FLEX LNG Ltd

NYSE:FLNG

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you all for standing by, and welcome to the Flex LNG Quarter 2 2020 Earnings Presentation. [Operator Instructions] I must advise all that this conference is being recorded today, Wednesday, 19th of August 2020.And without any further delay, I would like to hand the conference over to the first speaker of the day, Mr. Øystein Kalleklev, CEO. Please go ahead, sir.

[Øystein M. Kalleklev, Principal Executive Officer]

Thank you, Gino, and good day and welcome, everyone, to the second quarter 2020 presentation for Flex LNG. My name is Øystein M. Kalleklev, and I'm the CEO of Flex LNG Management, and I will be joined today by our CFO, Harald Gurvin, and we will guide you through today's presentation. A replay of this presentation will also be available at our website, flexlng.com.So first, a disclaimer with regards to, among others, forward-looking statements and completeness of detail. The full disclaimer is available in the presentation and we recommend that the presentation is read together with the interim financial report as well as our 20-F annual report.So the highlights. The spot market for LNG shipping has stayed weak over the spring and summer due to the fallout from the COVID-19 pandemic. A general weak spot market over the summer is not really surprising and something which we also highlighted in our Q1 presentation in May as well as in our market webinar in early July. When we presented our numbers in May, we disclosed the fact that we have booked 97% of Q2 days at Time Charter Equivalent earnings, or TCE, of close to $50,000 per day. Earnings on the remaining 3% have been on the soft side. So we are, therefore, delivering a TCE of $47,000 per day, which is, however, in line with our current cash breakeven levels. Our cash breakeven level is, however, expected to be reduced a bit when we are scaling our business with the remaining newbuildings, which, on average, also has slightly lower financing costs.In Q1, we achieved a TCE of $68,000 per day for our fleets. So the average TCE for the first half of the year was $57,000. This is a trading result which we are reasonably satisfied with, given the very challenging market environment. Notwithstanding the obstacles posed by the novel coronavirus outbreak, we have managed to operate our ships with 100% uptime and availability. We are pleased that cargoes have been delivered without disruptions or delays to our customers. Furthermore, we have mobilized our newbuildings for delivery as planned. Flex Aurora was delivered end of July while Flex Artemis was delivered on Monday, actually 2 weeks ahead of our contractual schedule.Crew rotations have been made particularly difficult for the shipping industry, resulting in a lot of seafarers being effectively stranded on ships. We are, however, pleased that we, on average, have been able to carry out 2 crew changes per ship in this difficult period, thus minimizing extended stay for our seafarers. So again, we would like to convey our gratitude to our seafarers and onshore personnel for delivering first-class operational performance also in trying times for everyone involved.In terms of financials, we delivered a slight adjusted loss of $700,000 for the quarter or an adjusted loss of about $0.01 per share. This compares to an adjusted net income of $9.3 million in the first quarter or $0.17 per share. Thus, during first half of the year, we delivered adjusted net income of $8.6 million translating into $0.16 per share.When it comes to financing, we are pleased that we have put in place $920 million of attractive long-term financing for our 7 newbuildings for delivery in second half of 2020 and first half of 2021. Five ships, including Flex Aurora and Flex Artemis just recently delivered, will be financed under the $629 million ECA facility, which we recently increased to a $639 million facility as we were able to add the $10 million accordion pass for the Flex Artemis as she is employed under a long-term charter with a subsidiary of Gunvor. For the remaining 2 newbuildings, Flex Amber and Flex Volunteer, we announced $281 million of financing through our sale-leaseback and a bank loan, respectively, in our May presentation. This financing was subject to final documentation and this financing have now been signed and executed in June according to plan. Hence, 98% of our remaining CapEx is covered by long-term debt. The remaining $17 million of CapEx, we can easily finance by our cash at hand, which stood at $116 million at quarter end. We also believe we will be starting to generate positive cash flow again in the fourth quarter, which we could utilize for this purpose. Having all ships financed long-term with no maturities before second half of 2024 as well as having a very comfortable cash position puts us in a very strong financial position.As we have previously announced, we have been active, securing contract coverage for our 2020 newbuilds in order to not be too overly exposed to fluctuations and gyrations in the spot market. Hence, Flex Aurora, Flex Amber and Flex Resolute have all been fixed out on TCPs with periods ranging from 8 up to 12 months. Flex Artemis is already committed on a long-term charter with Gunvor, as explained earlier.With more ships on the water in third quarter, we expect our revenues to continue to grow. Although freight rates are now finally improving ahead of autumn, these rates are typically for voyages in September or October. Hence, we are guiding similar TCE numbers for third quarter as numbers are also being slightly dragged down by the fact that we have certain positioning and mobilization costs for the 3 or possibly 4 ships for delivery in third quarter.When it comes to dividend, which we all like, we have to ask for some patience from our shareholders. Right now, the world is facing its sharpest decline in economic activity and energy demand since the Great Depression. In this period of time and given the state of the LNG shipping market during second and third quarter, we think it's rather in the best interest of our shareholders that we continue to preserve cash for the time being. That said, we will continue to be a very shareholder-oriented company as our affiliated companies, Frontline, Golden Ocean and SFL, have evidenced both in the past as well as yesterday with the 66th consecutive quarterly dividend paid by SFL.So before handing over to Harald for financial review, I will just summarize our fleet composition. As of today, we have 3 ships on fixed TCs. This is Flex Ranger, which commenced on new TC with Spanish utility, Endesa, at end of May. During July, ship management for Flex Ranger was transferred to Flex LNG fleet management, and we thus have all our ships under in-house management. In addition, Flex Aurora and Flex Resolute have been fixed on shorter-term TCs of 8 and 11 months, respectively. These TCs also have a fixed rate higher structure, and these TCPs commenced subsequent to deliveries from yard. We have, in total, 4 ships currently operating under variable hire TCs. This provide us with what could be described as utilization insurance while we keep exposure to the overall freight market. The ships serving these types of contracts are Flex Enterprise, Flex Rainbow and Flex Artemis, which was recently delivered under long-term variable TC to Gunvor. Flex Amber will also be operating under a variable TC once she is delivered either end of September or October. Three of our ships are operating in the spot market, Flex Endeavour, Flex Constellation and Flex Courageous. So with these ships, we are fully exposed to the ups and downs in the spot market for good or bad. With our contract portfolio, our industry low cash breakeven levels, our very strong financial position and the fact that our fleet consists entirely of planned new efficient LNG carriers, which are generally sought after by charters, this isn't certainly a risk we can't manage. Lastly, we have 3 remaining unfixed newbuildings being Flex Freedom, Flex Volunteer and Flex Vigilant, which we market towards potential clients now. All in all, we think this gives us a balanced contract mix where we are keeping exposure to the overall freight market while also ensuring an adequate level of utilization and fixed earnings for our fleet. For Q3, we are now 94% fully booked and we also have a fairly high level of income secured for Q4, also with 7 ships serving fixed or variable TCs in this quarter.So I will hand it over then to Harald for our financial review.

[Harald Gurvin, Principal Financial Officer]

Thank you, Øystein. Looking at the income statement. Revenues for the quarter came in at $25.8 million, down from $38.2 million in the previous quarter. Revenues in the quarter were affected by the fallout caused by the COVID-19 pandemic, which has resulted in lower gas demand and thus impacting freight demand. Adjusted EBITDA for the quarter was $17.4 million, down from $27.8 million in the previous quarter. The result for the quarter includes a noncash unrealized loss on interest rate swap of approximately $6.2 million. At quarter end, we had entered into interest rate swaps totaling $610 million at an average interest rate of approximately 1.3%, and the noncash mark-to-market loss was the result of the continued fall in long-term interest rates during the quarter. All our interest rate swaps relate to financing agreements, and we are not required to post any cash collateral under agreements when the mark-to-market is negative. We also recorded a noncash foreign exchange gain on cash deposits held in Norwegian kroner of $700,000 in the quarter due to strengthening of the Norwegian kroner against the U.S. dollar in the quarter. Net loss for the quarter was $6.7 million. And adjusted for the above items, the adjusted net loss was $700,000 or $0.01 per share. Then moving on to our balance sheet as per June 30.We had a solid liquidity of $116 million per quarter end, down from $120.8 million in the previous quarter. The Time Charter Equivalent rate achieved for the quarter is around our cash breakeven rate, and the reduction in cash is primarily due to an increase in working capital of $4.3 million in the quarter. As mentioned, we do not have any restricted cash relating to our interest rate swaps, and the very limited restricted cash of $70,000 relates to mandatory deposits required by tax authorities. Our assets at quarter end consisted of 6 vessels on the water with an aggregate book value of $1.1 billion. In addition, we have booked vessel purchase prepayments of $349 million relating to the 7 newbuildings still to be delivered at quarter end, which represents the advanced payment on these. Total debt at quarter end was $762 million, of which approximately $36 million is due over the next 12 months and thus classified as current liabilities. Total equity as per quarter end was $812 million giving a strong equity ratio of 50%.As Øystein mentioned, we have now secured for attractive financing for all our vessels, including the 7 newbuildings still to be delivered at quarter end. In June, we signed 2 financing agreements announced in the previous quarter. The first is $156 million, 10-year sale and leaseback transaction with an Asia-based leasing house for the newbuilding, Flex Amber, which is scheduled for delivery in September or October this year. The transaction is priced at LIBOR plus a margin of 3.2% per annum and has an 18-year payment profile with annual repurchase options commencing on the first anniversary and there is a purchase obligation at the end of the 10-year lease period of $69.5 million.The second facility is $125 million term loan and revolving credit facility for the financing of Flex Volunteer, which is scheduled for delivery in the first quarter of 2021. The 5-year facility has a repayment profile of 20 years, in line with our other bank facilities and we've split into a $100 million term loan and a $25 million revolving facility. We have already entered into interest rate swaps for the full amount of that facility, giving attractive all-in pricing, including margin of 3.3% per annum.In July, we also agreed a $10 million accordion increase for Flex Artemis under the $629 million ECA facility based on the long-term charter for the vessel with Gunvor. The vessel was delivered Monday this week, whereby the $135.8 million tranche was drawn. Post quarter end, we also utilized the swap option under the $629 million ECA facility to replace Flex Amber with her sister vessel, Flex Vigilant, which is the final of our newbuildings scheduled for delivery in the second quarter of 2021. With $920 million in debt secured for the newbuildings, the net on funded CapEx is less than $20 million versus $116 million in cash at quarter end. Following these transactions, we will have a very comfortable debt maturity profile with the first maturity due in July 2024. The staggered debt maturity profile also mitigates refinancing risk.And with that, I hand the word back to Øystein who will give an update on the market.

[Øystein M. Kalleklev, Principal Executive Officer]

Okay. Thanks, Harald. So let's start by doing a quick recap and review of the spot market for LNG shipping. 2020 have followed the usual seasonal pattern. The rates weakened during February as the warm winter and the COVID-19 outbreak softened sentiments considerably. We actually had a short rally in March as China dealt what was perceived at the time as swiftly with the outbreak. However, as ramification of the outbreak became more evident with lockdowns implemented throughout the world, the market fell back again in April and has stayed weak during the spring and summer months.Headline rates for modern 2-stroke tonnage fell from $55,000 to $60,000 in March to around $35,000 to $40,000 per day in April where they have stayed until early August. However, where we have experienced the biggest change in Q2 has been in relation to the ballast bonus sentiment. During Q1, ballast bonus sentiment was ranging between fuel ballast bonus, high fuel -- and higher back to hub to even round trip economics, i.e., where you get ballast bonus from hub to hub or back to load ports. During Q2, we have seen below full ballast bonus sentiment with a lot of voyages being done at 1-way economics of fuel back to hub. This means achieved TCE have been well below headline rates in the spot market. We did -- do, however, now see improved sentiment in the spot market.During August, headline rates have recovered to the $50,000 level with sentiment turning bullish. Ballast bonus conditions are where we see the sharpest change in sentiment. Atlantic is now back at full round of economics while Pacific have recovered to full ballast bonus to hub with sentiment firming towards better economics for owners. Looking forward, we do expect the rates to follow the normal seasonal pattern with higher rates during the winter season. That said, arbitrage economics are mostly likely -- most likely not sufficient this year to support the blowout in rates that we saw in 2019 and more so in 2018.So next slide, we are illustrating the development in gas prices. Prior to the COVID-19 pandemic, we already have had very low seasonal gas prices due to the 2 warm winters in a row and generally weak Asian demand due to economic slowdown. European buyers came to the rescue in 2019, gobbling up around 90% of the about 35 million tonnes of new supply coming online last year. However, with another warm winter, we already had a supply overhang, and this was further amplified with the lockdowns and reduced economic activity following the outbreak. Thus, we have seen record low gas prices during the summer with European gas for some time actually trading below a $1 per million BTU. Asian spot prices have for short periods also been trading below $2 and the Henry Hub hit 20-year -- 1-year low in June with $1.40. We have, however, seen a rally in LNG prices lately, and JKM is now above pre-COVID-19 levels with a price assessed by Platts yesterday of $4.2 per million BTU while LNG prices in Northwest Europe have recovered to $3.8, which is the highest level since January 3.Following the coronavirus outbreak, we also saw an oil price crash in March with West Texas Intermediate oil price benchmark at onetime trading below $0 while Brent traded down to around $20 per barrel. In contrast to LNG, however, we have seen sharp production cuts for oil with expected 2020 production now being about 8% lower than 2019, following the big 9.7 million barrel per day cut by OPEC in Russia as well as somewhat lower output in the U.S. This has stabilized oil prices, which rather quickly bounced back to the $40 range. The oil price determines the price of about 70% of the LNG sold to pricing formulas, typically with about 6 months delay. So we will also see large volatility in these contract prices with currently low contract prices before these bounce back in delayed tandem with oil price recovery, while the super contango in oil quickly evaporated with recovery in the spot prices resulting in oil-linked LNG prices now flatlining once recalibrated. Spot LNG prices, however, continues to be in contango. Spot LNG prices are in fairly strong contango as prices are expected to recover and gradually convert to more sustainable prices as product market is expected to become tighter in the coming years as economic activity resumes.So let's consider Europe. As I mentioned, we have seen record low gas prices. And paradoxically, the lowest prices have been recorded in Europe despite this region being a major LNG importer, taking about 25% of the global volumes. The reason for this peculiarity is the fact that Europe has ample import and storage capacity and thus can act as the buyer of last resort, benefiting European consumers. We saw this in 2019, as mentioned, but we have also seen European buyers being extremely active during the spring, buying LNG fist over hand for storage injection. The recovery in carbon prices in Europe has also incentivized this hoarding as LNG is much cheaper than burning coal. So despite energy demand in EU expected to decline about 10% in 2020 due to the lockdowns, we do definitely see that cheap gas is pushing out both pipeline gas imports which were significantly down in the first half of the year, but even more so with coal facing existential threat in Europe from cheap gas and pricey carbon permits. In June, U.K. broke another new record with 67 days, 22 hours and 55 minutes without consuming any coal power. Nevertheless, the storage capacity in Europe is finite. Capacity is limited to about 100 million BCM or about 70 million tonnes of LNG equivalent. Still, this is a pretty massive storage capacity, representing equivalent to about 80% of European LNG imports in 2019. Consequently, we have seen European import costs tapering off during June and July, resulting in the storage curve converging towards the injection level seen in 2019 and thus avoiding tank tops in the summer. Lower demand from European buyers has, however, resulted in large production cuts of flexible U.S. volumes and thus, again, rebalanced prices from the lows seen during the summer. I will review the production cuts in more details at the end of the presentation.So let's look at the biggest import area, Asia, which accounts for about 70% of the imports and which comprised the traditional import markets in North Asia as well as the growing markets in Southeast and Southwest Asia. Asia together with Europe imports about 95% of the global LNG production with Middle East and Americas, primarily Latin America, being the 2 other import regions. The Asian imports have during -- is there something wrong with the slides? Or...

[Harald Gurvin, Principal Financial Officer]

Yes. Yes.

[Øystein M. Kalleklev, Principal Executive Officer]

Yes. Okay. The Asian imports have during 2020 been fairly flat, growing about 3 million tonnes in the period January to July. At the beginning of the year, despite warm winter, imports into Asia grew pretty robust. But following the lockdowns, we have seen imports, particularly in Japan and South Korea, being on the low side. Chinese and Indian demand has, however, recovered quicker as lockdowns have eased and these countries also benefit or earned more from cheaper LNG as they have relatively less contractual obligation for imports linked to oil price.At the beginning of the year, there were also some positive sentiments around the Phase 1 trade agreement between U.S. and China, and folks were hoping for a rapprochement. U.S. exports to China actually resumed in April with 3 cargoes going to 7 cargoes in May. However, with the fallout from COVID-19 and the increased brinkmanships between Washington and Beijing seen lately, U.S. cargoes to China has tailed off again with only 3 and 2 cargoes in June and July, respectively. We also expect only 2 or 3 cargoes for August. Right now, it seems nothing will happen on the political side before November elections in the U.S., and China is now almost $40 billion behind their $200 billion commitment agreed in January according to Standard's & Poor (sic) [ Standard & Poor's ].So we have now explored that dynamics behind the swing buyer, Europe. So let's explore the swing producer, U.S., in a bit more detail. As we highlighted in our July webinar, U.S. producers are inherently more at risk for cargo cancellations due to their cost base and their flexible offtake contracts, but customers can typically notify our cargo cancellation 60 days prior to loading by paying the fixed tolling fee. This tolling fee is typically around $2.50 per million BTU.In contrast to the U.S. tolling project, the vast majority of LNG projects worldwide are vertical integrated oil and gas project where a feed gas underpinning the LNG production is associated gas at very low economic cost, if any, at all. Furthermore, the capital investment are generally sank, which means the short-run marginal cost of producing the LNG is very low and for most projects range from $1.5 to $2.5 per million BTU. As the U.S. projects need to source feed gas in the market, although competitively priced U.S. gas, the cost base is thus higher, but also more flexible. So it's no surprise that these U.S. projects on the right-hand side of the cost curve are the ones with cargo cancellations. The project in the graph with the highest short-run marginal cost is the Tango FLNG project in Argentina where the charter IPF (sic) [ YPF ] has declared force majeure due to the effects caused by COVID-19.Despite the cargo cancellation, U.S.-based producers can thrive as they also have built-in flexibility in their business model with Cheniere reporting compensation from cargo cancellation in Q2 of a whopping $708 million, and thus securing the company a net income of $197 million for the quarter. That said, companies like Cheniere tend to do better in a buoyant LNG market as income from trading activity is then typically higher. So in that regard, increased feed gas deliveries to U.S. export plants lately should be positive for future export volumes.So floating storage. During 2020, we have seen a very volatile levels of floating storage, which -- with a couple of spikes at period of times where we normally see very limited floating storage or any at all. We first saw a spike in floating storage in February following the Chinese lockdowns. But during the summer, we have also seen a lot of cargoes floating around when prices were low and demand on the soft side. A level of 3.5 million tonnes floating equates to around 50 ships. So it's unprecedented that we see that many ships in floating storage during the summer months, and this is more a reflection of disruption and weak demand. As prices have recovered, the levels of floating storage have started to tail off again, and we are now back to the band of normalized level with [ Keppel ] marking 13 ships currently as floating.We are now approaching the winter months again, and we would expect a gradual buildup of floating storage, again in line with the seasonal pattern. We also do expect fuel cargo cancellation from U.S. and it's likely that some of these cargoes will end up in floating storage, playing the contango time spread instead. In our Q1 presentation, we said that we expect floating storage would be massive, and we still expect this to be the case once we are getting closer to the peak consumption months.Then the final slide before summarizing today's presentation, this is an updated graph from the July webinar where we've shown the monthly and cumulative export growth with associated cargo cancellations. At the beginning of the year, we were expecting about 25 million tonnes increased export in 2020, and the trajectory in the first quarters was ahead of the curve. During second quarter, Asian demand faltered and Europe initially soaked up these volumes by injecting cheap gas for storage. However, during June, July and August, low gas prices have incentivized cargo cancellations and export volumes have thus started to decline. We do see July and August as the peak cancellation months and expect a gradual decrease in cargo cancellation and thus a recovery to some export growth in the fourth quarter, which will thus be supportive of freight demand. As of September, Platts reckons 165 U.S. cargoes have been canceled, and we expect around 270 cargoes in total during 2020, of which U.S. cargoes are probably making up around 200 of these cargoes.The other exporter facing big cancellations are -- is Egypt, which exported about 3.7 million tonnes in 2019, but have in 2020 only exported about 0.5 million tonnes. We have also seen lower exports from Australia during July and August while the Qatari exports are, however, remaining stable and are expected to be at similar levels as in 2019. There have been a lot of projection about growth levels following the COVID outbreak, and we estimate about 10 million tonne increase in our webinar in July. Due to the higher U.S. cargo cancellation and also upward revisions of past cancellation, we now expect goal to be about 6 million tonnes in -- for 2020, in line with Energy Aspects' recent estimates.The worst-case scenario have, however, been avoided with Poten expecting a fall of 6 million tonnes in April, which have now been revised to up to about minus 2 million tonnes. Please note, it's important to differentiate between imports and export numbers. Export numbers is a better proxy for shipping demand. About 3% to 4% of exports are consumed by ships as boil-off gas during transit in cargo operations depending on voyage lengths and whether it involves floating storage, which also drives freight demand. Projecting 2021 export is more difficult as this will be very dependent on the winter weather as well as the shape of economic recovery. When it comes to the winter temperatures, chances of El Niño are very slim. And actually, we've seen La Niña alert for this autumn and winter with 55% to 60% probability. La Niña weather usually means colder winter and should be positive for gas demand. When it comes to economic recovery, this is very much tied to how quickly a vaccine is brought to the market and thus enabling normality to return to everyday life. However, if growth and demand recover, there is a lot of growth potentially in the LNG market, both near term and long term, which should be supportive of freight markets.So then to summarize, the summary is actually exactly the same as in our webinar July -- on July 2 with only 2 changes. The first being that we have now secured $920 million in financing for our newbuildings rather than $910 million due to the $10 million additional financing secured for Flex Artemis. The second change is that the second wave of COVID-19 has now become a reality in many places rather than a probability. With the recent fixtures, Flex LNG is well positioned with a mixed portfolio of fixed variable contracts as well as ships in the spot market, a market we think will improve near term as we expect substantial reduction in U.S. cargo cancellation and increased floating storage. And for floating storage, we have the best ships as our ships are large with very low levels of boil-off from the cargo tanks, thus preserving maximum cargo deliveries. Near term, the winter temperatures and the shape of economic recovery are the 2 most important factors which will affect the shipping market, as explained on previous slide. You could add politics to the mix with the November election, but we don't really expect a quick resolution to the disagreement between the 2 superpowers. With only 3 newbuildings being ordered in the first half of 2020, we are back to basics in terms of newbuilding contracting. The positive side of a weaker shipping market, coupled with extremely limited appetite by investors and banks to commit capital to the sector, is that newbuildings usually dry up, which is the case for most shipping sectors these days. However, we do expect to see project orders going forward with some of the big projects sanctioned last year as well as the mega expansion by Qatar.Lastly, we would like to point out our strong balance sheet and financial position. We have secured the equity we need. We have a substantial cash position of $116 million at quarter end. And finally, we have now $920 million of financing in place for the remaining newbuilds. Our financial position, our brand-new fleets, our first-class operational performance puts us in a very good position to continue to build our company. There are about 160 old steamships and high fuel ships due for redelivery under their existing charters for the next 5 years. TradeWinds is running a story today about Nigeria LNG considering renewing their fleet by getting rid of their steamships. There are still around 200 steamships in the market or about 40% of the fleet. So we think this will create ample opportunities for us to continue to build our contract portfolio, ensuring a robust commercial and financial strategy.So that concludes today's presentation. Thank you all for listening. And let's open for some questions, Gino.

[Operator]

[Operator Instructions] Our first question comes from the line of Gregory Lewis from BTIG.

[Gregory Robert Lewis, MD and Energy & Shipping Analyst]

Øystein, I guess my first question is around the dividend. Clearly, you guys have the balance sheet and where you need -- where you want it to be, you have -- financing is basically taken care of. So just kind of curious, as we think about the decision around the dividend this quarter, would you kind of characterize it as more around the uncertainties around COVID or the coronavirus? Or is it more a function of we have vessels in the spot market and depending on how the spot market goes, that's going to impact our decision around the dividend? And while that might be the case, as the fleet gets fully delivered through the first half of next year, does that change how you think about the dividend?

[Øystein M. Kalleklev, Principal Executive Officer]

Yes. Good question, Greg, and good to have you on the line again. Yes, I think when we decided to cut our dividend, this was back in February when we suspended the dividend, we -- of course, it was a lot of uncertainty. And I -- as you rightly point out, uncertainty was the key factor here. Of course, we have had fairly high exposure to the spot market. So in that regard, we have seen that Q2 and Q3 would be very tough quarters. That's no surprise for us. We said this already in February and repeated it a couple of times since then. So it's more about in that situation. Also, especially if you look back to March, the financial markets and credit markets were in turmoil. Surprisingly enough, we are now in August. And S&P 500 is back above the level we had prior to the COVID situation. So given both the uncertainty in terms of the financial market with our stock doing pretty poorly and the amount of capital available, uncertainty about how we would perform in Q2 and Q3, we felt it was really no benefit of pushing out dividends, of course, it would be better to be in a position to preserve the cash. I think uncertainty right now seems to be lower, especially if you look at markets. So at one stage, of course, we will do a reassessment of this. You know the companies in this kind of group with our affiliated shipping companies, as I mentioned in the beginning, that we have a big, long track record for being shareholder-friendly and paying out excess cash if we have that ability. It's not like we're going to build an empire ourselves. The free cash flow shall be paid out if we have excess cash to shareholders. And right now we are finished with Q2. It's not like Q3 will be a great quarter either. So once we are starting to make money again, then, of course, we will have a frank discussion about that with the Board, and it's a bit too early to predict the outcome of that. But what I can tell you is, of course, we will, of course, pay dividend when we are making money.

[Gregory Robert Lewis, MD and Energy & Shipping Analyst]

Okay. And then just clearly, Europe has been I guess, dumping ground is not the right word, but that's where a lot of the LNG has been going just simply as there's really no other place to put it. As we move through the winter, how do we -- how do you kind of think that, that LNG storage in Europe, how do we think that impacts the market? Is there the potential -- you touched on JKM prices rising, is there the potential that some of that LNG could return to the market, if there are opportunities in Asia? Or is that -- once it's in that system, it doesn't -- it tends not to leave? Just kind of a little curious around that.

[Øystein M. Kalleklev, Principal Executive Officer]

I think if you look at the market right now, of course, we have added reduction in the floating storage. And the floating storage we have had over the summer hasn't been people playing a contango or playing time spreads. It's more have been disruptions. Or actually, you have to put it somewhere, as you mentioned, like a dumping ground. Right now, we have gone down to a more normalized level, and we expect this to start rising again because now you can actually play the time spreads where you're buying, let's say, September cargoes and selling -- sailing and then maybe floating a month and selling into a much higher November price. The -- we have had the situation where LNG prices have been very low, which have made this kind of time arbitrage difficult. It's becoming open now again. So we will expect this to have a gradual buildup. The last 2 years, we have seen around 35 ships in floating storage. We think it probably will be higher this year. And then in terms of reloads, I think that's the other big factor usually, which is very positive for shipping markets. If you're starting to get spreads between Europe and Asia, you could certainly see cargoes flowing out of Europe for reloads into Asia. With kind of Northwest European prices, as I mentioned in the presentation, going back to $3.8 while JKM is at $4.2, it's still a bit narrow that the spread to kind of make that trade work. But it will have to be, of course, dependent on the winter. Cold winter will create more demand and then, of course, as I mentioned, the economic recovery is also playing its part there. But markets are becoming more normalized, and we see that we have a big rally in the gas prices which are also driving up the freight rates recently.

[Operator]

[Operator Instructions] No further questions over the phone line, please continue.

[Øystein M. Kalleklev, Principal Executive Officer]

Okay. Since like we are -- can adjourn then for the day, thank you, everyone, again for participating in the presentation. We will be back in November with the Q3 numbers. Hopefully, the COVID focus will gradually fade away, and we are getting back to more normality. And hopefully, back in November, we will have pretty good winter market. So see you all then. Okay. Thanks.

[Operator]

Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect. Have a good day, everyone, and stay safe. Thank you.