FLEX LNG LTD., an emerging leader in the Liquefied Natural Gas (“LNG”) shipping and floating regasification market, reports unaudited results for the three and nine months ended September 30, 2017.
Highlights for Q3 2017:
- Reported Revenues of $9.8m vs. $8m in previous quarter.
- Reported Operating Loss before Depreciation of $4.1m vs. Operating Loss before Depreciation of $7.4m in previous quarter.
- Reports loss before tax for the third quarter of $4.0m, or $0.01 per share and $11.7m, or $0.04 per share, for the nine months ending September 30, 2017.
- During the quarter, operated four chartered-in LNG carriers (“LNGC”) to be able to establish a market presence and build an operational track record.
- At the end of third quarter, two chartered-in vessels were redelivered while remaining two chartered-in vessels were subsequently extended for an additional 180 days. Profitable employment has been secured for the two remaining chartered-in vessels
- Transferred primary share listing from the Oslo Axess to Oslo Børs
Other and Subsequent Events:
- On 14 November, the Company received a firm offer for a $315m term loan facility (“TLF”) secured by the three newbuildings with the delivery in first half of 2018. The debt available under the TLF is agreed to be drawn in connection with the delivery of newbuildings and the financing is subject to the execution of definitive documentation and satisfaction of customary closing conditions
Jonathan Cook, CEO comments:
“Over the past months, there has been upward pressure on charter rates as the LNG shipping market has tightened considerably, and we continue to see a trend towards a three-tier market with modern gas injection LNG carriers commanding a premium. As our fleet of state of the art newbuildings begins to deliver in the first quarter of 2018, we believe that a continued strengthening of structural fundamentals in the LNG sector will improve the rate environment further and provide us with various attractive employment options for our vessels.”
Øystein M. Kalleklev, CFO comments:
“We are pleased to have reached agreements to finance the first three of our LNG newbuildings that are scheduled to be delivered in the first half of 2018. The financing structure allows us to adjust the facility size depending on how we elect to employ our vessels and to substitute pledged vessels. This structure provides us significant balance sheet and operational flexibility as we grow our business.”
Liquefied Natural Gas Carriers (“LNGCs”)
FLEX LNG has entered into agreements to order or acquire 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. The Company’s MEGI LNGCs are scheduled to be delivered over the next two years.
Two of the Company’s LNGCs, originally ordered in 2013, 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. In February 2017, the Company entered into a transaction for the acquisition of two high-end MEGI LNGC newbuilds (“Initial DSME LNGC”) under construction at Daewoo Shipbuilding and Marine Engineering Co. Ltd. (“DSME”). These vessels were acquired from affiliates of Geveran Trading Co. (“Geveran”), the Company’s largest shareholder, and are expected to be delivered to the Company in the first quarter of 2018. In April 2017, the Company entered into an agreement to acquire two additional MEGI LNGCs currently under construction at DSME from affiliates of Geveran. These vessels are expected to be delivered to the Company in 2019.
Upon delivery of the newbuilding vessels described above, the Company will own a fleet of six MEGI LNGCs with the most advanced propulsion and fuel-efficient technology compared to the existing LNG fleet.
The Company entered into four separate LNGC time charters for 180 days with an option to extend for a further 180 days. These vessels are fourth generation Tri-Fuel Diesel Electric LNGCs, with sizes ranging from 155,000m3 to 174,000m3, and were delivered to the Company towards the end of the first quarter of 2017. The Company has actively sub-chartered these LNGCs in the spot and short term market to a wide range of LNG charterers.
The Company’s chartering activities have allowed it to establish a presence in the market and build an operational track record. Additionally, the Company has begun to develop strong customer relationships and undergone extensive vetting processes with respect to its operational and internal controls, as well as putting in place Master Time Charter Contracts with key LNG charterers. These actions have positioned the Company to actively market its MEGI LNGCs ahead of their respective deliveries.
In September 2017, the Company elected to redeliver two of the four vessels at end of third quarter. The Company has successfully secured employment for the remaining two vessels to third parties for the duration of the optional extension period, starting in September 2017 with redelivery in the first quarter of 2018. These two extensions will have a positive contribution to the Company’s earnings. The Company will continue to evaluate opportunities to charter in third party LNGCs to the extent that they will provide a positive contribution to the earnings position, although the Company’s primary commercial focus is to secure attractive employment for its newbuildings.
Floating Storage and Regasification Units (“FSRUs”)
FLEX LNG is actively pursuing opportunities to leverage its experience towards the implementation of FSRU projects, although no such opportunities will be committed to on a speculative basis.
The Company and NextDecade Global Solutions, a subsidiary of NextDecade, LLC, have signed a Heads of Agreement (“HOA”) to create a full value chain solution for customers seeking to purchase LNG from NextDecade’s Rio Grande LNG export project in Brownsville, TX. Initially, NextDecade and FLEX LNG will develop FSRU and dockside solutions for international customers of NextDecade, with the LNG supply also provided by NextDecade. The HOA will enable the companies to jointly develop and deliver timely cost-effective LNG import solutions tailored to their customers’ needs.
On July 19, 2017, NextDecade announced that it had signed a Memorandum of Understanding (“MOU”) with the Port of Cork Company (“Port of Cork”) to advance a joint business development opportunity in Ireland for a new FSRU and associated LNG import terminal infrastructure. FLEX LNG continues to support NextDecade to provide a fully integrated LNG import solution for the proposed LNG terminal at the Port of Cork.
Results for the Three and Nine Months Ended September 30, 2017
The Company reports a net loss of $4.0m and loss per share of $0.01 for the third quarter of 2017 compared with a net loss of $0.5m and a loss per share of $0.00 for the third quarter of 2016. Net loss for the first nine months of 2017 was $11.7m compared to net loss of $1.6m in the first nine months of 2016.
Voyage Revenue amounted to $9.8m and $19.5m in the third quarter and first nine months of 2017, respectively, and related to four vessels that were chartered in by the Company. Voyage revenue for the third quarter and first nine months of 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 $13.0m and $30.7m in the third quarter and first nine months of 2017, respectively, and related to expenses incurred in connection with the vessels that were chartered.
Administrative expenses amounted to $0.8m and $2.6m in the third quarter and first nine months of 2017 respectively compared to $0.4m and $1.4m respectively in the same periods in the prior year. In addition, costs of $4.6m have been capitalised onto the four new building assets in the first nine months of 2017 compared to $0.5m for the same period in 2016.
In the nine months to September 30, the Company’s cash balance increased by $10.4m compared to a decrease of $1.3m in 2016. This was mainly driven by cash inflows of $221.0m from share issuances and was partly offset by $76.6m of payments in relation to newbuilding contracts, $117.0m of loan repayments and a $16.9m loss from operating activities.
In 2017, the Company expanded its fleet of modern LNG newbuildings through the acquisition of four newbuildings from 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 Initial DSME LNGCs. The net cash proceeds of approximately $221m 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 Credit Facility is availability to the Company for a period of three years following the delivery of the Initial DSME LNGCs.
On 14 November 2017 the Company received a firm offer for a $315m term loan facility (the “TLF”) to finance the first three of its newbuildings – DSME HN 2447 (Flex Endeavour), DSME HN 2448 (Flex Enterprise) and SHI HN 2107 (Flex Ranger). The TLF has been offered by six banks and has been approved by each bank’s respective risk and credit committee. The TLF is agreed to be drawn in connection with the delivery of newbuildings and financing is subject to the execution of definitive documentation and satisfaction of customary closing conditions. 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 2017.
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 does not contain a 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 not linked to earnings, but rather includes balance sheet requirements that book equity exceeds 25 percent of total assets and that free cash is higher than $15 million and 5 per cent of net interest bearing debt. The structure of the TLF 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 will be available until at least 12 months following delivery of all the six LNGCs. Thereafter $30m will be available for working capital until the maturity of the TLF unless otherwise agreed. 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.
During 2017, the Company has assembled an experience management team with the appointments of Jonathan Cook as Chief Executive Officer, Øystein M. Kalleklev as Chief Financial Officer and Thomas Thorkildsen as Senior Vice President, Business Development. Messrs. Cook and Thorkildsen have extensive LNG and FSRU experience and are exceptionally well suited to lead the Company’s development plans, and Mr. Kalleklev has comprehensive financing and commercial experience from similar CFO roles in Knutsen NYK Offshore Tankers and Umoe Group.
In July 2017, the Company completed the transfer of its shares from the Oslo Axess exchange to the main Oslo Børs. The transfer will help to increase the Company’s visibility among the investment community and to facilitate better trading liquidity in the Company’s shares.
367,972,382 ordinary shares were outstanding as of September 30, 2017, and the weighted average number of shares outstanding for the period was 288,186,302.
LNG Market Outlook and Strategy
The LNG shipping market tightened throughout the third quarter, and rates increased sharply in October following gradual increases since May. This was due in part to strong LNG demand from China which helped to widen the arbitrage between spot LNG import prices in Europe, U.S. and Asia. This led to increased cargoes from the Atlantic basin and an associated increase of average sailing distances. The current market dynamic is supportive for a further increase in rates during a seasonally strong period of the year. It is also important to note that a relatively small portion of the global fleet of LNGC operates in the spot market (less than 10%), which can result in periods of increased volatility.
The globalization of the LNG markets continues to develop with LNG increasingly being traded as a global commodity. Historically, intra-basin trade in the Atlantic and the Pacific has been a large component of the LNG shipping market. This has begun to change as U.S. and Australian export capacity continues to ramp up, coupled with import countries’ strive to ease trading restrictions and new markets for LNG opening up with the help of FSRUs.
LNG export capacity continues to increase globally, and this has been a key driver of demand, creating a competitive LNG pricing environment, which encourages potential buyers and infrastructure projects and ultimately the adoption of LNG as a country’s primary energy portfolio. As the market continues to evolve, increased price transparency, liquidity and flexibility where an increasing amount of LNG is sold on a spot basis and under contracts without destination restrictions, will all contribute to a more global and liquid market.
Global demand for seaborne LNG continues to grow throughout 2017. In the first nine months of 2017, 218 million tonnes of LNG were exported, up 12% over the same period last year. In the U.S., LNG has been exported to 26 countries, as compared to 12 in 2016. A total of 39 countries have imported LNG year-to-date 2017.
Demand growth has come primarily from Asia, with China, South Korea, India and Taiwan all showing strong annualized growth. In particular, demand from China has increased by over 43% year over year, in part due to a rise in contracted imports that may exceed actual end user demand. Yet, the government of China has committed to diversifying its energy portfolio to focus on clean energy sources. This was recently affirmed by reports of a commitment by China to invest $43 billion to develop Alaska’s LNG sector. Likewise, the new South Korean administration temporary closed coal mines over 30 years of age in June. These mines have temporary closures scheduled for three months per year in 2018 through 2021 before they are permanently shuttered in 2022.
Most of the future growth in world energy demand is expected to come from rapidly growing emerging economies, with a significant portion of this growth likely to stem from China and India. According to the International Energy Agency, global gas demand is expected to grow by 1.6% annually over the next five years, with China accounting for 40% of this growth. Of the three primary energy fuels (coal, oil and gas) gas is the only one that is expected to continue to grow its relative portion of the share of the global energy portfolio. 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 18 months. As such, the Company is well positioned with six MEGI LNG carriers set for deliveries over the next 2-21 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 LNGc newbuildings 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, newbuilding 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.