FLEX LNG LTD., an emerging leader in the Liquefied Natural Gas (“LNG”) shipping and floating regasification market, reported unaudited results for the three and twelve months ended December 31, 2017.
Highlights for Q4 2017:
Reported Revenues of $7.9m compared to $9.8m in previous quarter.
Reported net operating income before depreciation of $1.3m compared to a net operating loss before depreciation of $4.1m in previous quarter.
Reports profit before tax for the fourth quarter of $1.3m, or $0.00 per share and loss of $10.4m, or $0.03 per share, for the twelve months ending December 31, 2017.
During the quarter, operated two chartered-in LNG carriers (“LNGC”) in order to build a market presence and operational track record.
Signed and executed a $315m secured term loan facility
Other and Subsequent Events:
On January 9 and 11, 2018 the Company successfully took delivery of its first LNGC newbuildings the FLEX ENDEAVOUR and the FLEX ENTERPRISE, respectively. After crew mobilization and safety drills the FLEX ENDEAVOUR commenced it’s time charter to Uniper Global Commodities (“Uniper”), a leading international energy company headquartered in Germany. The time charter to Uniper is for a firm period of 15 months plus an option period of 3 months. Subsequent to crew mobilization and safety drills, the FLEX ENTERPRISE was put into spot trade.
In connection with the delivery of the two vessels, $210m of the Company’s $315m secured term loan facility was utilized. The remaining amount available under the secured term loan facility will be utilized in connection with the scheduled delivery of the FLEX RANGER in May 2018.
Subsequent to the drawdown of the secured term loan facility, FLEX LNG repaid $100m under the Sterna revolving credit facility. Following this repayment to Sterna, remaining outstanding amount under this $270m facility was $60m.
Jonathan Cook, CEO comments:
“We are pleased to deliver profitable results for the fourth quarter as two of our chartered-in vessels were employed in profitable charters throughout the quarter.
In January, we successfully took delivery of the first two of our six newbuildings and secured a 15 to 18 month time charter for one of the vessels in line with our strategy to secure balanced fleet employment as the market continues to improve due to expected tighter supply/demand dynamics in the LNGC market.”
Liquefied Natural Gas Carriers (“LNGCs”)
FLEX LNG controls a fleet of six M-type, Electronically Controlled, Gas Injection (“MEGI”) LNGCs, as described further below. MEGI LNGCs are among the most technically advanced vessels in the world and offer superior fuel savings and earnings capacity as compared to previous generations of LNGCs.
Two of the LNGCs were delivered by Daewoo Shipbuilding and Marine Engineering Co. Ltd. (DSME) in January 2018, two LNGCs are currently under construction at Samsung Heavy Industries and are scheduled to be delivered to the Company in the second and third quarters of 2018, and two LNGCs are expected to be delivered to the Company in second and third quarters of 2019.
In 2017 the Company entered into four separate LNGC time charters for 180 days with an option to extend for a further 180 days in. The Company actively sub-chartered these LNGCs in the spot and short term market to a wide range of LNG charterers. In September 2017, the Company elected to redeliver two of the four vessels at end of the third quarter.
The Company secured profitable employment for the remaining two vessels for the duration of the optional extension period through the end of first quarter of 2018. These two extensions have had a positive contribution to the Company’s earnings which is reflected in the fourth quarter results.
The Company will continue to evaluate opportunities to charter in third party LNGCs to the extent that they will provide a positive contribution to earnings, although the Company’s primary commercial focus is to secure attractive employment for its newbuildings.
Floating Storage and Regasification Units (“FSRUs”)
FLEX LNG is also continuing to actively pursue opportunities to leverage its experience towards the implementation of FSRU projects, although no such opportunities will be committed to on a speculative basis. Projects will only be pursued where there is a tangible long-term contract with bankable counterparties and project structures.
Results for the Three and Twelve Months Ended December 31, 2017
The Company reports a net income of $1.3m and earnings per share of $0.00 for the fourth quarter of 2017 compared with a net loss of $0.2m and a loss per share of $0.00 for the fourth quarter of 2016. Net loss for the year ended 31 December 2017 was $10.4m compared to net loss of $1.8m in the year ended 31 December 2016.
Voyage Revenue amounted to $7.9m and $27.3m in the fourth quarter and the year ended 31 December 2017, respectively, and related to four vessels that were chartered in by the Company. Voyage revenue for the fourth quarter and the year ended 31 December 2016 was nil as the Company did not have any vessels in its operating fleet.
Voyage Costs, including the costs to charter in vessels, voyage related costs, and broker commissions amounted to $5.8m and $36.5m in the fourth quarter and the year ended 31 December 2017, respectively.
Administrative expenses amounted to $0.8m and $3.4m in the fourth quarter and the year ended 31 December 2017, respectively, compared to $0.1m and $1.5m, respectively, in the same periods in the prior year. In addition, costs of $6.5m have been capitalised onto the four new building assets in the year ended 31 December 2017 compared to $1.2m for the same period in 2016.
In the year ended 31 December 2017, the Company’s cash balance increased by $8.5m compared to a decrease of $2.3m in 2016. This was mainly driven by net cash inflows of $221.0m from share issuances and was partly offset by $77.7m of payments in relation to newbuilding contracts, $117.0m of loan repayments and a $17.7m cash outflow from operating activities.
In 2017, the Company expanded its fleet of modern LNGC newbuildings through the acquisition of four newbuildings from Geveran Trading Co. (“Geveran”). In connection with these acquisitions, the company issued approximately 239.9 million new shares of which 78 million shares were issued as payment in kind to Geveran for ownership in two DSME LNGCs (the “Initial DSME LNGCs”). The cash proceeds of approximately $225m from sale of the remaining 161.9 million shares has been utilised to fund the newbuilding program.
In connection with the Initial DSME LNGCs, the Company also entered into a $270m revolving credit facility with Sterna Finance Ltd., a company affiliated to Geveran (the “Sterna RCF”). The Sterna RCF has a fixed interest rate of 1.00% during the period while the vessels are under construction and an interest rate of Libor+300bps following the delivery of the vessels. The Sterna RCF was made availability to the Company for a period of three years following the delivery of the Initial DSME LNGCs.
On 20 December 2017 the Company signed a $315m secured term loan facility (the “TLF”) to finance the first three of its newbuildings – DSME HN 2447 (FLEX ENDEAVOUR), DSNE HN 2448 (FLEX ENTERPRISE) and SHI HN 2107 (FLEX RANGER) with a group of six banks. The closing conditions were fulfilled on 28 December and two loan tranches of each $105m were utilized in connection with the two newbuilding deliveries in January.
The tenor of the TLF is five years from the date of the last newbuilding financed under the TLF, resulting in an average term of approximately 5.4 years given expected delivery of SHI HN 2107 in May 2018. The remaining $105m loan tranche is expected to be utilized in connection with the delivery of FLEX RANGER in May 2018.
The TLF affords the Company significant balance sheet and operational flexibility. Under the terms of the TLF, the Company has the option to swap vessels as collateral for the facility without having to refinance the loan and incur associated costs. This enables the Company to have to flexibility to take a vessel out of the collateral base in the event it can be financed in other ways and redeploy the loan to finance a separate newbuilding.
The TLF also has no requirement that the Company obtain firm term employment for any of the LNGCs financed under the facility and the financial covenants for the TLF are also not linked to earnings, but rather balance sheet values of book equity level exceeding 25 per cent and free cash being higher than $15 million and 5 per cent of net interest bearing debt.
The combination of no requirement of employment and non-earnings based covenants allows for an opportunistic employment approach designed to maximize the Company’s exposure to periods of strength in the LNGC rate environment. Furthermore, under the terms of the TLF the Company can seek to increase the size of the loan tranches in the event that it secures longer term employment for a vessel financed under the facility.
In order to alleviate financing risk for the remaining three vessels, the $270 million Sterna RCF has been amended and the full amount will now be available until 12 months following delivery of all the remaining for LNGC newbuildings. Thereafter $30m will be available for working capital until the maturity of the TLF, unless otherwise agreed.
The Sterna RCF relinquished security in the Initial DSME LNGCs and has secured its loan by share pledge in the remaining three newbuildings. While the Company intends to finance its additional newbuildings with non-affiliated commercial financing, the continued availability of the Sterna RCF will ensure that the Company has minimal financing or liquidity risk.
In July 2017, the Company completed the transfer of its shares from the Oslo Axess exchange to the main Oslo Børs. The transfer has increased the Company’s visibility among the investment community and facilitated better trading liquidity in the Company’s shares evident from average traded volumes on the Oslo Stock Exchange.
367,972,382 ordinary shares were outstanding as of December 31, 2017, and the weighted average number of shares outstanding for the period was 307,639,159.
LNG Market Outlook and Strategy
The LNG shipping market continued to tighten throughout the fourth quarter. Seasonality and its winter peak once again brought a welcome boost in demand for LNG shipping. The arbitrage window between European and Asian LNG prices stayed open and increased demand for spot vessels loading out of European ports – so called “re-loads”.
Headline rates increased from ~$30k in July 2017 to $80k in December 2017. The ballast bonus component improved from fuel only/partial hire to full Round-Trip economics. The lack of vessel availability in the Atlantic meant Charterers agreed to position vessels in from the Middle East, or even Far East, to cover their requirements. In addition, there was an increased activity in short-term fixtures with a total of 13 vessels put way on multi-month charters in Q4.
Russia’s new liquefaction plant, Yamal LNG, began producing cargoes in November. The project is based on the Yamal peninsula, above the Arctic Circle and is a joint-venture of NOVATEK (50.1%), TOTAL (20%), CNPC (20%) and Silk Road Fund (9.9%). This is Russia’s second LNG export project, after Sakhalin LNG. Yamal LNG will have a nameplate capacity of 16.5 mtpa of LNG which will be shipped to Asia-Pacific and European markets.
Yamal is the latest example that LNG export capacity continues to increase. Next to start up is Cove Point, which will be the second U.S. liquefaction project coming on-stream. Commissioning cargoes are scheduled from April and several vessels earmarked for the project which have been operating in the spot market while waiting for the project to start up and be removed from the spot market.
However, Cameron LNG and Freeport LNG are experiencing delays and up to 28 vessels ordered for these projects might come to market ahead of their intended project. Charterers are adopting various strategies to address the anticipated idle time. Many of the Japanese-built vessels have agreed with the shipyards to delay delivery. Up to five vessels have been fixed on multi-month charters basis to bridge the gap.
Global demand for seaborne LNG continued to grow in 2017. For the full year 2017, 291 million tonnes of LNG were exported, up 11% year-on-year, or 29 mt. The LNGC fleet now exceeds 450 vessels with 24 vessels delivered in 2017. Demand growth has been driven primarily out of Asia, with Japan, South Korea, China, India and Taiwan all showing strong annualized growth. In particular, demand from China has increased by over 45% year over year.
The Government of China is committed to diversifying its energy portfolio to focus on clean energy sources and improve air quality. This effort was intensified leading into winter, as authorities began to aggressively cut coal use in an attempt to speed up the switch to natural gas. Europe also saw an increase of 10% in LNG imports during the year, largely due to low LNG prices in the first half (Europe being the “last resort” of LNG), and reload activates in the second half.
Significant LNG export capacity will come online over the next five years against this backdrop of growing demand for gas, which is expected to maintain LNG as a competitively priced energy commodity. This will in turn be a positive driver of demand for downstream product, LNG shipping, and LNG import solutions.
FLEX LNG expects the coming growth of LNG production and the expected growth in demand for natural gas in combination with the recent limited ordering activity of LNG Carriers to gradually tighten the shipping market over the course of the next 12 months. As such, the Company is well positioned with two LNG MEGI ships on the water and another four newbuildings set for deliveries over the next 18 months. We believe that the strengthening market sentiment will continue and that our state-of-the-art MEGI vessels will command a premium in the market. The Company is actively marketing the LNGCs in both the term and spot markets to secure an optimal position in the improving market.
The Company will continue to take a proactive approach and explore further accretive transactions. It is constantly evaluating opportunities in the charter, newbuild and second-hand market and has significant financial flexibility to pursue transformational deals due to the continued support of its largest shareholder to pursue these deals.
Source: Flex LNG