Earnings Call Transcript - FLNG Q1 2025

Marius Foss, Interim CEO

Hi, everyone, and welcome to the First Quarter 2025 Result Presentation. I’m Marius Foss, the Interim CEO of Flex LNG, and I’m here with our CFO, Knut Traaholt, who will walk us through the financials shortly. We will discuss the financial results, provide updates on the market, and wrap up the presentation with a Q&A session. If you have any questions, feel free to use the chat or email us at [email protected]. Before we start, I’d like to remind you that today's presentation will contain forward-looking statements and utilize non-GAAP measures. Adjusting for non-cash items, we reported $29.4 million in adjusted net income, which translates to $0.54 in adjusted earnings per share. In the last quarter, we secured up to 37 years of new contract backlog for Flex Constellation, Flex Courageous, and Flex Resolute, enabling us to explore attractive refinancing options. Consequently, we initiated the balance sheet optimization program 3.0, which Knut will elaborate on later. Regarding our fleet, Flex Constellation was redelivered from time charter in late February and has been operating in the spot market since then. Additionally, Flex Artemis, currently trading on a variable index, is set to return from a five-year time charter, and we expect to receive it back in Q3 2025. We reaffirm our full-year 2025 revenue and earnings guidance from last quarter, anticipating full-year revenues between $340 million and $360 million and TCE between $72,000 and $77,000 per day. We expect EBITDA to range from $250 million to $270 million. The Board has approved a $0.75 per share dividend, which results in total dividends over the past 12 months of $3 per share, equating to a dividend yield of 12%. This distribution to our shareholders is backed by our strong balance sheet, which holds $410 million in cash and a robust contract backlog. Our contract coverage remains solid, with 59 years of minimum firm backlog, potentially expanding to 88 years if all charter options are exercised. Financially, the impact of Flex Artemis redelivering in 2025 is minimal. The vessel is equipped with a complete reliquefaction system, making it highly attractive to charterers, especially for long-distance LNG transportation. Flex Constellation returned from her 312-day charter at the end of February and will begin a 15-year time charter in the first half of 2026. Overall, we have a strong backlog and are well positioned to capitalize on increasing LNG export volumes projected for 2028 to 2030. Despite the current lower freight rates and two vessels being available by Q3 2025, our robust backlog leads us to project that 2025 revenues will remain similar to the levels of 2024. We anticipate TCE to be in the mid-$70,000s per day, translating to revenues between $340 million and $360 million. In 2025, four ships will undergo a special five-year survey compared to just two last year, a factor we have considered in our guidance. Flex Aurora and Flex Resolute will go into dry dock later this quarter, while Flex Artemis and Flex Amber will enter dry dock in the third quarter. We are determined to establish a clear and transparent approach to dividend payouts based on specific decision criteria, including earnings and cash flow, contract backlog, balance sheet strength, capital expenditures, and debt maturity profile. Over the past three to four quarters, we have maintained a cautious outlook for the near-term LNG market, and this perspective remains the same. We note that while the long-term outlook is positive, as highlighted in earlier slides, Flex benefits from a strong charter backlog and, as Knut will soon explain, maintains a solid balance sheet. Given these factors, the Board has declared an ordinary quarterly dividend of $0.75 per share, bringing our trailing 12-month dividend to $3 per share, with a yield of 12%. Now, I will turn it over to you, Knut.

Knut Traaholt, CFO

Thank you, Marius. Let's review the financial highlights for the first quarter. Headline revenues totaled $88.4 million, and when excluding EUAs related to the EU's emission trading systems, revenues were $86.8 million, which translates to a time charter per day of $73,900. The decrease in revenues compared to the fourth quarter is mainly due to a seasonally weaker spot market affecting the variable hire contract for Flex Artemis. Additionally, Flex Constellation operated in the spot market in March after being redelivered from its TC contract. Operating expenses were reported at $18.1 million or about $15,500 per day. This aligns with our annual guidance but is slightly higher than the fourth quarter. It’s important to note that vessel operating expenses can vary based on timing. Therefore, we maintain our operating expense guidance at $15,500 for the full year. Interest expense was $22.2 million, a decrease of $3.3 million from the fourth quarter, attributed to lower base rates and the impact of converting one of our term loans to an RCF, which reduced our drawn debt for the quarter. Regarding the derivative portfolio, we experienced a net loss of $7.3 million, consisting of a net unrealized loss of $11 million and realized gains of $3.7 million. The realized gains help lower our interest expense. Our net income stood at $18.7 million, but after adjusting for non-cash items like the unrealized losses on the derivative portfolio, adjusted net income was $29.4 million, or $0.54 per share in adjusted earnings. We adjust our numbers to account for non-cash items to allow for better quarter-over-quarter comparisons. When analyzing the $26.5 million difference in net income compared to the fourth quarter, it all relates to unrealized gains and losses on our interest rate derivative portfolio. In the fourth quarter, we had $15 million of unrealized gains, while in this quarter, we recorded $11 million of unrealized losses, resulting in a total net difference of $26 million. Focusing on cash flow for the quarter, we generated $49 million from operations, which was offset by negative working capital changes of $5.7 million. Additionally, we spent $2.6 million in advance payments for dry dock work for the four upcoming dockings this year. We also had $27 million in scheduled debt installments and distributed $41 million to shareholders as dividends, finishing the quarter with a robust cash balance of $410 million. Our balance sheet remains clean and transparent, primarily comprising cash and vessels on the asset side. The 13 modern vessels, averaging 5.5 years in age, were ordered and delivered at a low cycle point and are recorded at $165 million per vessel. Looking at capitalization, our book equity ratio is healthy, and with a net debt of $1.4 billion, this translates to approximately $106 million of net debt per vessel. The interest rate markets have seen significant fluctuations, which we also observed in the first quarter. In response, we actively added exposure when we found it favorable. During the first quarter, $35 million of our existing interest rate swaps matured. Furthermore, on the last day of the quarter, we entered into $100 million in new interest rate swaps, raising our total notional swap exposure to $700 million at the quarter’s end. This swap portfolio features a weighted average duration of 3.5 years and a weighted average fixed rate of 2.1%. After liberation day, there was more volatility, prompting us to add another $150 million in two-year swaps, increasing our swap portfolio to $850 million. The additional swaps were secured at a weighted average rate of around 3.5% with a duration of two years, providing a positive carry of 75 to 80 basis points until the Fed lowers rates. Our hedge ratio stands at approximately 70% for the next 24 months, and we will keep monitoring the market to increase exposure if both short and long-term rates decline. As previously mentioned, we’ve initiated the balance sheet optimization program 3.0 to free up an additional $120 million in cash. We also announced securing an appealing JOLCO financing for the Flex Courageous based on the new contract from last quarter. This financing, expected to close in the second quarter, is projected to release about $40 million in cash proceeds, lower our debt cost by 1.5% annually, and extend our debt maturities. We are also targeting similar financing for Flex Resolute, addressing its 2028 debt maturity, and have attractive financing plans for Flex Constellation with a solid 15-year contract. We aim to finalize commitments and sign agreements for both Flex Resolute and Flex Constellation, anticipating to draw down in the latter half of 2025. Our current balance sheet, alongside the optimization program, ensures we maintain a strong financial standing, stable cash flows from our contracts, and a solid cash position of $410 million at the quarter’s end, expected to grow with refinancing plans. We have an RCF capacity of $414 million used for cash management and reducing interest rate expenses. Our CapEx liabilities are minimal, with Flex Resolute’s first debt maturity in 2028, which we are addressing, followed by the next maturity scheduled for 2029. Thus, our fortress balance sheet provides the necessary support for Flex's journey, ensuring both commercial and financial flexibility. Today, we released our seventh ESG report for 2024, which outlines our approach to ESG matters, particularly emissions, safety, and governance. We proudly report efficient and safe operations, achieving zero lost time injuries for 2024, reflecting the health and safety commitment to our seafarers. At Flex, we believe everyone should return home safely after work. Our CDP rating for 2024 is a B score, and I want to commend the Flex LNG team for their accomplishments and this report's creation. Additionally, we submitted the application for delisting to the Oslo Stock Exchange, following approval from our AGM on May 8, initiating the formal delisting process. We expect the Oslo Stock Exchange to conclude on this application in the second quarter, with trading ending in the second half of 2025. The final trading day will be determined and announced by the Oslo Stock Exchange separately. If you hold shares on the Oslo Stock Exchange and wish to continue with us on our journey, please contact your bank or broker to arrange the transfer to our shares traded on the New York Stock Exchange. We have prepared a Q&A section on our website under Investors and OSE delisting, where more information is available about the next steps and this process.

Marius Foss, Interim CEO

Thank you, Knut. I'm sure you will have more questions about the Oslo delisting. The LNG trade from January to April 2025 grew approximately 1% to 143 million tonnes compared to the same period last year. The top three main exporters, the USA, Qatar, and Australia, represent more than 60% of the total LNG trade. U.S. LNG exports increased by more than 20% year-over-year, and this is explained by new volumes arriving from Venture Global Plaquemines and the expansion at Cheniere's Corpus Christi. Australia exports declined by around 7% during this period, which is largely explained by Woodside shutting down a train at the North West Shelf LNG terminal due to declining feedstock and slow upstream developments. Europe has significantly increased its LNG appetite over the last few months, particularly after Russia halted its pipeline gas export to Ukraine last December. European gas inventory levels are currently low, at only 45% full. It should also be noted that we have seen a recovery in overall European gas consumption, as the last four months have seen a decline in renewables consumption. While Europe’s LNG imports have soared as the continent tries to maintain a fragile gas balance, this has driven up LNG prices globally. Overall, Asian LNG ports have retreated, especially evident by a drop in LNG imports to China, which are down by 24%. China has completely halted imports from U.S. LNG since February and is now reselling its contracted volume in the markets. India has also seen flat growth year-over-year, which is notable compared to the double-digit LNG import growth from last year. Relatively high LNG prices and the availability of more affordable energy sources help explain this trend, as many of the developing Asian countries are price-sensitive when it comes to LNG imports. The more mature JKT economies, Japan, South Korea, and Taiwan, have seen their LNG imports drop by only 3%. The newbuilding prices for modern LNG carriers built in South Korea have stabilized, with ship brokers quoting prices between $250 million and $255 million per vessel. It should be noted that shipyards are quite busy, and slots offered at these prices are for deliveries in 2028 and onwards. This means that the cost of financing during this period and for building supervision will likely push up the all-in delivery price for newbuildings substantially. We expect newbuilding prices to stay at these levels going forward. Term rates for 5-year and 10-year TCPs are currently quoted between $75,000 and $85,000 per day. However, there are very few recent deals concluded. Approximately 300 LNG vessels are scheduled for delivery over the next five to six years, with over 90% of these secured on long-term charters. A significant portion of this order book relates to the Qatar fleet renewal program. In the complying chart, the dark blue bars represent vessels ordered by Qatar Energy or tied to Qatar-related TCPs, while the light blue bars reflect non-Qatar-related newbuildings. Notably, while more than 70 vessels were originally planned for delivery in 2024, only around 60 were actually delivered from the shipyards. Approximately 10 vessels have been pushed into the 2025 delivery window, and we will not rule out the possibility of similar slippage occurring now in 2025 into 2026. When we analyze the newbuilding delivery profile, it's crucial to look at the full picture, not just what's coming in, but also what is quietly slipping out of the active fleet. The chart shows a number of idle vessels split between steamers in gray and tri-fuel ships in blue. What we are witnessing is a growing cluster of older vessels with efficient cargo economics and outdated propulsion systems essentially being parked. By the end of March 2025, close to 60 vessels were idling. That's not a small number, and it matters because fewer available vessels mean less supply, which helps bring balance to the overall markets. But it doesn't stop there. More of these vessels are being put in layup, either warm or cold. And it's not just steamers anymore; we are seeing tri-fuels also starting to join that list. Bringing a cold layup vessel back into service is not cheap and is very time-consuming. So, what happens next? The natural conclusion is scrapping. So far in 2025, only three steamers have gone for recycling, but the number might be even higher. Several others are quietly being offered for sale, and frankly, the chance for them to find a new buyer is slim. Scrapping is therefore becoming a more realistic option. Bottom line, while the order book is substantial, the market is shedding the last efficient vessels, which plays a big role in shaping a significant future for the balance between supply and demand. Let's wrap up the market section with a slide that might look familiar but is very important to revisit. The outlook for new LNG supply remains strong, and the wave is building. Over the next few years, we will see a steady stream of new volumes entering the market, primarily driven by Qatar and the United States. In just the past few weeks, we have seen two major developments from the U.S. that underscore this momentum. Woodside has taken FID on the Louisiana LNG project. This is a significant greenfield development with three trains, each having a capacity of 5.5 million tonnes per annum, for a total of 16.5 million yearly tonnes. The project has expansion capacity and permits for two additional trains, which would bring the total capacity up to 27.6 million yearly tonnes, with first LNG expected in 2029. Energy Transfer made headlines during its first quarter call, announcing its ambition to take FID on the Lake Charles LNG project, also at 16.5 million tonnes per year, by the end of the year, representing another major step forward. What does that mean for Flex LNG? It means momentum. It means confidence in the long-term demand for LNG. Most importantly, it means more ships will be needed. With these projects on the horizon, we see a bright future for LNG shipping, and we are well-positioned to ride the next wave. We delivered strong quarterly results with solid profit and robust cash generation. Our balance sheet optimization program is underway, and our guidance for 2025 remains firmly intact. With continued earnings strength and a healthy charter outlook as well as a reported dividend yield of 12%, we are well-positioned to deliver long-term value to our shareholders. With that, let's open the floor for questions.

Knut Traaholt, CFO

Then, we are ready for the Q&A session, and we have received a number of questions. So, thank you to everyone who has submitted. A number of these questions relate to the market and the soft spot market rates, and Artemis being delivered, and the Constellation trading in the spot market until she commences a long-term contract. How do you view the summer market and the winter market, and the prospects for these two ships?

Marius Foss, Interim CEO

Thank you, Knut. Artemis has not been delivered yet. She will be redelivered later in the year. But if you look at 2025 so far, we have amazingly seen the highest amounts of fixtures being concluded in the spot market for two strokes. At the same time, we have seen the rates hovering on a very low side, from single digits up to double digits, maxing at around $35,000 to $40,000 per day. So, Flex Constellation is currently trading in the spot market, and we plan to do so until delivery in the first quarter of 2026. While as you mentioned, Flex Artemis is coming back to us in August, and she will undergo a dry dock. So, we are marketing the vessel as open thereafter. She has been one of our best contributors since delivery, and of course, we are seeking term employment for her this autumn.

Knut Traaholt, CFO

You mentioned that there has been very high activity in the spot market. Some of the questions relate to activity in more of the long-term contracts. What can you say about the number of fixtures or activity tenders for long-term contracts?

Marius Foss, Interim CEO

The charters are in no rush to secure long-term contracts while the spot market is what it is right now. So, while we have high activity on the spot, the levels are hovering low. We are currently in the doldrums, waiting for things to pick up. I'm sure there are many potential charters who will enter and secure tonnage, but it is a bit early as of now. We are seeing signs of contracts and interest, particularly for the Artemis this autumn and also into Q1 2026. So, we are hopeful that she will find employment.

Knut Traaholt, CFO

Then, we have a number of questions regarding our delisting on the Oslo Stock Exchange. Some of them are detailed. We recommend going to our website. We have a separate Q&A section for our delisting. If there are further questions, please reach out to us via our investor email, [email protected]. As a reminder, first, the Oslo Stock Exchange will need to conclude on the application, and they will have a separate announcement regarding that, also announcing the last day of trading.

Marius Foss, Interim CEO

With that, I would like to thank everybody for listening to our broadcast, and we wish to welcome you back to our Q2 presentation in August. Thank you.