FLEX LNG - Q2 2024

Transcript

Oystein Kalleklev (CEO)

Hi, everybody, and welcome to Flex LNG's second quarter result presentation. It's August 14, and I'm Øystein Kalleklev, CEO of Flex LNG Management, and I will be joined here, as usual, by our CFO, Knut Traaholt, who will run you through the numbers a bit later in the presentation. Before we begin, just want to highlight, we will do a presentation followed by a Q&A session, where the best question today can win a summer pack consisting of the Just Flex It T-shirt. We are already preparing for Oslo Marathon in September. I might be on Gastech and not able to attend this year, but Knut, he will run this year. He promised me. Flex on the beach, street, no, beach, Flex on the Beach, sandals, and then, of course, the Flex cap.

So, before we then start the presentation, just to remind you that we will be providing some forward-looking statements, so there are limited details. We will be using some non-GAAP measures, so please also read the earnings report together with the presentation. Yeah, let's kick off with the highlights. Revenues for the quarter, $84.7 million, which was in line with what we said. Close to $85 million was our guidance. This resulted in net income and adjusted net income of $21.8 million and $30.4 million, respectively. Just a reminder, the difference here is, in adjusted net income, we only include the realized gains on, and losses on derivatives, while in the net income figure, we are also including unrealized numbers.

So earnings per share came in at a healthy $0.41 or $0.566 on adjusted basis. Of the major recent events, we also touched upon this in our earnings report back in May. We have fixed one ship on a 10-month charter, so we had, as some of you might recall, we had Flex Constellation being redelivered back from our 3-year firm charter end of Q1 last year, and we then decided to take it in dock early, as this is a low period of the market. We completed the dock according to plan and budget, and took her back in the market in the middle of April, where we traded her spot for a while.

We managed to get a cool-down slot so we could get the ship back in cool condition. And then after our spot voyage, we fixed her on this 10-month charter with a large Asian buyer, LNG, Asian LNG buyer, where the redelivery then is end of Q1 2025, but where the charter has the option to extend this time charter by one year to 2026. So that means we are fully covered, 100% charter cover for the remainder of the year. Also, a very high coverage going forward, as I also will touch upon a bit later in the presentation. We, as some of you also recall, we have been doing an extensive balance sheet optimization phase for some time, and we had one phase where aim was $100 million.

We did a balance sheet optimization 2.0 and then 2.1, and, correct me if I'm mistaken, Knut, I think we raised $387 million on those refinancing, and we actually have a very good financing situation. But, you know, we are not idling because of a good financial structure. We try to optimize and find better terms.

As I said in the Q1 presentation, we had an extension of Flex Endeavour from 2030 to 2032, and with that attractive backlog on that ship, we were able to secure a very attractive Japanese operating lease on that company, and we also amended our bank loan, and we have thus secured $430 million of new financing with the net proceeds from this financing of $97 million, which Knut will tell you more about. During this quarter, Q2 is more or less always the softest quarter. We try to plan our dry dockings during this quarter. So we had Flex Constellation, as I mentioned, in dock, and Flex Courageous also taken out from a TC, out of operation in dock and back on TC.

Both ships were done at 17 days each, 3 days below our guidance of 20 days, cost of docking around $5 million, according also to our budget. That means we do expect revenues and earnings to pick up in Q3. We have all the ships back in operation. Two ships were out of the market for some time in Q2. So with all ships back in operation, somewhat better spot market affecting the one ship on variable hire. We do expect revenues to pick up to around $90 million, time charter equivalent earnings also to increase a bit, and the same then goes with EBITDA, as most of our costs are fixed in the short term. So with our very healthy backlog, which I will touch upon, a very strong financial position, good outlook.

Once again, we are declaring $0.75 quarterly dividend. Dividend last twelve months is $3.125 per share, implying a running yield of around 12%. So, just a reminder here on the guidance. We guided between $70,000-$75,000 on the TCE rate, delivered in the middle of that. We delivered spot on the revenues. We said close to $85 million. $84.7 million is as close as you get to $85 million. And then, adjusted EBITDA, we said close to $65 million, $63.2 million, a bit lower because OpEx is slightly higher in Q2 than Q1, due to timing effects that Knut will tell you more about.

And then, as I said, we expect higher revenues and earnings for Q3 and probably, you know, usually Q4 is the strongest quarter for us. We have one ship on index linked to the spot market, and Q4 tend to be the high season in the spot market. As mentioned, the dry dockings we had scheduled for this quarter was completed according to both plan and budget. I mentioned the backlog. So there's been one change from or recently. You know, we have some of our ships on very long duration charters, Flex Rainbow, 2033. We recently extended Flex Endeavour from 2030 to 2032, with option—the charter has the option to extend to 2033, and we utilized that kind of added backlog on that ship to refinance the ship on better terms.

Vigilant, we last year extended to 2031, with option is to 2033. Then we have two ships to 2029. We have the Flex Freedom to 2027, with option 2029. Resolute and Courageous, we announced in Q1 that those two ships were extended from 2025 to 2027, as expectation. And we do expect these ships also to be declared until 2029. Due to the contract structure of these ships, where you have a front-loaded firm rate compared to the option rate, which you will also find more details about in our earnings report, where the remaining ships in our portfolio have a higher, about 18% higher option rate. Though this doesn't apply for these two ships, and it has a bit revenue recognition effect, although not a cash flow effect.

Flex Volunteer, Aurora, 2026 with option to 2028. Then we have Flex Ranger, fully open 2027. And then, as I mentioned, Constellation fixed now until end of Q1 2025, where the charter has the option to keep on until end of Q1 2026. So that's our first fully open ship, with Ranger coming back, of that in 2027, and we have some ships in 2028, 2029, which we think is a very good window of having ships open, for reasons I will explain a bit later in the presentation. Then the last ship, Flex Artemis, is on a variable hire index charter, where it's linked to the spot market, where typically, revenues are highest in Q4, and then Q1, Q3 tend to be a bit similar, and Q2 being the softest quarter.

Here, the charter has the option to keep that ship until 2030. So with the healthy backlog, a high level of income visibility, 47 years of firm backlog, which may go to 66 years, we have a fairly predictable cash flow. Last three years now, we paid out $528 million of dividends, consisting of the ordinary dividend, $0.75 per quarter, plus some special dividends in the past. We're topping those dividends up. And as we have said and touched upon a lot of times in the past, the dividend decision factors, not gonna go into too much details. The change we have here, we upgraded market outlook for reasons I will tell you in the market section.

Spot rates are up, but that's not really the driver here. It's really the fact that term rates have been picking up. Where we take this back to green, as I said in last presentation, we were intending to have the color yellow also in Q4 2023 when we reported in February, but we got a bit color blind here by all the green lights and forgot to do it. We are upgrading this again to green, so green colors on most of the decision factors. In terms of the dividend and $0.75, once again declared, bringing the trailing 12 months dividends to $3.25. Then I think I hand it over to you, Knut, on the financials.

Knut Traaholt (CFO)

Thank you, Øystein. Revenues for the quarter came in at $84.7 million, slightly down from the first quarter, but as explained by Øystein, this is due to the seasonal lower period, impacting the variable hire contract for Flex Artemis and also the spot operations for Flex Constellation. In addition, we had fewer operating days as we had a number of ships in dry docking, resulting in off-hire. That returns into a time charter equivalent per day of $72,400. And if you look at the vessel OpEx, as we commented on the Q1 presentation, we were a bit low compared to budget, but that is timing effects of our expenses.

So we're slightly higher this quarter, but please note that the full six months average of $14,600, and we are in that sense in line with our budget. When we look at the net income, net income at $21.8 million, that is $0.41 per share. In the report, you will see that we had realized gains from a derivative portfolio of $6.8 million, and we had unrealized losses of $3.4 million. In the adjusted numbers, we adjust out the unrealized gains and losses, so for this quarter, the $3.4 million, and also the slight FX gain. And then we also add back the cash gains that we realized on the amendment of a interest rate derivative swap in April.

As announced in the first quarter presentation, we reduced the duration of two swaps, one for Q1 and one for the second quarter, and that's adjusted into the numbers, so we get an Adjusted Net Income of $30.4 million, or $0.56 per share. Looking at our cash balance, we're at $38 million from operations and $9 million of change in net working capital. We reduced our debt by $27 million in scheduled installments, and they have also the cash from the termination of the swap and then pay dividends of $40 million. That ends up at the cash balance at the end of the quarter, $370 million. And as we note here, as the mentioned refinancings are expected to be concluded in the second half of the year, we will free up $97 million.

And I'll come back to the refinancing a bit later. On our derivative portfolio, we have reduced the duration of it. We've maintained the short term, the short-term high coverage, which is in line with our expectations of the long-term interest rate development. When we now add a Japanese operating lease, we will also have a fixed rate element of that. And in August, we also amended a so-called mirror swap structure, where we now have added $100 million and used the positive value from the mirror swap structure to reduce the fixed rate interest rate. And as you see there, it's six years starting in 2026 at attractive 82.5 basis points.

On the refinancings, this started off with a new contract or the extension of the Flex Endeavour contract, which made sure attractive for a lease financing, and in particular, these JOLCO financing structures. We will, we have raised $160 million for that. It's at near about 10 years lease financings, and that will release about $48.5 million. This is a structure where we have a fixed rate element and a floating rate element. And on a blended basis, we have a loan margin here of about SOFR plus 130 basis points, which is very attractive. On the back of that, we are then refinancing the two remaining vessels of the old $375 million facility. We are extending the duration and also increasing the leverage somewhat.

That will release $48 million. As you see, we are matching the terms of the recent $290 million facility, where we have now a margin of SOFR plus 185 basis points. In total, this will release $97 million, and we expect to conclude these transactions in Q4. If we look at the debt maturity profile, we see that we are now prematurely addressing our 2028 maturities. We are pushing them now, so we have remaining a maturity in 2028 of $103 million, and then spreading out the remaining maturities. And with that, I hand it back to you, Øystein.

Oystein Kalleklev (CEO)

Okay. Thank you, Knut. To show you don't want the summer kit for your holiday with Madonna. So, okay, let's look at the market. So this is the overall product market for LNG. Quite muted growth in the quarter, up just about 1% year-over-year compared to last year, with Australia, now U.S. being the main growth engine, now solidly behind, now ahead of Australia and Qatar, 43 million tons in the first half of the year versus 41 and 40 for Australia and Qatar.

Interesting to see that, despite the conflict in Ukraine, Russia is still growing and expect them to grow, even more so now with we have seen two loadings on the Arctic LNG 2, the new liquefaction plant, where they have been able to source all the steam tonnage for this project to do the loadings, as we alluded to in our May presentation, where we said that we thought that a shadow fleet of LNG ships would develop based on, you know, the discussion we had with the different market actors and interest in the S&P market. So not really surprising for us to see that. Rather, a bit surprising that some people didn't expect this to happen.

Russia have had a lot, lot of time to prepare for this, and, we are basically, they basically following the recipe for the petroleum market, where they have been successful in keeping oil barrels flowing to friendly nations, typically India, China, Brazil, so it's really the BRICS. So, we do think that the Russians will find also willing buyers for these LNG volumes. On the import side, we have mature Asia, being Japan, Korea, Taiwan, growing 4%, driven mostly by coal shutdowns, and of course, lower prices also helps. Europe had a mild winter, with high inventories coming out of the season, somewhat muted the energy demand, and then reducing its imports by 20% year-over-year, which means more cargos are flowing again back to Asia.

China growing very steadily, 10%, driven by low prices compared to other feedstocks. India, even more so, 25%, impressive growth in India. Thailand been growing for a long time now, 11%, and rest of world also very good growth, 28%. So we do see more shift of cargos to Asia, which I will come back to here shortly. If you look at it graphically, you will see the U.S. LNG export share going to Europe, which kind of increased dramatically once you had the uncertainty with Russian flows to Europe, and even more so when you had the invasion, stayed at very elevated levels.

The energy situation in Europe is more manageable these days, and prices have come down, which is enticing Asian buyers back to the market, with now the Asian importers being bigger again than Europe, which used to be the case in the past. As you can see here in European gas demand, year-over-year change, we do see some pickup in industry, but power generation, residential is quite muted. And also, gas storage levels at around 85% is quite high compared to the past, the ten-year average, solidly ahead of that. And then, as I mentioned, Asia is where we see the growth, which is generally positive for shipping.

Shipping flexible cargos all the way to Asia via Panama is almost, yeah, it's about twice the distance than going to Europe, but few LNG ships utilize the Panama Canal. Panama authorities have had discussions with the LNG exporter to try to find ways to entice them to use the Panama Canal, but a lot of people are trading around the Cape of Good Hope, which means that ton-mile goes even more quicker, since Suez is not really a feasible route this time. If you have a U.S. cargo going from U.S. to Europe, typically, rule of thumb, it's about 5,000 nm; going to China, 10,000 nm. Going to China via Cape of Good Hope, 15,500 nm.

So it's really a big driver of ton-mile, which is good for the shipping market and which is also why shipping market sentiment has turned in the recent months. So you do see here on the right-hand side, Asian LNG imports is up in the high range of historical demand and much higher than last year. A recent trend there lately, again, about Russia, we have had a somewhat surprising invasion of Ukrainian troops into quite far into Russia, all the way to Kursk, not that far away from Moscow. And these are creating uncertainty about Russian pipeline volumes that going to Europe is still quite a lot.

It's also still a lot Ukrainian transit, as you can see here on the left side of the graph, affecting, you know, potential purchasers like Austria, Slovakia, Moldova. And that's been firing up the European gas prices recently as there's more concern about supply situation. But then we also see a similar response in Asia. Asia also want the LNG. They have been through a heatwave where cool demand has shot up, and we actually see a similar increase then in the JKM, which is the Japan-Korea market or the Asian spot price.

This really needs to be higher than the European gas price, TTF, in order to make the cargo economic so that you are willing to take the longer route to Asia rather than just selling the cargo into the European market. Henry Hub prices still at low levels, making this spread between U.S. and domestic gas prices and international gas prices very attractive for those people with a contract that can ship the cargo from U.S. to either Europe then or Asia. So as I mentioned, spot market has also turned up recently.

We do follow the seasonal pattern here, so coming from fairly good levels at the start of the year when we are in the winter season, and then you have the lull in the shoulder months, let's say March, April, where you hit the bottom and then trending upwards. Right now, two-stroke, the modern type of LNG ships, 85,000, and the dotted line here represent the future prices, where we do see levels of, yeah, $130,000-$140,000 in the peak winter season. That's why we also think that our numbers will be the best in Q4, affecting the one spot ship we have. Although levels are lower than we've seen in the past, it's still historically very high levels.

Once you're getting above $100,000, most ship owners with a spot ship is quite, quite happy. But, you know, what we have been more, which we think is a more positive sign, is the trend up in the term rates. So, for some time now, we have had a soft spot market, which have dragged down the rate curve, where short-term rates been lower than long-term rates. But that has changed.

So while long-term rates, 10-year charters, these are typically for new builds, economics around $95,000 a day, which is needed in order to defend an investment of, let's say, $260 million at yard sticker price, plus the lead time, typically 3.5-4 years, and the kind of financing cost of building that kind of lead time. So, 5-year rates now ticked up slightly ahead of the 10-year rate, which I think bodes well also then for the ships we have coming open 2026, 2027, 2028, where we can recontract ships, hopefully at better levels than what we have today, and thereby increasing our revenues down the road. In terms of the order book, still, it's quite a lot of new builds for delivery near term.

This is one of the reason or the main reason why we have taken protection by having a, a very long backlog in near term until 2026, 2027, 2028, where we think market condition looks better, because then we have been through this massive order book. Of course, the order book is for two reasons. It's a lot of new projects coming to the market, which needs and require ships, and then it's the general phase of out of the older steamships that are uneconomically, which needs to be replaced, and there are still a lot of these ships, which eventually will be phased out of the market. Positive to see now that with the high prices of new builds and the long lead time, very seldom you see any speculative contracting.

The contracts being done are mostly for Qatar, for their planned expansion and renewal. And then ADNOC was recently in the market, securing quite a few LNG ships for their expansion and renewal project. So less than 7% of these ships in order, around 350 of those are speculative or open. If you look at the steamships, we just on the left-hand side here have, like, a scatter graph where you will see the redelivery of these steamships. So, as we said in the past, most of these steamships were built against 20- and 25-year charters back-to-back, typically with the LNG purchasing contract, and typically, these ships were built around 2000.

So these ships are now coming off or rolling off existing legacy contracts, and we do not expect the vast majority of these ships being able to extend those contracts. So these ships will be you know, phased out of the market because they are not economically, because of the inefficiency and the size of these ships. So here we see all the ships being redelivered near term and the age of this ship. And these ships, some of these ships are rather old. And then, as I touched upon, we have seen buyers linked to Russia picking up a couple of these ships for their trade in order to lift the volumes from the sanctioned Arctic LNG 2. If we look at the right-hand side, is economics for these ships.

Given their inefficiency, the rates for these ships are much lower than for the modern tonnage. In terms of the product market, despite the moratorium by the White House on U.S. export licenses coming into force in January, we still see a lot of activity in terms of buyers committing to long-term offtake agreements, and even doing so in U.S., because most buyers feel confident that the moratorium will be lifted regardless of who will win the election. As there is a lot of projects ready, it can create economic value for the country in exports, which generate trade surplus and not really trade surplus in general for U.S., but at least an improved trade situation, and also jobs.

So, we do see people signing up not only to Qatari volumes, but also in U.S., for U.S. projects that are being put in a bit of a limbo right now, but where people are signing up because they think this moratorium will be lifted, depending a bit on who wins the election, either later this year or probably next year, if the Democrats win. So, good to see that, the volumes are quite healthy, 48 million tons, contracted in first half of the year, which is not far off, the previous year, despite this moratorium and the duration of these contracts on average 14 years. So, as I mentioned then, there is a lot of project in the U.S. ready for being green-lighted once the moratorium is lifted.

Despite not any U.S. project being sanctioned, in the first half of the year, we saw projects in other places. Of course, North Field West in Qatar, 16 million tons, which is why they are contracting more ships. In the United Arab Emirates, the 10 million tons, which we also expected, and why ADNOC, Abu Dhabi National Oil Company, is out in the market also contracting LNG ships, one project in Canada and one in Oman, bringing the FID volume to 30 million tons in the first half of the year. Once we get the moratorium lifted, there's a lot of volumes that can be sanctioned very quickly in the U.S.

And, you know, while we are waiting for this, as I mentioned, these projects are signing up more, offtake agreements, which means that once the moratorium is lifted, they are ready to go because they have the required contract coverage to FID those projects. So that is kind of underpinning the third wave of LNG. We will see a lot of growth in the market from 2026, 2027, 2028, where we have most of our ship open, so we can benefit from this growth in the market. We can benefit from the replacement of steam ships and the fact that term rates today are higher than what we have in our portfolio today, so we can reprice the portfolio. And as Knut mentioned, the interest rates are also on the way down, expectations.

So, interest expenses is actually our biggest cost component. So, if interest rate drops, that will also be beneficial for free cash flow. So, growth will then come from Qatar and U.S., and I think we are well positioned to capture that growth. So with that, I think we just summarized the presentation. We delivered numbers according to our guidance, $0.56 of adjusted earnings per share, which is the measure which takes out the unrealized effects of the derivatives. We have secured one new contract for Flex Constellation. We have some new financing that Knut has talked about, which are very attractive in our view. We have done the dry docking schedule for this year. Next year, we will have four ships for dry docking, three in 2026, and then zero in 2027.

So, we have this on a regular basis. Every five years, we take the ship out of service. This year, we've been able to do that on 17 days on average. Revenues is expected to pick up in Q3, driven by all ships back in operation, higher spot rate on one ship, and then we think, numbers will be probably better in Q4. We'll come back with a guidance on that, when we are reporting in November. And once again, we're declaring our ordinary quarterly dividend of $0.75 per share, giving you $3.125 on a trailing 12-month basis, 12% yield.

We are well covered to pay that dividend with our pro forma cash balance of $467, I believe it was, and then, of course, the backlog I showed you earlier today. With that, I think we conclude the presentation, and Knut might have some questions on his laptop.

Knut Traaholt (CFO)

Yes. Thank you all for the questions you have provided. We have a number of them. But maybe start with the market and the sentiment for long-term contracts. Have you seen any change in sentiment or activity? And how do you then view the opportunities for types of Flex Constellation and Flex Ranger?

Oystein Kalleklev (CEO)

Yeah, I think, you know, it's easy to say something, but you know, we are a bit data-driven as well, so we do see that rates have picked up on the term rates. Spot rates, of course, it's not unusual that spot rates picks up. They usually pick up. They bottom out typically March, April, and then they go up. But we do see also the term rates picking up here, and we are once in a situation where shorter-term rates or five-year rates are higher than 10-year rates, which is how the market should be in a balanced way, you know. If somebody can commit to taking a ship for five year at the same rate as a 10 year, most people will commit to taking five years rather than 10 years.

Typically, people want a discount if they're taking a commitment of 10 years rather than 5 years. So, we are getting a bit better balance in the market. We see increased inquiries for term rates. And it's not really surprising because there is this roll-off of steam tonnage I've shown earlier today. The steam ships on legacy contracts being rolled off, people don't want to keep those ships. They want to renew them with much more efficient ships. We've shown in the past, fuel efficiency per a cargo, a ton lifted on our ships is about 58% better than a steamship. So that means that it's not only good economics, it's also good for the environment. When people are committing for a five, 10-year charter, they don't want steam technology.

They want the new ships, so we do see more inquiries for that, for fleet renewal, and also some of these projects where are now signing up SPA contracts are also starting to look at locking in shipping. So I think that bodes well for our strategy here, trying to fix that window near term, where we have seen muted growth of the market in terms of volumes, and then having our ships available, ready for the next wave of LNG.

Knut Traaholt (CFO)

We touched upon in the presentation on the Russian Shadow Fleet. So a number of question here, how do you see that impacting the LNG shipping market, if that their ability to grow to a large fleet, and how that will impact the global trade?

Oystein Kalleklev (CEO)

Yeah, this is not a like a new phenomenon. This is a well developed situation on the tanker side, both the crude tankers and the product tankers, but also the, on the LPG side. I run the Avance Gas as well. The shadow fleet on the VLGC is very big there. We're talking up to 15% of the fleet being in this captive shadow trade. So it's, it's, for that particular trade, it's Iran, China. On the petroleum products, it's typically Russia, India, China, mm, maybe Brazil. On, on the crude, it could be Venezuela, Iran, and then, Russia. So this it's a lot of read-through from the other markets. It's, it's basically the same thing happening.

Older ships are being taken up by the affiliates with the Russian counterparties, and they go into a captive trade. Once that ship goes into that trade, it will never come back to the regular trade. It will stay in that trade. If they have insurance at all, it's with a shady counterparty. And this is a way of the sanctioned party to avoid the sanction and being able to generate revenues on the products. So it means that, you know, you could have some steam tonnage that we thought might be scrapped will go into that trade, but this basically also tend to replace those ships that the Russians were trying to buy, a lot of ice-breaking Arc7 ships, which were sanctioned and are not delivered.

So they have to find a way to arrange that logistics without those ships that they contracted. So it doesn't really affect the net fleet growth because some ships are not being delivered, and some ships that we thought would be scrapped, they might go into this trade, and we will never be in this kind of trade. Most serious actors will not be in that trade, but it just changed the dynamics because we haven't had the shadow fleet in LNG in the past. But it seems like this is something that will happen now and with a lot of similarities to the tankers and the VLGC side.

But, you know, it's not good in the sense of you have a lot of ships trading around the world without proper insurance and maybe not proper maintenance, and these ships are old. So it's a, you know, it's a time bomb before one of these ships end up in a situation where you will have, spills and, ships sinking, breaking, whatever, which will, be an environmental catastrophe. It's not that serious on the LNG side, because the LNG is cooled methane. So if something happens, that gas or the LNG on that ship will heat up, become gas vapor, or basically methane vapor, and it will evaporate. But, that is not the case if you look at the crude tankers or the petroleum tankers, then you have a product that's not gonna evaporate, but it's gonna be landing on somebody's shores.

Knut Traaholt (CFO)

Then we are transitioning over to more to the trading pattern of the global fleet and a normalization in the Panama Canal operations. But still, most of the ships are trading through the Cape of Good Hope.

Oystein Kalleklev (CEO)

Mm.

Knut Traaholt (CFO)

Do you see any trend back to a normalization by with transit through Panama Canal, or it continued that the Cape of Good Hope will be the preferred route?

Oystein Kalleklev (CEO)

I think the booking schedule in Panama is not really always suitable to the LNG's trade. It's very rigid. A lot of things can happen in the market. You book a slot, and you have a cargo. Suddenly prices moves, and you rather want to send that cargo somewhere else. Or in terms of you ballasting a ship, and if you're going in the Pacific Ocean when you're ballasting that ship, there's really no place to pick up a cargo except for U.S. If you're ballasting from China to the Atlantic, you can pick up a cargo in Australia, you can pick up a cargo in the Middle East, West Africa. So it gives you a lot more optionality to fix that ship on a cargo. While if you're going the Pacific route, you only have just one option.

So the canal authorities have been in dialogue with LNG players to try to find a system that incentivize them to use the canal more, but we still see that people just don't, you know, they don't like the rigidity. And also there are costs associated with using the Panama Canal. If you have a lot of slack in your program, for example, you have a commitment to deliver a cargo, you have a natural boil off. So kind of some of the fuel has a sunk cost. So if you are using the Panama, you're paying them the toll, you go through, you come to China, and then you are waiting for 10, 14 days in order to discharge. You will not stop the boil off, so you have to kind of consume that.

You know, it's not really any cost of going the longer route. You save the Panama fees, and you're just burning the same basically amount of LNG. There are some differences there because some ships have equipped reliq system. We have four ships with a partial reliq, three ships with the full reliq. So if you have those kind of ships, very advanced ship, you can use the Panama, you can go to China, you can idle there, and you can reliquefy part of the boil off and then get that back to cargo, so to reduce your fuel. So it's really a bit also dependent on the specification of the ship in that trade.

Knut Traaholt (CFO)

And then a follow-up to that, as we see in more and more cargo going to Asia and also taking the long route to the Panama Canal, no, sorry, the Cape of Good Hope, the ton-mile effect of that versus the fleet supply coming over the next.

Oystein Kalleklev (CEO)

Yeah, so of course, in general, of course, we always like when you have a pull to Asia, especially if you have a pull to Asia with congestion in Panama, because, as I mentioned, these numbers in nautical mile, it really drives up the requirement for ships. So we've seen that now lately. Often, if you have ships from U.S. going to Asia and not utilizing the Panama, they will typically use the Suez Canal, better weather and shorter route. Today, nobody is using that except for those taking cargo into Egypt, which has switched from being an exporter to importer recently, and then to Jordan. Except for that, nobody's using the Suez Canal for transit, except for these two ships linked to Russian buyers for Arctic 2. So, it's positive.

We want as much LNG to flow to Asia in general because it drives up ton-mile, and that's one of the reasons why I would say spot market's been surprisingly good this summer, because we didn't really expect that much pull to Asia. And then on top of that, you have the Suez crisis, which also adds some extra ton-mileage.

Knut Traaholt (CFO)

Then to Europe and EU ETS, how do you see that play out for the modern two strokes versus the steamers and the trifuels?

Oystein Kalleklev (CEO)

Yeah, you can... I can start with the question. You are more, more, in charge of the implementation on our side for it-

Knut Traaholt (CFO)

Yeah

Oystein Kalleklev (CEO)

... but I can just give you some broad idea. So of course, for this year, ships trading into Europe will have to buy CO2 carbon permits or basically the ETS, to for the emissions they are creating. And of course, this is being implemented over a couple of years with a higher threshold you have to buy every year. Eventually, this will be 100% of the kind of documented emissions you have on 50% of the trade. So if you're going from U.S. to Europe, there's two legs in that trade. It's the laden leg, and then it's the ballast back. So that's why you're getting to 50%, because you are 50% in Europe and 50% in U.S., which don't have this EU ETS. So the price of this EU ETS, of course, is volatile.

It can be EUR 100 or EUR 60. So you have to measure that kind of emission you are creating, and then it's not offsetting it because it's not a carbon offset, but you have to pay for that permit of the documented CO2. So that will create a cost of emissions, which I think is the best way of dealing with global warming. If people pay for it, they have a real monetary incentive to do it, much better than having bureaucrats making a lot of rules and giving out a lot of subsidies. Better put a price on it, and behavior will change. So we are generally in favor of this. We like our CO2, and we think it should be implemented more worldwide. It will be a competitive advantage for us.

As I said, we have a fuel consumption per ton cargo transported about 58% lower than a steamship. That means the steamship has to buy a lot more of this carbon credits in Europe to off, not offset, but to pay for the permit of emitting. So that, you know, in first you have the steamships, they are uneconomically, as I mentioned, on the fuel consumption. They are small, and then you have this carbon penalty on top of it. So, so generally, we like it. It's good for us, and then Knut here has been in charge with adapting our time charters, because this is not our cost. So we... this is a cost pass-through.

We gross up on these taxes, so this is for the charter's account, which has to pass it on to the consumer, who eventually pays for this. So that means all our time charter, under a time charter, the time charter, we get paid a fixed fee. We run the ship, and they will pay for all costs associated with that trade, being Panama Canal, ports, and fuel. So we guarantee a fuel consumption, and that, that is what we are allowed to utilize. And then when taxes come on top of it, taxes related to the trade, they will also pay for that, so we implemented that so that we are sending them documents. "This is the CO2 we are emitting. This is the CO2 we have to buy. Here is the invoice.

Please either refund us or provide us with those carbon credits, so we can hand them over to EU organ in charge of this." Or do you have something to add, then?

Knut Traaholt (CFO)

No, I think that's. We are doing the reporting. We are, and we are passing this on to our charterers as long as we are on a time charter basis. Slight geopolitical question, U.S. elections, do you see how that will impact the LNG market? And I assume here, in particular, the permitting process in the U.S.

Oystein Kalleklev (CEO)

Yeah. No, I think, of course, if Trump wins, it will have the positive effect for LNG that we think this moratorium will be lifted very quickly. Of course, there's a judge already in Texas who have decided that this is not allowed. So, of course, at that decision in a court in Texas, don't really will affect this. But I think if Trump wins, it will be repelled quite quickly. If Harris wins, it will take some more time. But I think it's in any event, it will happen. They kind of put this in January in order to attract more votes from kind of green votes. This is a good case for them, especially after permitting oil drilling in Alaska.

They had to do something, and this looks good on a tweet or whatever. Then eventually, there are so much gas in the U.S. that this can create so many jobs, that, you know, we do think that the reason will prevail, and eventually, they will slowly say that, "Okay, you can start issuing permits again." Of course, there is a lot of pressures from other nations as well to, on U.S. politicians to allow this. Both allies in Europe and Japan are pressing on the U.S. politicians to repeal this moratorium, and I think that will happen regardless. Once that happen, a lot of these projects have been filling up with, new, LNG, offtake agreements.

Once it lifted, they are more or less ready to go and will kick off the next wave of U.S. LNG.

Knut Traaholt (CFO)

Good. Then we'll round up a couple of questions on Flex and strategy. How do you view the outlook for growing the fleet and the company, being M&A, second-hand tonnage and newbuildings?

Oystein Kalleklev (CEO)

Yeah, I thought you were gonna say how to spend it. That's usually-

Knut Traaholt (CFO)

That's the next one.

Oystein Kalleklev (CEO)

The question we get. Okay. Now, as we said repeatedly, we are 13 ships. The last ship we got delivered was May 30, 2021, Flex Vigilant, so of course we are happy to grow, but we have to grow profitable. We are not gonna grow just to have a bigger fleet and a bigger revenues. It has to be accretive. It has been hard to find good growth prospects the last couple of years because of the skyrocketing newbuilding prices, going from the low when we purchased the ship at $180-ish to $260. So it's a very big ramp-up in prices.

Not only have the prices gone up, but also lead time gone out, from two and a half years to suddenly four years, and that cost a lot of money when interest rates is about 5%. So that... I just have to repeat what we said in the past. I think we demonstrated for some time now that we are not gonna pay to grow. We're gonna do it disciplined. If we find... Right now, I think the order book is already so sizable that, it, we don't really need more orders, and, and, and I don't find it that very attractive. $260 million, having to wait to 2028, I don't find that attractive compared to paying dividend, in this period of time.

So I think we need to, if we are to grow, it's more natural to do that through consolidation. We are the world's biggest listed LNG shipping company by far. We have a modern fleet. We have a good track record. More or less, all the ships, all the LNG ships in the world, it's about 650 on the water, 350 under construction. That's 1,000 LNG ships. Almost all of them are owned privately. We have 13 ships. CoolCo have 13 ships. Awilco has 12 ships. The rest of the ships are in private hands. If you are a private owner, you have a good fleet, you want to go public, cash in, have a better position having a stock rather than a private ownership, you should reach out to us. Don't call Morgan Stanley or JPMorgan.

They will charge you a hefty fee to take your company public. Rather, call us, and we can maybe consider giving you some shares in Flex for the ships you have in your private account.

Knut Traaholt (CFO)

Then there's the questions on, balance sheet optimization and what you can expect, going forward. Are there more in the pipeline?

Oystein Kalleklev (CEO)

Hmm.

Knut Traaholt (CFO)

I guess I can take it-

Oystein Kalleklev (CEO)

Yeah

Knut Traaholt (CFO)

... on the two financing we are announcing today is basically triggered by the 500-day extension on the contract with Cheniere, and also availability of an attractive financing package in Japan. Concluding that, that means that we also then have to address the two other vessels or have the opportunity to address them, as they are fairly low levered. This was the first transaction we did in the balance sheet optimization program for the bank financing. So they have amortized, and values has also improved with the banking market. So, that concludes those three ships.

As you also saw, we are then also in discussions with some of the banks to convert a term loan tranche to an RCF, so we maintain our $400 million of bullet or non-amortizing RCF capacity. For a next refinancing, that will most likely be subject to contracts and the long-term contracts and the availability of attractive financing. We are very pleased with the package we have today, and I also want to mention that with the JOLCO, we're introducing a new bank to us, which we are very pleased with working with in this process and look forward to expand business with as well. So, for now, we are able trigger for more refinancing is probably a new contract.

Oystein Kalleklev (CEO)

Yeah. I think it has to be interest rate derivatives optimization, which is next. Now, we have run through. We were way ahead of Fed. We started doing a lot of swaps early 2021, 2022, when rates were low, well ahead of a year before Fed started to hike rates. That trade have generated $127 million of profit since 2021. We have monetized and crystallized most of it. I believe balance sheet now is around $35 million of unrealized gains, so $127 million. So most of the gains have been realized and crystallized. Rates are now peaking down again. We have plenty of trading limits, so we will be opportunistic to have to see if there are levels which are attractive to lock in a higher hedge ratio.

We have been anticipating a pivot from Fed, peaking our hedge ratio in Q2. Long-term interest rate have fallen a lot since the employment figure in U.S., 1.5-2 weeks ago. So we will monitor that development and see if there are opportunities to hedge rates at attractive levels, as they have been going down quite a lot recently. And typically, we try to use windows where there are distress in the market, like when Silicon Valley Bank collapsed, to secure good terms for our shareholders.

Knut Traaholt (CFO)

Yeah. That concludes the Q&A-

Oystein Kalleklev (CEO)

Hmm

Knut Traaholt (CFO)

... and, announcement of who wins the Flex kit.

Oystein Kalleklev (CEO)

Yeah, you can have a look at the, the names and-

Knut Traaholt (CFO)

We have one very active shareholder investor asking questions.

Oystein Kalleklev (CEO)

Yeah.

Knut Traaholt (CFO)

It's a number of questions reaching all of the topics, and it's Petter Sveum.

Oystein Kalleklev (CEO)

Okay, Petter.

Knut Traaholt (CFO)

So-

Oystein Kalleklev (CEO)

Then you will have the Flex LNG kit. Before concluding, then I just want, again, thanks to our technical team and our crews who have done a fantastic, once again, a fantastic dry docking of Constellation and Courageous. It's the 6th dry docking we have done, now the last two years, or actually 1.5 year, all according to time and budget. So we're very happy with that. Very high technical quality on our team. And, then we will be back in November with our Q3 numbers, which we have guided today, so we don't expect any surprises in November. And in the meantime, you can enjoy the $0.75 per share of dividends, which I think will be payable at the end of the month. Okay, thank you, everybody, for listening in.

Knut Traaholt (CFO)

Thank you.