earnings Call

Hi, and welcome to today's FLEX LNG Webcast, where we will be presenting our Second Quarter Results, as well as discussing the latest development in the Company and in the LNG markets. As always, we will conclude with the Q&A session. If you would like to ask a question in the Q&A session, you can either use the chat function in this webcast at any time, or you may alternatively send an email to [email protected]. And we will try to answer these questions at the end of the presentation. Before we start, I will remind you of the disclaimer as we will provide some forward-looking statements. We will utilize industry-specific non-GAAP measures like TCE and figures like adjusted EBITDA or adjusted net income. Additionally, there are limits to the completeness of detail that we may provide in these presentations. So we therefore recommend that you also review our earnings report for additional information. So without further ado, I hand over the floor to Oystein Kalleklev, the CEO of FLEX LNG management, who will guide you through today's presentation together with our CFO, Knut Traaholt. Go ahead, Oystein. The floor is yours.

Hi, everybody, and welcome to FLEX LNG's second quarter result presentation. We are pleased today to deliver strong numbers or revenues of $84 million which is $10 million higher than in Q1 and in line with the guidance of approximately $85 million. Net income and adjusted net income came in at $44 million and $33 million, respectively, where the main difference is the gains we have recorded on our interest rate swaps. Earnings per share and adjusted earnings per share came in at $0.83 and $0.61, respectively, giving us our strong profit for the quarter. In June, we announced three new contracts, two seven-year charters and one-time charter of ten years with very good counterparties. This added 24 years of backlog and we now have a backlog of a minimum of 54 years, with the new contracts adding about $750 million of new revenue backlog. With our strong earnings visibility, we are also reiterating our revenue guidance for the second half of the year. Q3 revenues are estimated to be around $90 million, while we expect Q4 revenues to be somewhere in the range of $90 million to $100 million, i.e., numbers for the second half of the year will be even better than the first half. The quarterly dividend is $0.75 per share, but in this quarter, we are also adding a $0.50 special dividend. So in total, we end up at a dividend of $1.25 per share. We have recently concluded our balance sheet optimization program where we raised $137 million of cash and we are now distributing some of this cash or excess cash back to our shareholders. With our distribution in the last 12 months of $3.5 per share, this implies an attractive dividend yield of around 10%. Let's touch upon the recent contracts. As I mentioned, we added three new contracts in June, two new seven-year time charters for Flex Enterprise and Flex Amber, which already commenced on July 1 and will be running until the end of the second quarter 2029. We also fixed Flex Rainbow on a 10-year charter, which will start in direct continuation of our existing time charter, which is ending in January 2023, i.e., this ship is covered until the start of 2033. Altogether, this added 24 years of backlog. As I mentioned, our backlog is now 54 years with additional extension options, which could further increase this backlog. We have been busy fixing out many ships recently. Prior to COVID, we fixed only one ship. We fixed Flex Artemis on a variable time charter in the autumn of 2019, and that ship was at that contract level in August 2020. During 2020, the market was very depressed, also affecting the long-term time charter rates, and we decided to rather play the spot market and wait to fix our ships when the market improved. So last April, we fixed five ships to Cheniere, Flex Endeavour, Flex Ranger, Flex Vigilant, all commenced the time charter last year. Flex Volunteer commenced the time charter with Cheniere during the second quarter, and Flex Aurora will commence the time charter with Cheniere at the end of the third quarter this year. In May last year, we also fixed two ships, Flex Freedom and Flex Constellation. Flex Constellation for a three-year time charter, where we delivered that ship to the charter in May, and then Flex Freedom for a five-year time charter, where we delivered this ship to the supermajor in the first quarter of 2022. Last autumn, we also fixed out two more ships, Flex Resolute and Flex Courageous, which were delivered to the charter at the beginning of 2022. These contracts are for three plus two plus two years, but we are very confident that these ships will sail under these time charters for a total of seven years. And as I mentioned, we recently fixed three more ships: Flex Amber, Enterprise and Rainbow on 24 years of total contract duration. This means we have a very strong charter backlog. During our May presentation for the first quarter, we put in three stars in this overview. We put in our star on Rainbow, the Amber and the Enterprise as these ships were coming open in the market, and we were very confident in our ability to fix these ships out on attractive new charters. For Flex Amber and the Enterprise, we replaced the variable time charter these ships had and replaced them with seven-year fixed higher time charters as mentioned, while Flex Rainbow is fixed forward for Q1 next year and then for a duration of 10 years, bringing that ship into 2033. Our spot exposure has thus also been reduced quite a lot. In Q2, we had three ships on variable higher index Amber, Enterprise and Artemis. We also had about one hardship in the short-term spot market. These were Flex Aurora, which we fixed on a five to seven months multi-month time charter, and where she will be delivered to Cheniere at the end of Q3. Flex Volunteer, Cheniere agreed to take early delivery and this ship was delivered to Cheniere in the middle of Q2 after servicing the spot market. Going forward, then most of our income is fixed rate higher, so our earnings visibility is very predictable. The only ship then exposed to the spot market is Flex Artemis, which is on a variable higher time charter linked to the spot market and which is ending in August 2025 with further extension options by the charter. So let's talk a bit about the dividend. We have picked up in the past our list of the key decision factors influencing our Board when making the appropriate dividend level. As you can see, our adjusted EPS has been picking up. Q2 is usually the weakest or softest quarter in LNG shipping as this is the low season of the market with our increased fixed rate contracts. Q2 numbers for this quarter are actually stronger than the Q1 numbers. This is the fourth time we are paying out an ordinary quarterly dividend of $0.75. After we fixed nine ships last year on attractive contracts, we hiked the dividend to $0.75 and we are continuing to pay that quarterly dividend. In addition, this time, we are also paying a special dividend of $0.50 bringing it to $1.25 per share because, as I mentioned, we have been through a big refinancing phase where we have boosted our cash balance to $284 million at the end of the second quarter. So when we look at these decision factors, we said last May that we expected all these factors to turn green by the second quarter, and so they have. Our earnings are strong, the market outlook is good, we have a fantastic backlog, our liquidity position with $284 million is very strong, we are passing all the financial covenants with flying colors, we have no upcoming debt maturities near-term and all the ships have been delivered. Therefore, CapEx liabilities are only related to the ordinary dry-docking of these ships, which we will have by the fall of next year, but such cost is about $3 million per ship. Although consideration is a bit more difficult to assess, but with the Fed aggressively fighting inflation and the cooling down of the Chinese economy and fairly volatile financial markets, we still keep this factor as a win. Nevertheless, we are paying a very generous dividend for this quarter. So with that, I think I hand it over to you Knut for our financial wrap-up.

Thank you, Oystein. And let's have a look at the financial highlights for the second quarter. Revenues came in at $84 million and as mentioned, $10 million higher than the first quarter of $75 million. This equates to a time charter equivalent per day of $70,700. This is significantly higher than the second quarter of previous years and has already been mentioned by Oystein, the second quarter is normally a seasonal low quarter in LNG shipping. So the higher result is explained by our fixed rate contract portfolio, where we have a higher number of vessels from fixed rate contracts. We have the two new seven-year contracts for the Amber and the Enterprise that will go from a variable higher contract to attractive fixed rate contracts. So the seasonality effect in the coming quarters and the coming second quarters will be significantly lower. If you look at the operating expenses, they are at par with the first quarter and the OpEx per day is about $13,000 per day, which is at the guided level we have previously announced. If you look at the interest rate expenses, they are also at par and that's partly explained by our interest rate hedging portfolio, which we see on the second line, which is a gain on derivatives of $14 million for the quarter on top of the $32 million for last quarter. I will come back with more details on the derivative portfolio in the next slides. So that comes into the net income of $44 million or $0.83 per share, and an adjusted net income of $33 million or adjusted EPS per share of $0.61. If we look at the balance sheet that remains robust and clean, we have 13 state-of-the-art LNG vessels with an average rate of 2.6 years at the quarter end. As a reminder that this fleet has been acquired and the book value reflects that these were acquired at the historical low prices and is only adjusted by regular depreciations. Our balance sheet, as already mentioned, has a rock-solid cash balance of $284 million, and if you look at the equity of $910 million, that equates to a book equity ratio of 34%. If we look at the cash flow for the quarter, it's mainly affected by the refinancing activity that we did in the second quarter. That is a conclusion of the balance sheet optimization program Phase I, where we released $111 million during the quarter. That boosts our cash balance to $284 million. As a reminder, amortization in Q1 and Q3 are higher, so it's a bit lower amortization this year due to the semi-annual repayments under the ECA facility. If we then go to the next phase of the balance sheet optimization program, we have completed Phase I. We have one vessel left for delivery that is Flex Endeavour under the $375 million term loan and RCF facility. She will be delivered back to us under the financing now during September. For Phase II, we have started this with the Flex Enterprise. We bought back on our existing fixed rate sale and leaseback structure, and we have refinanced her with cash. So she is probably the only unencumbered two-stroke LNG vessel in the world at the moment. We have initiated various financing dialogues, and we are in advanced stages for a $150 million bank loan facility, which is back-to-back with the contractor—seven-year contract with the supermajor. Then we are considering further refinancing, intending to optimize our debt funding but also to free up an additional $100 million in cash. Our priorities are to extend our repayment profiles, improve the pricing under the facilities that will reflect our credit profile, but also the credit profile under the underlying contracts. And then we are further seeking to push out debt maturities and improve leverage to release the $100 million in cash. We have a number of facilities that we are addressing. After the Enterprise, we will consider all of these. It could be an amendment and extension of existing financing or plain refinancing. But all in all, this is what we will spend time on for the next quarters, and we hope to revert shortly with more updates on this. So let's take a look at our interest rate hedge portfolio. We have a combination of fixed-rate leases for the Flex Volunteer entered in December last year at an all-in rate of 4%. In addition, we have a portfolio of interest rate swaps with the notional value of $853 million. Historically, this has been LIBOR swaps, and in Q1, we entered into $200 million in 10-year interest rate swaps based on SOFR. During the second and third quarters, we have amended and extended some of our LIBOR swaps in an additional $250 million and swapped these for 10-year SOFR-based swaps at attractive levels. If we look at the SOFR portfolio, that has an average remaining duration of 8.9 years at a 1.9% fixed rate, which is attractive compared to the 10-year SOFR rates of 3.1. And also for our LIBOR swap portfolio, which has a shorter duration of 2.8 years compared with the two-year swap rates at 3.7. Overall, this gives us a hedge ratio of 63% on the total debt excluding any utilization of the RCF. This gives us a solid foundation for any increase and further increase in long-term interest rates. And with that, I hand it back to Oystein for an update on the LNG market.

Thank you, Knut. We are certainly ahead of the curve compared to the Governors of the Federal Reserve. We started rolling about inflation with all this fiscal stimulus and have entered into our very good portfolio of interest rate hedges, which have so far this year gained $46 million, good job on those swaps. So let's talk a bit about the market. Global LNG volumes are up about 5% in the first seven months of 2022. As in the past, most of this LNG export growth is driven by the U.S. The U.S. is contributing about half of the growth in these first seven months of the year with 6 million tons of additional exports. Russia, despite all the sanctions, is still increasing its LNG exports, particularly from Yamal, and there are really no sanctions on Russian gas, so the Russian gas will continue to probably flow. And as we've seen on the oil side, Russians have been able to offload some of the volumes to Asian buyers if the European buyers are not interested. The older bracket here is mostly Australia and Malaysia, which have added about half of these 4 million tons. And that brings us up to 232 million tons of exports in the first seven months of the year. More interestingly, on the import side, Europe has been gobbling up LNG spot cargoes at unprecedented levels. So far this year, about two out of three U.S. LNG cargoes have ended up in Europe compared to one in three last year. In some sense, you could say Europe has been lucky because the cooldown in the Chinese economy driven by COVID lockdowns has resulted in lower demand from China, and Chinese imports this year are down by more than 20%. So their imports are down 9 million tons and European buyers have just been able to get access to these cargoes, which would have been a lot more difficult if the Chinese economy were running at normal capacity. If we are looking then more into the European gas crisis, Europe came out of this winter with very low levels of gas. And this was further aggravated by the Russian invasion of Ukraine at the end of February, which kind of put a panic in the market. European gas consumption in the first half of the year is actually down 10%, but this is mostly driven by pipeline exports, especially from Russia, and the pipeline gas flow in the third quarter is down 75% compared to the levels in 2021. And actually, the levels of imports from Russia were pretty low in 2021 in Europe compared to the prior COVID levels. Nevertheless, given the rapid increase in LNG imports in Europe, European gas inventories have actually been brought back to the normal level, and we are seeing the inventory levels approaching 80% coming into September. However, the gas crisis has not been alleviated. With the reduction in the Russian pipeline flows, Europe will face a very difficult time during the winter as there is not enough LNG in the market to replace the Russian pipeline flows. So if we look then at pricing, the price of LNG has rocketed. These are the numbers from the close of the day Monday when the TTF, which is the Dutch gas hub price hit $84 per million Btu. This is close to $500 per barrel of oil equivalent and we are also seeing the German one-year forward electricity price equating to somewhere close to $1,000 per barrel of oil equivalent. The glut of LNG into Europe has, however, created some bottlenecks. So we see the widest spread between LNG and pipeline gas prices in Europe ever. So the price for our LNG cargo delivered ex-ship in Northwest Europe is $60, leading to a $24 spread compared to the pipeline gas price. The European gas price is also driving up the spot price for LNG into Asia, where the JKM, which is the Asian benchmark price, is more or less on par with the LNG price in Northwest Europe. Even though the Henry Hub is now at a 14-year high of around $10, it's immensely profitable to export these cargoes from the U.S. to either Europe or Asia with an arbitrage of around $200 million per cargo. But keep in mind that about two-thirds of all the cargoes are still being sold on long-term contracts at a discount to oil, so that gives a price of around $12 per million Btu. These cargoes are mostly shipped into Asia, and Asia is mostly tapping the spot market for marginal cargoes in the peak season, which is usually the winter, so we are certainly in for an interesting winter. If we look at forward prices, high gas prices are here to stay. The future prices are way above the oil price-linked contract price. So at the bottom of the graph, you can see the Henry Hub price is at a 14-year high now of $10, but given the vast shale resources in the U.S., the future pricing is leading to a lower price in the U.S. The gray line here is the price for LNG sold on long-term contracts linked to oil, which is still at a fairly low level when you compare it to the spot prices on the European gas hub TTF and JKM, which is the Asian spot price for LNG. Lately, Europe, as I mentioned, has been the main driver for the price increases, and prices are at a premium to Asia, and this premium is also why the spot market was very soft in Q1 following our very strong spot market in Q4. The high price in Europe has incentivized exports from the U.S. or the Atlantic area into Europe rather than to Asia, which entails longer sailing distances and absorbs more shipping capacity. However, as I mentioned, there is a big price spread between the gas price in Europe TTF and the LNG price in Europe. So we do see some cargoes being shipped to Latin America and Asia, as there is really not enough capacity to import these cargoes into Europe. So high gas prices may actually enforce higher earnings potential for our modern LNG carriers. All LNG carriers are about 60% more efficient than the older steam generation, and they are substantially more efficient than the diesel electric or tri-fuel ships that were very popular 10 years ago. We have here highlighted our sensitivity on the charter rate, given different LNG prices. Keep in mind that LNG ships mostly utilize the LNG on board as fuel, as we are utilizing the boil-off from the cargo tanks to fuel the propulsion of the ship and having a more efficient ship means that you have a bigger cargo to sell at your destination. So if we are looking at, for example, prices today of $55 per million Btu, if a spot steamship is making $15,000 per day, which is basically its OpEx level. You can add a premium of $104,000 per day for a tri-fuel ship because this ship is much more efficient and generally a bit larger than a steamship, but you can add another premium on top of that of $71,000 per day for a two-stroke ship like a MEGI X-DF, bringing the charter rate to $190,000. Of course, these are theoretical numbers based on fuel consumption and cargo parcel size. But this means that in theory, with a $55 LNG price where a steamship is making $15,000, you could pay $190,000 for a modern ship. So all in all, a tight LNG market even increases the premium that all ships can command in the market. So let's take a look at the spot market. The spot market was super strong in Q4, where we actually saw the highest spot rates ever for LNG ships. But as I mentioned, we had this shift of trade from Asia into Europe with the European gas crisis, and this resulted in a lot shorter sailing distances. Sailing distances fell 15% from Q4 to Q1, and this released a lot of ships available in the market, driving down freight rates at the start of the year. However, the market bounced back rather quickly; usually, the spot market bounces back around the middle of March. We bounced back a bit quicker this time, and the market recovery was very strong with rates above $100,000 during May into June before we had this closure of the Freeport LNG export plant in the U.S. The Freeport LNG export plant has 50 million tons of annual production. So this resulted in a loss of around 15 to 17 cargoes on a monthly basis, thus releasing a lot of especially relets in the market. With more ships available in the market, freight rates plummeted back to around $60,000 to $70,000 before recently bouncing back strongly again to around $120,000. Some of the bounce back is probably explained by the expectation that Freeport would start up again, loading from October. This has now been pushed back to November. As we learned yesterday, this might delay the uptick a bit by a month or so, but the future rates for LNG spot rates are super strong for Q4, where we can see probably rates in the $200,000 range again and that also explains why we have an EBITDA range in our Q4 revenue guidance as we have one ship linked to the spot market. So let's have a look at the term market, which has remained strong the whole period. The term market has been less volatile and very firm even in this period with spot market weakness. One-year time charter rate for MEGI X-DF ships is above $170,000 per day. The three-year rate is around $140,000 per day. So these are extremely high period rates for modern tonnage. And of course, as I mentioned, driven by a tight LNG market, high LNG prices where these modern ships are commanding a high premium. Another factor is that the newbuilding prices have really been picking up. We did our investment in ships in 2017 and 2018 when newbuilding prices were around $180 million per ship. The last year or so, we have seen a big increase in the price of LNG carriers driven by higher material prices for both nickel and steel, higher labor prices, but also much tighter balance at the yards because of the glut of orders, not only from LNG carriers but from container ships, which is making yard slots fairly scarce. Today, if you want to order a ship, you are talking 2027 deliveries. The price is now approaching $248 million for a newbuilding, which is the price SSY is pegging now in a recent report. This has also driven up the five-year time charter rate. With higher CapEx, you need to have a higher rate to defend that investment, and the five-year rates have almost doubled during the last 18 months from mid-60s now up to $110,000 per day, which also gives us comfort on the further recontracting of our fleet. Looking at the fleet structure, as I mentioned, there's been a lot of LNG orders and the order book is now around 250 ships. This is driven by two main factors: one, being the replacement of older tonnage, which is inefficient as I previously illustrated; and the second factor, of course, is the high growth of LNG exports coming especially from 2024 and onwards. All the new ships for this trade are the new MEGI – new type, the MEGI X-DF. The purple ones there are the specialized ice ships for the Russian Arctic trade, which don't usually trade in the ordinary LNG carrier market. We do see here that there is a lot of steamships still in the market and I will come back to that also shortly. So looking at the order book, as I mentioned, around 250 ships, but very few of these ships have been ordered on speculation; almost all of them have been ordered towards new contracts or fleet renewal. So out of these 250 plus ships, only 30 ships are available for new charters and very few of them in the period there until 2025. So that gives us some comfort in our ability to also recontract our ships once they are coming open. Heading back to the steamships, we have this graph with a dinosaur for a couple of years now. These ships are too inefficient to continue to trade for longer-term. A lot of ships are coming off existing legacy contracts, typically legacy contracts with a duration of 20 to maybe even 25 years. There are already 36 steamships open in the market with the average age of 28 years. Then there are rolling off 100 steamships from contracts by 2027. These ships will face a very hard time going forward not only because of the high LNG price making them economically obsolete, but also because next January, we have new IMO regulations, called the EEXI and the CII, which will impose much stricter requirements on the efficiency of ships. We think this will result in a very big spike in the inefficiency of older steamships, which will be replaced with newer type ships. As mentioned, the global gas crunch is also creating interest for new volumes. We have seen an uptick in contracting for LNG. We have had around 100 million tons of new volumes being signed up during the last 18 months. With the gas crunch in Europe, you should think that the European buyers are the big buyers, but actually, even though China has a reduction in LNG imports this year of more than 20%, they are signing up almost half of these volumes because the LNG story in China is in its early phases. This year, actually, Japan would probably import more LNG than China, and they are living more than 10 times as many people in China. So China will continue to grow once they get control of COVID and reflating their economy. We do also expect European buyers to sign up for more SBAs as they need to replace a huge amount of Russian pipeline gas with LNG, and probably also renewables. So we have a list of some recent contracts. I'm not going to go through all of them, but for sure, there is a new wave of LNG export capacity coming. So then let's finish with the first slide, the Q2 highlights. I'm just going to repeat them: revenues $84 million, $10 million higher than Q1 in line with our guidance. Net income of a healthy $44 million. Adjusted for these derivative gains, we came in at $33 million, translating to $0.83 or $0.61 of earnings per share respectively. We have recently announced three new contracts adding further backlog to our fleet, which now has 54 years of revenue of firm backlog. Our revenue guidance remains the same as we recently updated $90 million of revenues we expect in Q3, slightly higher than in Q2. And then we still believe Q4 will be the strongest quarter $90 million to $100 million of revenues we expect depending a bit on the spot market affecting the one ship we have on index. So with that, we are also happy to announce today, our biggest share dividend ever, $1.25 per share, including the $0.50 special dividend. This gives $3.5 of dividend in the last 12 months or a yield of around 10%, which we think should be attractive for our shareholders. And with that, I conclude today's presentation. We will now open up for some questions. So please use the chat function at any time or send an email to [email protected], and we will try to answer most of the questions shortly. Okay. Thank you, everybody. I hope you enjoyed the presentation. We are now going to do some of the chat questions, so Knut, maybe you could start.

Yes, and thank you all for the questions. I think we can start off with the question from Omar Nokta from Jefferies. So we now have a sizable revenue backlog and the highest visibility since the company was created. So what's next for FLEX? Are you happy to continue operating with your existing market footprint or do you see opportunities for expansion?

That's a good question. Thank you, Omar. Of course, we are mostly driven by what is good for our shareholders. Of course, I think we can easily scale our company to a size that is at least doubled easily, but investing in ships now at the price, which we just shown ahead of around $200 – close to $250 million per ship. Ships are due for delivery in 2027. If we're spending $270 million of cash on – now $250 million of cash, and that cash will be tied up until 2027. We don't really see it as a very attractive investment choice considering also the rather large order book. So we prefer sending some of the money back to all investors. And special dividends, energy prices here in Europe are sky-high. So maybe our special dividend will be a good timing for that today. Of course, that is organized; we are also open for consolidation. I think we have a very good stock. The stock is the biggest market cap of any LNG shipping company in the world is fairly liquid, both in Oslo and New York. So of course, we could be open for consolidation where we are rather looking at acquiring ships to the issuance of new stocks to those people who have maybe private ships. So we are flexible in nature. We are looking at opportunities. But if we are to grow, it has to be accretive. We like the dividend. So if we do something, we also have to make sure it's good for existing shareholders. We're not going to pursue growth just to grow our fleet and build a bigger empire. We're very happy with the status today, and we can certainly continue just operating with the existing fleet if we deem that to be more effective than growing.

Yes. And a follow-up from Omar on the demand side of it. Have we been approached by any of the U.S. LNG export projects, the fast track that is due to come on stream in the second half of the decade? Have we been approached either for existing or new buildings?

Of course, we are in constant dialogue with a lot of the charterers. We have a lot of repeating customers. For the fast track project, we don't really have any ships available. Fast track, as I mentioned earlier, ships available is the middle of 2024. There are certain option sales, so the first fully open ship is in the middle of 2026. So we are focusing on those ships, seeing if there are opportunities to even add duration to existing contracts like we just did with Amber, Enterprise and Rainbow because we find the term rates quite compelling, and they create good value for us looking for that cash flow.

And then his final questions, I can take, it's on the balance sheet optimization program Phase II. If the $100 million plan unlocking of cash in addition to the cash we have would raise the financing, would raise from the financing of unencumbered vessels. So just specifying that, Q2 we had a cash balance of $284 million done into Q3. We bought back the Enterprise, so she is unencumbered now. Once we refinance her, if you take the – she was bought back at $137 million, and then we refinanced her again with $150 million. So the $13 million there is included in the $100 million.

Yes. And also maybe worth mentioning because we had this accordion feature on the $375 million loan where we could add our fourth ship. So what we were considering was to add Enterprise to that facility, increasing it to $500 million. But what we can see now with this new contact for Enterprise, we can finance even better, $150 million rather than $125 million and lower margin as well based on a long-term contract. We are therefore optimizing and not utilizing that accordion feature.

So that leads into similar questions regarding our cash balance and our capital allocation strategy going forward. So maybe you can say what is our capital allocation going forward and how we will use the cash balance?

Yes. We get this question quite a lot about how to spend it basically. What we see is that the last 18 months, we have basically gone from being 100% spot exposed until April last year. All the ships were either on index or short-term TC. With the kind of the fixed signal of 12 ships, as I shown in one of the slides, we have really taken down the credit risk and improved our credit profile. This enabled us to tap into very attractive debt, both in terms of leverage, margins, duration and also putting in revolver facilities where the cost of having access to this cash is very low. For example, there isn't $375 million facility; $250 million of that is structured as a revolver, which means the cost of having that credit line is only 0.7% per year. If you've been in shipping for a while, which we have, you know the optionality of having cash is huge in shipping because there's always something happening. That's why we are now utilizing our strong balance sheet and credit profile to raise ship debt. We are structuring it in a way that it doesn't really cost us a lot of money to carry this debt, but where we have the ability to draw credit lines on quick notice. For example, if we find some good opportunities and in this instance for this quarter, we have also sent back some of the excess cash to our shareholders through our special dividend. So capital allocation is basically we have a fleet today. We will only grow if it's accretive for our shareholders and we will focus on paying very healthy, good dividends for our shareholders.

And that leads into a couple of questions regarding our dividend. Can you give any guidance on future extraordinary dividends or alternative usage of excess cash?

Yes. Okay. We kind of made a decision last year when we had contracted out nine ships during that period from April to November. We took on the risk that we hiked our dividend to $0.75 on a quarterly basis, equating to $3 a year, which we found like an attractive long-term sustainable dividend. However, as we have gone through the balance sheet optimization for reasons I've explained, we have ended up with a lot of cash. So that's why we are sending back a special dividend. We are not going to guarantee any special dividend; that's why we're calling it a special dividend. But from time to time, if we do see that we have excess cash, we might send it back. This will depend on a couple of things. It'll depend on finalizing Phase II of the balance sheet optimization where we already started with this $150 million loan that Knut mentioned, it'll depend a bit on market conditions. Are we continuing to recontract ships on longer duration? And then also kind of the financial markets as well. Actually, right now, with this strong position, we don't mind volatile financial markets because that can create opportunities for us. So we are not going to guarantee special dividends, but you can assume that we will always be shareholder-friendly. We are also invested in this company and we also like dividends. We will continue paying very healthy dividends; special dividends will happen on more on and off occasions I would say.

Okay. And then to round up on the questions on the cash, there's a question on our working capital requirement. I think we can say that we have financial covenants relating to our cash balance. The trigger now is 5% of the net interest-bearing debt. So it's about $75 million. We have previously guided that we have sort of a management comfort level around $100 million?

Yes. And also just on the working capital, worth mentioning working capital in LNG shipping is negative. It's a bit different from the tanker business and bulk business. Tanker and bulk business, you do voyage charters. So you get paid when you're discharging your cargo. On LNG, all the contracts are time charters. This means we get paid in advance. Our working capital requirement is actually negative because we always get paid early and we pay our bills later on. So working capital then only relates to the kind of cash covenants imposed by the banks.

Okay. It leads over to another question regarding newbuildings and newbuilding orders. So how is your risk reward assessment of ordering a newbuilding at the current elevated prices? Can the current charter rates defend the investment?

Yes. It's a good question. We have shied away from it. Maybe that's well known when we see prices approaching $250; maybe we should have ordered at $220. It’s really gone up very quickly. It's driven by the commodity prices, labor prices, and the fact that the yards are very much busy these days, also with container orders and LNG orders. This is pushing up the yard prices, even though the yard prices are going up. The yards are not really making a lot of money. So the margins are fairly thin here. We think today it's hard to defend ordering ships that are around $250 for delivery in 2027. That's why we are rather focused on our existing ships, trying to extend duration on those. We have found that to be more attractive.

We have another question, some more of the operations and how is the Ukraine crisis impacting supply and demand and your tanker traffic?

Okay. It's not our export of LNG. No LNG is exported in that region where you have a conflict today. This is mostly affecting Russian pipeline exports to Europe where you have a tug of war between Russia and Europe, where Russia is holding back volumes, finding excuses to halt it. That increases the demand for LNG, not only in Europe but worldwide. On the LNG side in Russia, you basically have two export regions: Yamal, the Arctic, where you have Yamal and Arctic LNG-2, and then Circle in on the east side of Russia. The direct effects on LNG shipping do not really have any direct effect; it's indirect to the shutdown of Russian pipeline flows. There is one direct consequence, and that is all the Russian crew, who are finding it hard to find employment today because of the sanctions, we are not able to pay Russian crews. A lot of Russian crew are out of job because of this conflict. That's very unfortunate and makes recruiting harder.

And then a final question a bit on the future, but are our LNG ships able to transport hydrogen in five years? Is this maybe needed?

Yes. I think you have to wait a lot longer than five years, but the simple answer is no. We transport our very cold cargo; it's LNG minus 162 degrees, or minus 265 and high. If you're going to go to hydrogen, you have to be much colder. Liquid hydrogen is minus 253 degrees. So it's 90 degrees colder. It's only 20 degrees from zero Kelvin, the absolute coldest you can go in the universe. This would require a totally different ship. One thing is of course that temperature, another factor is that hydrogen is the smallest molecule in the universe. These molecules could easily escape from piping the cargo containment system and hydrogen is extremely flammable. This puts a much more complex aspect on safety. There's never really been any accident with LNG ships, but for hydrogen, it's a much more complex cargo to transport temperature-wise, leakages, flammability, and also the fact that hydrogen is not really dense. So you need – in order to transport the same amount of energy, you need a lot more ships. Therefore, no, hydrogen is not something we are planning to transport on our ships. Whether it's efficient, most of hydrogen is produced from natural gas. Natural gas prices are high, and that is also driving up hydrogen prices because basically hydrogen is converting natural gas to hydrogen in a very inefficient process. You could also make it the green hydrogen rather than blue hydrogen. Then you would need a lot of electricity in an inefficient process making hydrogen through the Haber-Bosch process. If you're doing the electrolysis process, then you know – if you look at electricity prices here in Europe, this is not really viable today. One of the other ways of transporting hydrogen, which is slightly easier, is as I mentioned, ammonia. So basically you make hydrogen and mix it with nitrogen to get ammonia, which is easier to transport, but has certain drawbacks; it has drawbacks in terms of toxicity. Ammonia is toxic in terms of corrosion. Even though it's explosive, it's hard to ignite, so you need a lot of pilot fuel. We will stick to LNG, I think cleaning up LNG would rather involve carbon capture systems. I think that's the most viable path forward.

Okay, then with the high LNG prices, are FLEX vessels fueled by LNG?

Yes. That's a very good question. Yes, almost all the time. Once we pick up a cargo, we take this super cool cargo on board, and keeping something at minus 162 centigrade is quite difficult. We have a boil-off of around 0.07% on our ships. So it means that every day you're losing 0.07% of the cargo in boil-off, but we're not losing it. We are using it as propulsion. We are burning this LNG natural gas and fueling the ship. So it's actually – you're getting into area. If you had a lower boil-off, you would have to force it out. Then you come to the discharge port, then you have to make a decision. What you usually do is you keep some of the cargo on board, which we call the heel, because then you can keep the cargo tanks cold. You can't load LNG into a ship unless it's minus 130 degrees in the cargo tank. So if you strip out all the LNG, first of all that will take a lot of time. The import terminals are already congested today. If all the ships are going to heel out, they are going to get even bigger bottlenecks. Especially in Europe, you don't have that option today. But let's say you are doing it; let's say you're heeling out because the gas price is so high and you're burning very low-sulfur oil on your ballast; that creates another problem. That's the bottleneck on the export plant, because if you arrive at the export plant with your cargo tank warm, you need to cool them down. You have to do what we call a gas-up or cool down, or a cool down where you have to add LNG in small amounts, spray it in the cargo tanks, get the temperature down to minus 130 before you can load LNG. This again takes a lot of time, and terminal space on these terminals is limited. So it's not very often that people heel out. Even though in economics, it sounds very good. For most of the time laden and ballast, we burn LNG, yes.

And then I think we can wrap up the two final questions in one. It's a big topic. What will happen to the steamships and how will our vessels be impacted by EEXI and the CII regulations?

Yes. Okay, we have been talking about this for – at least I have been talking about this for five years as the big business opportunity for us because we have the modern ships. The steamships are very inefficient. In all other shipping segments, steamship propulsion has gone away for a long time. The new decarbonization rules are going to push these ships out of the market, but also the highest LNG prices. It's not economical to run these ships anymore, and fewer ships in the market usually leads to supply and demand, higher rates for existing ships, and we will benefit there, as I've also shown with this graph of the term rates given the newbuilding prices. We are fully compliant. As I mentioned, our ships are 60% more efficient than the steamships. So we are flying through this EEXI and CII requirement with flying colors. These are the most efficient ships in the market.

Okay, that concludes the questions. So thank you for watching and...

Yes. I hope you liked the new format. We try to make it a bit more viewable and we will be back in November in the same format. So hope to see you again then. Thank you very much for staying with us.

Thank you.