FLEX LNG Ltd

OSE:FLNG

Earnings Call Transcript 2019-Q2

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Flex LNG Second Quarter 2019 Earnings Presentation. [Operator Instructions] I must advise you that this conference is being recorded today Tuesday, the 20th of August 2019. And now I would like to hand the conference over to your speakers today, Øystein Kalleklev; and the CFO. Harald Gurvin. Please go ahead.

[Øystein M. Kalleklev, Chief Executive Officer]

Thank you, and hi, everyone. Welcome to the Second Quarter Earnings Presentation for Flex LNG. My name is Øystein Kalleklev, and I'm the CFO -- I'm the CEO of Flex LNG management. And I will guide you through today's presentation together with our CFO, Harald Gurvin, who will run through the numbers a bit later in the presentation. A replay of the webcast will also be available at flexlng.com. Flex LNG is a shipping company focused on the growing market for seaborne transportation of liquefied natural gas. And since 17th of June, we have been listed both in Oslo and New York Stock Exchange under the ticker FLNG. So our disclaimer with regard to, among others, forward-looking statements and completeness of details. The full disclosure is available in the presentation, and we recommend that the presentation is read together with the interim financial report and our annual report, which are all listed on our webpage. So then let's move on to the highlights for the quarter. In the second quarter, we delivered revenues of $19 million in line with both first quarter 2019 as well as third quarter 2018. TCE edged up slightly from Q1 from $43,000 a day to $46,000 a day due to less positioning costs, resulting in our adjusted EBITDA of $11.5 million compared to $8.7 million in the first quarter. Due to unrealized noncash mark-to-market loss on derivatives of $2.2 million in the second quarter, the net loss for the quarter was $3.9 million compared to $3.4 million in the first quarter. The first half of the year was negatively impacted by lower transportation demand, which adversely impacted freight rates utilization and ballast sentiment. A very mild winter and a glut of LNG hitting the market in the first half of the year resulted in plummeting spot prices for gas, which have been the key drivers for lower-than-expected shipping demand, and I will go into more details about these drivers in the market section a bit later in the presentation. As I said, the shipping market has improved gradually with increasing tonne mileage and less availability of ships recently. Hence, the outlook for second half of the year is considerably better than the first half. Furthermore, as we are approaching winter season, gas prices are in steep contango, not only in the -- through the winter season, but also into the next year with summer prices 2020 for European gas actually at similar levels as this coming winter. With increased shipping demand and improved market positions, we are also pleased to guide that the third quarter is now booked with expected TCE of around $60,000 per day. This subject to normal operation and uptime of our vessels. Furthermore, we've been very busy on the financing side during the summer, executing both the $300 million global sale charterback deal for Flex Endeavour and Flex Enterprise as well as a new $100 million refinancing of Flex Ranger. These 2 effective refinancings have contributed with around $103 million in increased liquidity as well as longer funding. This gives us a high degree of financial flexibility and a healthy cash buffer in relation to our remaining 7 newbuildings. Lastly, it's worth mentioning that we've also listed our shares on New York Stock Exchange on 17th of June. So our stocks can now be traded on the 2 most relevant market basis for shipping companies. Next, before turning it over to Harald for the financial numbers, I will briefly touch upon the development of the company. In the period 2017 to 2018, we increased the fleet of this company from the 2 Samsung ships, Flex Ranger and Flex Rainbow, to now 13 ships. Our ships are our hardware, and I'm pleased to say that our hardware is the -- state-of-the-art. All our ships are large LNG carriers with cargo capacity in excess of 170,000 cubic meters and they are all fitted with the latest generation efficient slow speed two stroke propulsion either high-pressure MEGI or low-pressure XD-F. Such ships can deliver about 30% larger cargo capacity at about 50% less fuel consumption than the old steamships, which are now rolling off contract in the near term. This is also good news for environment as the carbon footprint of our new ships is significantly lower. However, in order to operate these expenses and sophisticated hardware, you also need the right people, software and quite a lot financing given the price tag of the ships. When it comes to people, we have during the last year also actively recruited very experienced management teams. Given the fact that we have the best fleet of LNG carriers around and a vibrant environment in the sea tankers' organization, which operates about 200 ships, we have been able to cherrypick people for all functions. Our organization is now in the process of taking the ship management in-house together with our partner Bernhard Schulte, and this will be executed by fourth quarter. The reason for taking the ship management in-house are primarily that LNG is a complex trade with basically a live cargo, which needs to be managed correctly at all times and is considered mission-critical by all charters. Secondly, this is, for us, business driven. Our customers are demanding and require first-class service 24/7 to ensure safe and reliable transportation. As Flex has the most modern fleet of large and advanced LNG carriers, we think our commitment and involvement will put us in a better position to also secure long-term commitments by charters through long-term employment contract when the time is right. Thirdly, we have a long-term perspective on our assets, and our assets have a very long technical and economic price. Greater involvement will also ensure better control that our vessels are operated and maintained to the highest standard ensuring competitive total cost of ownership during the lifespan of our vessels. When it comes to the software side of the business, this is related to the systems and processes. During 2018, we moved the management office to Oslo, integrating our staff with other sea tankers' affiliated shipping companies like Frontline, Golden Ocean and Ship Finance, which have a long experience operating sophisticated ships. Such integration do not only offer us cost synergies but also the ability to adapt best practices on continuous basis. Lastly, since we have invested around $2.5 billion in these ships, we also need to finance them. During the last 3 years, we have raised $630 million in new equity on top of the pre-existing paid-in [ capital ] equity. Hence our book value of equity is around $830 million, considerably more than the current market cap. In addition, we have secured around $800 million of attractive long-term financing for our first 6 ships as we did in July a refinance of our $315 million term loan by 2 leases as well as the new $100 million bank loan. This refinancing boosted our liquidity position by more than $100 million, and we are thus well capitalized both in terms of equity finance and liquidity. As mentioned, we also recently carried out the direct listing in New York. The company is thus dual listed in the 2 most effective capital markets. So, now over to you and the numbers, Harald.

[Harald Gurvin, Chief Financial Officer]

Thank you, Øystein. Revenues for the quarter came in at $19 million in line with the first quarter revenues of $19.1 million. Adjusted EBITDA for the quarter was $11.3 million up from $8.7 million in the first quarter, mainly due to lower voyage expenses due to increased utilization of the fleet in the quarter and lower administrative expenses due to costs associated with the U.S. listing in the first quarter partly offset by increased vessel operating expenses post due to delivery of Flex Constellation beginning of June. The result for the second quarter also includes a $2.2 million negative noncash mark-to-market on derivatives related to interest rate swaps and [ reentry ] in connection with the financing of the Flex Constellation. Net loss for the quarter including the $2.2 million mark-to-market was $3.9 million compared to net loss of $3.4 million in the previous quarter. Then moving on to our balance sheet after June 30. Following delivery of Flex Constellation in June, our assets consisted of 5 vessels on the water with an aggregated book value of $982 million at quarter end. In addition, we have booked vessel purchase repayments of $385 million, relating to the 8 vessels under construction, which represents advanced payments on these. We had a cash position of $26 million at quarter end, which excludes the $270 million freely available under revolving facility provided by Sterna. Total debt at quarter end was $567 million, of which approximately $30 million is due over the next 12 months and thus reclassified as current liabilities. Total equity as per June 30 was $820 million, giving a very strong equity ratio of 58%.Looking at our cash flow, the operational cash flow was $9.4 million for the second quarter, mainly due to improved utilization of the fleet during the quarter and of course the working capital adjustment of $4.7 million. The final payment upon delivery of Flex Constellation was $146 million, which was part financed by draw down of the first $125 million tranche under the $250 million bank financing entered into in April with net proceeds of $123.5 million after fees and expenses. The net cash flow for the period was negative $19 million, mainly due to the delivery of Flex Constellation, giving us a cash position of $26 million at quarter end excluding the $270 million available under Sterna facility. Post quarter-end, we closed the $300 million sale of charterback transaction with Hyundai Glovis with net cash proceeds of approximately $103 million after repayment of associated debt and fees giving a current strong liquidity situation. We have entered into several new attractive long-term financings over the last quarters, giving a very comfortable debt maturity profile with the first maturity due in July 2024. The $300 million sale in charterback transaction with Hyundai Glovis for the 2018 vessels, Flex Endeavour and Flex Enterprise was closed in July. Whereby, the 2 vessels were sold for a gross amount of $210 million per vessel with a net consideration of $150 million per vessel net of a $60 million seller credit. The vessels have been chartered back from Hyundai Glovis for a period of 10 years with a fixed monthly payment structure giving annuity-style cash flow profile at an all-in cost of around 6%. We have several repurchase options during the tenure of the charters and at expiry of the charters in 2029, there is a put/call structure at $75 million per vessel giving a repayment profile of 20 years and age adjusted profile of 21.5 years. The Flex Rainbow is also financed under a 10-year Asian tenure leaseback structure, maturing in 2028. The $157.5 million transaction closed upon the delivery of vessel in July 2019, base interest of LIBOR plus margin of 3.5% per annum and has a repayment profile of 20 years. Flex Constellation and Flex Courageous are financed under a $250 million bank facility entered into April this year. The first $125 million tranche was drawn upon the delivery of Constellation in June, and the second $125 million tranche is scheduled to be drawn upon delivery of Courageous in end of August. The facility has a tenure of 5 years from delivery of the last vessel, base interest at LIBOR plus a margin of 2.35% per annum and has a 20-year repayment profile. Post quarter end, we also entered into a $100 million term loan and revolving bank facility for the refinancing of the Flex Ranger, which together with Endeavour and Enterprise, was financed under a $315 million facility. The new facility is divided into $50 million term loan and a $50 million revolving facility, giving us flexibility to save the interest cost by the keeping the revolver undrawn. Although the existing financing with an outstanding amount of around $100 million does not mature until 2023, the rationale for the refinancing was to remove certain restricted covenants, including the dividend restriction included in the previous facility. In addition, the new facility has a very attractive margin of 2.25% per annum compared to a margin of 2.85% under the old facility. The facility has a tenure of 5 years getting maturity in 2024 and a 17.9-year repayment profile or 19 years age-adjusted. None of our financings have requirement for fixed employment giving us flexibility to opportunistically employ the vessels as we see fit. Based on the current interest rate levels, the average cash breakeven rates for our financings, including operating expenses is also attractive at approximately $50,000 per day. When it comes to funding and capitalization, we are in a comfortable situation as we raised $300 million of fresh equity in October last year and also closed the Glovis transaction which freed up around $103 million upon closing. At quarter end, we had $26 million in cash, adjusting for the Glovis transaction and the net cash due on delivery of the remaining newbuilding delivering in August. The pro forma cash balance excluding free cash flow is around $110 million. This excludes the $270 million freely available under the standard revolving facility. Excluding the remaining newbuilding delivering in 2019, we have investment commitments for the remaining 7 newbuildings of around $1.3 billion or an average of $184 million per vessel, which includes the full-ready kits on 3 of the vessels as well as newbuilding supervision. We have prepaid a total of $349 million of the CapEx, representing 20% on 2 of the vessels and 30% on the 5 vessels acquired in the fourth quarter of 2018. This leaves us with $937 million of remaining CapEx for the 7 newbuildings, equivalent to $134 million per vessel. Adjusted for the pro forma liquidity, again excluding the $270 million available under Sterna revolving facility, the number is $180 million per newbuilding, which is well below the recent financings concluded. Given the outlook for LNG shipping, we do think we are well capitalized with more than $800 million of equity on our balance sheet. Based on our existing financings, our average cash breakeven is around $50,000 per day. This means we have the potential to generate substantial free cash flow from our vessels going forward. A TCE rate of $75,000 per day means each vessel can generate $9 million of free cash flow per annum increasing to $18 million per annum with a TCE rate of $100,000 per day. Right now, we have 5 vessels on the water with an additional vessel delivering this month. Middle of next year, we will have 11 vessels. And finally in the second quarter 2021, we will have taken delivery of the last newbuilding, giving a fleet of 13 vessels in operation. This means we are uniquely positioned to generate substantial free cash flow over the next years. And with that, I hand the word back to Øystein, who will give an update on the market.

[Øystein M. Kalleklev, Chief Executive Officer]

Okay. Thanks, Harald. I'll now proceed with our update on the freight market. To start with conclusion first: the first half of 2019 has been disappointing in terms of trading results. It is fair to say that we had higher expectation for 2019 than what have materialized so far. Following the boom in the fourth quarter, the market went through a disruption in the first quarter this year with rates and utilization levels plummeting. The chart to the left illustrates the spot price development for the 3 different types of LNG carriers: older steam vessels, 160,000 cubic 4-stroke diesel electric vessels and lastly, the modern 2-stroke vessels. It is the latter which our fleet consists entirely of. Headline rates for large modern 2-stroke vessels have today rebounded to around $75,000 per day. The key drivers for a softer freight market in the first half of the year were primarily due to 3 reasons. Firstly, an unseasonably mild winter not only in Asia, but also in Europe due to the El Niño. Secondly, a glut of LNG entering the market, pushing down the product prices and thus with harsh economics and cost base in trade. Lastly, our shift in trading pattern have ensured hauls to Europe instead of Asia. These factors resulted in higher vessel availability and also a less -- and also a need for repositioning vessels from Pacific into Atlantic during the first half of the year. Headline rates, however, masked the importance of ballast bonus and utilization. Today, ballast bonus commissions are generally more advantageous than in the first half of the year with full hire and fuel compensation for ballast last leg currently. Firmer ballast commissions do reflect tighter shipping availability as illustrated in the chart to the right. Okay, let's move to the LNG market, which is the product we are transporting. After Asian LNG prices peaking at about $12 per million bcu last September, the slump throughout the winter season had unprecedented lower levels, both absolute but more so relative to oil. As explained, the mild winter have reduced heating demand, particularly in Asia. Softer demand, coupled with increased LNG supply, means spot price for LNG has slumped. This means a lot of new LNG supply coming out of U.S. and Russia have been picked up by European buyers, which have ample regasification and storage capacity as well as incentives to switch from coal to natural gas given the high carbon prices in Europe as we will illustrate in the next slide. That said, only about 15% of traded volumes are linked to spot prices, while around 70% of traded volumes are linked to oil price with the residual volumes being linked to gas prices like Henry Hub, National Balancing Point or TTF. Hence, most of the volumes are not linked to the spot price of LNG, which have implication for cargo destination. While low LNG prices can be negatively short-term due to charters' willingness to pay for transportation, low LNG prices spur demand and switch from coal to natural gas. However, product prices are not expected to stay at these lowest levels. Forward prices for LNG and gas are at a significant premium to spot, thereby creating a big contango. Contango is the best dance in town for ship owners and our ships are the preferred types given their favorable offtake cargo size and efficient 2-stroke machinery. When forward prices are higher, it also creates storage demand and sometimes this storage is done during transit to other markets by delaying this charge. Right now, you can buy gas cheaply on the spot market and sell it at a considerable premium forward. Similar terms [ per forward trade ] are a lot of floating storage, a lot of them with more than 30 ships being put into floating storage, thereby reducing the availability of ships and sending the freight rates to all-time high. So to illustrate the shift in trading pattern, we have on Slide 12 a break-down of U.S. volumes, which typically are a bit more footloose than most other cargoes. In the first half of 2018, about 3/4 of U.S. volumes were sold to Asia, which is in line with the market share. In 2019, the volume of U.S. LNG almost doubled, while volumes to Asia were flat. As explained earlier, European buyers stepped into the market, driving almost as much volume as Asian buyers and even chasing the purchases of U.S. LNG by a whopping 1,200%. Given the low prices of gas, we've also seen buyers in Latin American more than doubling their demand. As the sailing distance from U.S. gulf to Europe is about half of the distance to the largest import markets in Asia, the shipping costs are less and this has favored an Atlantic-centric trading pattern with negative implications for tonne mileage, i.e. how many ships are needed for 1 million tonne.With the product type differentials, we do, however, think demand in Asia for U.S. LNG will pick up in the second half of the year with positive effect on tonne mileage, and this we have already seen in the data with more Yamal cargoes being transshipped out of Europe to Asia. Next slide gives an overview of the various LNG projects competing for the green light. This slide from Bloomberg illustrates the most realistic project competing for green light in the near term. As you can see, there are plenty of projects, particularly in the U.S. where gas is abundant and cheap due to the increased output of shale oil, which has associated gas [ very ] suitable for LNG projects. The biggest project there is the 33 million tonne Qatar expansion, which is expected to receive FID in early 2020 once they firm up prices on EPC and also new ships for the project. The projects marked with dark blue color are considered likely to get a green light during 2019 and 2020, while the light blue projects are considered potential projects for 2019 to 2023. As you can see, there is not a lack of potential projects, and it's also interesting to see development where more of the projects today are initiated without locking up offtake agreements for the LNG on longterm contracts. Rather, projects like Canada LNG and Rovuma LNG are initiated without such offtake agreements, but rather where large international energy and utility companies utilize the balance sheet to commit to both financing and offtake similar to how upstream oil projects are typically executed. 2019 is already a very good year when it comes to sanctioning of LNG projects with several projects being sanctioned during the last 12 months, as I will illustrate on the next slide. That said, the current low gas price, turmoil in the energy markets and trade conflict between U.S. and China are forcing delays in project sanctioning compared to the projections 12 to 18 months ago. So if we look at the project, which has received FID this year and the ones that are most likely to receive it. We used this slide also in our first quarter presentation in May but there have been some developments with 2 new projects being sanctioned and 2 projects firming up. The base case installed capacity today is 392 million tonnes. Another 56 million tonnes are under construction. These being mostly U.S. projects like Freeport, Cameron, Elba, Corpus Christi and Sabine Pass Train 5, which will provide visible growth during 2019, 2020 and 2021. So far this year, 33 million tonnes of new volumes has been sanctioned, but Bloomberg estimates that sanctioned volumes could approach 100 million tonnes for 2019. In February, Golden Pass received a green light and recently we have seen approval of both Sabina Pass Train 6 and Mozambique LNG. The Calcasieu Pass modular greenfield project of 10.8 million tonnes has secured both financing and offtake of most of the volumes. Additionally, they have secured environmental permits from FERC and export license from the Department of Energy. So it is expected that this project will receive formal FID shortly. Woodfiber in West Canada is finalizing its EPC contract, it is also expected to announce FID shortly. Novatek has also during the summer announced that it has received full partnership commitment for the Arctic LNG-2 project, which is located in the proximity to the Russian Yamal LNG plant. This project is expected to be sanctioned in 2019 but could potentially slip into 2020. The remaining projects are then Exxon-led Rovuma LNG project in Mozambique and Phase 1 of Tellurian's Driftwood project. The uncertainty is probably highest with regard to the Driftwood project given its project finance nature and lack of firm offtake agreements. Furthermore, this project is competing with a lot of other U.S. projects for buyers. Recently, the Port Arthur LNG project has made several positive announcements with [ head-off ] agreements for offtake with both Saudi Aramco and Polish Oil and Gas, and this increased the likelihood of this project being sanctioned also in the near term. Given the trade conflict between U.S. and China, it is positive to see U.S. trends moving forward. However, without this conflict, there would certainly be more projects getting green lights as the biggest buyer are not eager to enter into financing or offtake for the U.S. projects.So our link in the LNG value chain is the midstream transportation side. The order book for large LNG vessels are currently 106 ships according to Poten. Of these 106 ships, 3 vessels are icebreaking vessels constructed for the Arctic Yamal LNG project. At the end of August, when we take delivery of Flex Courageous, we will have 6 ships on the water. In 2020, we have 5 newbuildings for delivery and another 2 for delivery in 2021. In 2020, which we think will be a very tight market, there are only 12 uncommitted vessels of which we have 5 ships. Hence, we control around 40% of this capacity. Although we have elected not to take long-term contracts so far, our strategy is not to be focused only on short-term contracts. Our strategy is to focus on the right contracts as the market is expecting to become tighter and older ships are rolling off longer-term charters. As I will illustrate later, Flex LNG is in good position to secure attractive long-term business. So far we have predominantly focused on spot markets, but once the markets gets tighter, as it's currently becoming, we are open to fix our vessels longer-term. Given the high-speed, large cargo size and efficiency of our vessels, they actually fit better on long-term contracts with high level of utilization and long sailing businesses, e.g. from U.S. to Asia. Our next slide is ordering activity of LNG carriers in a more historical perspective as the industry woken up to the fact that shipping market will become increasingly tighter, there was a flurry of ordering activity in the second half of 2018 and into 2019. We and Flex LNG have been ahead of this curve and fits generally with better slots than other owners who also have uncommitted vessels. Ordering activity do, however, vary depending on new projects coming to the market. The availability of capital, market sentiment and level of attrition, which is generally very low in LNG shipping as ships have a long technical and economic life as the cargo is light and noncorrosive. Despite a flurry of orders recently ordering activity is actually low compared to the period 2010 to 2014. That said, we do expect a big uptick in project orders, particularly by the Qataris, which want to secure ships for the 33 million tonne expansion which is expected to come on stream by 2024. The large project orders will put pressure on the [ yards ] in terms of capacity and limit the availability of slots available to independent ship owners in the coming years. We have a slide in our Q1 report which gives a more in-depth analysis of this for those who are interested.Then we will consider the supply/demand factor. As mentioned, we are estimating incremental production growth of about 29 million tonnes in 2019. This is slightly lower than Shell's recent LNG outlook projection of 35 million tonnes and our last estimate of 33 million tonnes. The new production will mainly come from 3 places, namely U.S. with 15 million tonnes, Australia with 10 million tonnes and the rest of the world including Russia with 4 million tonnes. U.S. and Russia has far longer sailing distance to the key Asian end user markets than traditional exporter and the Asian markets represent normally about 3/4 of the LNG demand. So the million dollar question is, who will be the end user of these volumes? As this will have big implications for shipping demand. As explained earlier, a large portion of both U.S. and Russian volumes have ended up in Europe, reducing the sailing businesses. However, the markets have recently become increasingly tighter, and we expect demand to outstrip supply by about 5 ships in 2019 in aggregate, and this trend is set to continue into 2020 with only 30 ships -- 7 ships scheduled for delivery. In 2021, we expect more ships and more [ entrants ] to enter the market, but this is a period of time when most LNG analysts think the market for LNG will become increasingly tight, which will probably affect trading pattern, arbitrage between the basins and increase for reloads, which is supportive of shipping demand. Additionally, approximately 6% of the LNG fleet consists of small, inefficient steamships with a cargo capacity of below 130,000 cubic. These ships are on average around 30 years old and a lot of them are rolling off longer-term contracts as I will illustrate on the next slide.Then let's have a look at the [ context by cheerful ] different segments of LNG carriers. The fleet of conventional LNG carriers are today about 500 ships, divided into about 200 steamships, about 200 4-stroke diesel [ electric ] ships and close to 100 large fifth generation slow speed 2-stroke LNG carriers. As mentioned, the new ships are much more efficient due to larger cargo capacity and more efficient propulsion system. At a price of $5 per million bcu, which is about the spot price currently, the new ships command a premium of around $30,000 compared to steamships. At $10 per million bcu, this premium goes to $45,000 per day. Please note that only 15% of cargoes are linked to the spot price, so if the gas is consumed during transit during -- as boil-off, it is less cargo to sell at discharge port and this price is more likely closer to $10 than $5. However, the expected observed premium is more likely higher than this due to the fact that newer ships have higher utilization and more of the parcel size being sold today are bigger than what the old steamships can carry. An additional point is the carbon footprint. More of the energy companies are implementing goals for greenhouse gas reduction, and this can only be accomplished by replacing steamships with high CO2 emissions and 4-stroke diesel electric ships, which have considerably higher CH4 emissions than the new MEGI and XD-F vessels. The paradox of LNG shipping is that the most inefficient ships are the ships on long-term contracts, while the newest most efficient ships are the ones with the lowest level of contract coverage. However, as older steamships are rolling off 2025 year contracts, in the coming years, we expect the charters to replace them by newer and modern ships so this situation will be fixed. This also makes sense when considering that the utilization of charter ships tend to be higher than spot vessel and it does make more sense for inefficient ships to take on increasingly higher share of spot cargoes. With 94 steamships and about 64 4-stroke diesel electric vessels rolling off contracts by 2025, there is a big contracting window for our ships. We would also expect interest capping activity of older inefficient ships, particularly of ships older than 30 years, which represent, as I mentioned, about 6% of the fleet. Additionally, there are around 70 ships built before 2000, which are also considered commercially challenging. Okay, I would like to try to summarize today's presentation. We delivered revenues of $19 million slightly higher this year than in first quarter according to our guidance. We are not content with the numbers, but they are -- reflect softer-than-expected first half of the year due to the reasons explained. Despite continued low gas prices, the shipping markets have gradually improved during the year and the market is now actually quite tight ahead of the winter season.Hence we expect trading results to be significantly better in the second half of the year with expectancy of around $60,000 per day in the third quarter. We are fairly bullish when it comes to the fourth quarter and think charter rates will continue to trend upwards. If contango gas markets leads to floating storage and/or arbitrage, freight rates has considerably more upside. However, LNG is a long game, and we maintain focus on long-term opportunities as well. We remain positive to the near-term and long-term outlook due to the compelling drivers for LNG in relation to price, demand and environmental footprint. But gas is competitively priced, will create more demand, so longer-term low gas prices will actually be supportive of demand for shipping. During the first half of the year, we have also secured, in total, $650 million of effective long-term financing, which have boosted our liquidity position. Greater financial flexibility enable us to return earnings to shareholders when the bottom line turns black. And lastly, we are well positioned with the most modern fleet of 13 state-of-the-art LNG carriers, which are attractively positioned for both improved short-term market and longer-term business. So that's it folks. I will the put the phone back to the operator, who can check if we have any answers -- or questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Greg Lewis from BTIG.

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

So I guess, my first question is, it seems like the market LNG spot rates have been more kind of just like grinding higher over the last month. I think if we would look back in previous years, it was a lot more like, I guess, spiking higher. I'm just kind of curious, what you're seeing in the market. And why it looks like we're seeing this more of a like methodical ramp up in pricing as opposed to some of the volatility we're seeing in past summers when rates started moving higher?

[Øystein M. Kalleklev, Chief Executive Officer]

Okay. I share your view. I think we had a very good sentiment in April, May, where the market turned up very quickly and availability of ships. So end of May, I would say, it looked very good. However, we had this leg down in the gas prices. Suddenly, over the summer, gas prices just collapsed. We had this double whammy of not only you had a mild winter in Asia, but the summer was not that hot either. So at least not before August. During August, temperatures in Japan have been hitting 40 degrees centigrade. So it's starting at least to be a -- become a bit more cooling demand, so you had low heating demand and in beginning of the summer low cooling demand in Asia. In Europe it's been quite hot. So the collapse in prices over the summer also resulted in the shipping demand softening. And June, July has been fairly flat in terms of rates, while we now see that increased cooling demand and demand from Asia is pushing cargoes into Asia, which means higher tonne mileage, JPM has been jumping up from around $4 to $4.70 and is creating less ships available and pushing basically the rates up to around $75,000 per day today. That said, we don't really have that volatility except for maybe our stock price, which has been very volatile, but when it comes to the freight market I think the reason why you haven't seen this same kind of volatility is the reload market. There hasn't been -- really been those netbacks to switch cargoes to Asia so far at least in the season and those are the kind of the super-profit cargoes. However, that said, we are still middle of August. And last year, the rates went $200,000 per day in the middle of September. So things can happen during the coming months there. If you look at the positioning of available tonnage, there's not really a lot of ships around and particularly not the big ones, which are, you know the preferred ships for the U.S. volumes where parcel size tend to be bigger and haulage is longer and there's a lot of U.S. volumes being ramped up now with more volumes in Corpus Christi and Cameron. Freeport is also soon start to commence, so this is kind of creating a positive sentiment in the freight market and the trend is definitely upward in terms of freights. And we're also heading into a season where people will start looking more for the contango trade, buying the cargo spot and reduce the -- increase the level of the latest charge where people are waiting for this charge and basically floating storage.

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

Okay. Great. And then just another question I had. Kind of like -- it seems like we're touching on it throughout the earnings call. I mean, you mentioned the fact that you were able to get rid of the covenants around the dividend, removal of the debt that had the covenants restricting dividends, you kind of highlighted you're cash breakeven, kind of talking about liquidity. As we think about Flex, clearly the goal of this company is to catch the up cycle, start returning cash to shareholders. But as we think about the timing of that, this month you'll take delivery of 6 -- of your 6 vessels, so you still have some newbuilds you need to address, financing looks to be in place. How is the company today thinking about, realizing it's still kind of early days for you guys, how are you guys thinking about dividends and/or buybacks as we sort of move forward or through this next couple of quarters, which probably looks like it's going to be fairly attractive?

[Øystein M. Kalleklev, Chief Executive Officer]

Yes. I think most people thought maybe 2019 should have been up as high as the market, and we also positioned in for 2019 to be a fairly good year for ship owners due to the reasons I explained, and the market turned out a bit different, at least now we are heading in the right direction. Our stock has been hammered quite implicitly at around $165 million per ship, which is rock-bottom pricing if you assume $200 million per ship, the stock price would be almost double. So, of course, on the other side, we had $300 million of equity in October. So we're really not dependent on selling any more stocks, and we decided to do our U.S. listing without printing any shares. So we're not really dependent on raising equities. So for us, it's more about actually returning equities to shareholders, which is our main focus, right now at the price of the stock is, it would be interesting looking at buying back. I think it's a bit early for us. We guided 60,000 earnings in Q3, which is at least positive cash flow for us. And then Q4 will be interesting to see, we're very well positioned for Q4 and if it raises costs up we'll, of course, make -- we'll aim to make considerably higher TCE in Q4 than Q3. And then we are a bit similar to the older sea tankers companies like Frontline, Ship Finance, Golden Ocean. We have our majority shareholder with a big stake of around 44%. So he is also interested in receiving some of the earnings from the company and traditionally in the system we have been shareholder-friendly and paid out dividends when we are getting excess cash flow. Right now, for 2018, we haven't created excess cash flow. However, we have created cash buffer by utilizing a lot of financing this year, which gives us more than $100 million of cash after delivery of wages, which is a very comfortable situation to be in. We don't have to buy or sell any stocks. You don't have to kind of raise any more liquidity, except of course, putting in base financing for the next 7 newbuildings.

[Operator]

And the next question comes from the line of [indiscernible]

[Unknown Analyst]

I was wondering, given that about 30% of LNG crude goes through the Strait of Hormuz, if you witnessed any big inflation in insurance rates?

[Øystein M. Kalleklev, Chief Executive Officer]

Inflation in insurance. So...

[Unknown Analyst]

In insurance. Yes, insurance.

[Øystein M. Kalleklev, Chief Executive Officer]

Yes. Of course, the insurance premium for going into Strait of Hormuz has ballooned. We wouldn't sail into Strait of Hormuz except if we want to pick up our cargo, and there is a lot of cargoes in that area. Qatar is producing around 80 million tonnes higher. So heavy rates, more or less, of course, vessels picking up cargoes in that area, and we are also open to trade into that area. We have a vessel on its way into Qatar these days. However, the insurance premium, every voyage in LNG shipping is a time charter, this means that you offer them the ship, but they pay for the cost, the insurance, canal duties, port fees, so it's a bit like if you go to Hertz and you rent a car, you have to take out the insurance, you have to pay for the fuel. So it's the same concept for LNG shipping. And the inflated insurance premiums is, of course, a cost factor that charters have to take into account.

[Unknown Analyst]

But is it material on the OpEx?

[Øystein M. Kalleklev, Chief Executive Officer]

No. I wouldn't say material. No. No. There hasn't been any incident with LNG ships, and these ships are running in and out of this area. They are typically at around 90 knots. So they're not an easy target.

[Operator]

[Operator Instructions] And the next question comes from the line of Anders Wennberg from Catella.

[Anders Wennberg;Catella;Analyst]

Maybe a little bit of a repeat from a previous question, but I just wonder if you can elaborate a little bit more on the dynamic that happened last year compared to how the setup is for this October, November time frame? I mean, so far the rates are approximately the same or slightly below last year? And the ship availability is quite low currently. I mean, what is required to get a similar kind of squeeze up? Is it possible to expect? Or is it unlikely?

[Øystein M. Kalleklev, Chief Executive Officer]

I think you're right. We're in a fairly similar situation, also the trading year has developed very similar to '18. On balance, actually the market is much tighter in 2019 than 2018, because you have much less vessels entering the market. Last year, you had more than 50 ships. This year, you have -- we expect 39 ships. There is a lot of new volumes in the market. So in a kind of like excel exercise, the market is much tighter in 2019, and that's why most people also are very bullish on 2019. However, the tonnage prices are lower this year and the kind of the spread between the different basins are a bit slightly less. So we have decided to go fairly short on the third quarter to have ships available in the fourth quarter. So we think the fourth quarter will be extremely tight on shipping, how high the rates will go, it's hard to predict. There are 2 factors working against each other, the one factor is that the market is tighter this year. You don't have capacity to have 35 ships in floating storage this season because there is not that many ships around. And then the other factors are the spreads. And, of course, the forward curve is actually not very good predictor of future prices and forward prices are the paper market. Then if you look at the forward price for this winter, when we were in September, you have the spot prices throughout the season at above $10. And we ended up all the way down to $4 and actually low in Europe. So the forward prices are -- it's just that the forward prices are steeper and it's unheard of that you would have these kind of low prices during winter season because of the heating demand. So we do expect product prices to go up. How far they will go? Hard to say, best prediction, I guess, is the forward prices, but they could go much higher as well. So it will be interesting to see. I think this can -- the kind of the drivers when we put them together and calculate on it, it should be a tight market but what we also like with the term structure for the gas prices is that you don't really have gas prices peaking off for the winter and then slumping down in 2020. The 2020 product prices in the forward market are also quite high so -- and which it should be. If you look at the gas prices compared to the Brent prices, historically gas prices have been 14% of Brent. One barrel of oil is 5.8 million bcu, so that means 1 million bcu should be priced 17% of Brent. However, gas has usually been at a discount to Brent so the historical price has been 14%. In our graph on Slide 11 we have this so-called JCC, 13%. That means the Japanese crude cocktail. So these are the import prices of light oil to Japan with 13%. So usually that contract in Asia has been around 12% to 14% of Brent. So right now gas prices are more like 7% of Brent, so that gas prices will pick up that we surely feel confident about and that we think will create a interesting shipping market going forward.

[Operator]

And the next question comes from the line of [indiscernible]

[Unknown Analyst]

I had three, if that's okay. How much -- can you say how much of Q4 -- your Q4 capacity have you already locked in pricing on? Second question, how many ships do you think or estimate are already engaged in some form of storage? And the third question was, do you think the tender that Qatar is carrying out or reported to be carrying out both of shipyards and also allowing existing shipowners to offer ships into that tender. Do you think that will be of interest to many existing shipowners as opposed to just the yards? And if that's something that you would consider flexibly kind of selling forward capacity in a number of years out?

[Øystein M. Kalleklev, Chief Executive Officer]

Okay. Thanks. Okay, let's start with the Q4. I don't want to give away too many trading features, but what I can tell you, in Q4 we have 6 ships on water; we have 2 ships on what I would call term contracts, meaning 1 year or longer. So we have Flex Ranger locked up with Enel. She entered a contract in June. The time charter rates projected in the 80s. Then we also have announced our 1 year time charter for Flex Enterprise, which was commenced around April, but she is on a market index rate. So if Q4 rates go up or down we're exposed to the spot market for that vessel. So what I can say is we have 5 vessels then exposed to the spot market for Q4, and we generally decided to go fairly short on the period. We didn't want to sell out a lot of Q4 coverage already has in the summer. So I think we have a very good position for Q4. When it comes to your second question, sea ship storage, we do see some reports that are delayed discharge meaning that the definition there is that the cargo is discharged more than 15 days later than kind of a normal schedule. So we do see some indications of delayed discharge of floating storage done, but it's very minimal. I think most people will get this from September onwards, and we have received inquiries from traders for floating storage, but we'll see. I think there will be floating storage this season as well, but as I mentioned, I don't think you have capacity to take out as many ships and the product price differentials don't incentivize that level of floating storage either. When it comes to the Qataris, we have a slide on this in Q1. Last May -- in May -- so they have 33 million tonnes of Qatar expansion, then you probably need around 45 ships for that. Qatar is also the 70% owner of Golden Pass, and they have this company called Ocean LNG, where Qatar is supposed to buy the LNG carriers for that project. It's 15 million tonnes. It's a longer sailing distance, so you probably need around 25 ships for that project as well. So then that gets you to 65 ships and then Qatar is also on -- they have 25 old steamships, which are rolling off contracts. So if you have those you get around 95 ships, and that's why this number of 60 to 100 ships are circulating in the press. They are in a tender which or they have invited people to express interest for managing the new ships. We would expect them to buy new ships for the Qatari expansion and Golden Pass, which is this 60, 70 ships. What they do with these steamships is still uncertain. It could be that they're open to look at home ships for those requirements. But I think most of the ships will be built for the projects that they want to have efficient ships for those projects when they are coming onstream in 2024.

[Operator]

And the next question comes from the line of [indiscernible].

[Unknown Analyst]

So you said that your implied NAV per ship based on the current market cap is $165 million per ship. That's a very important statement. Could you please give us just a bird-eye view as to how you reached this number, especially how you treat your SLB ships? Do you considered as part of your NAV? And how you reached that number?

[Øystein M. Kalleklev, Chief Executive Officer]

I think if you look at most analysts also, there has been a flurry of analysts sending out research reports these days they all concluded on more or less the same number, but the maths there is fairly simple. It's basically you would have to take the ships you have in your portfolio and the ships -- and you have to take the enterprise value. So for us, it would be -- today, we have around $820 million of equity. We have a debt of -- if we do this post-Glovis deal, we have around $800 million of debt, then you remove the $100 million of cash, then you have net interest-bearing debt of $700 million and then you have to add the remaining CapEx. So the remaining CapEx is $935 million and then you kind of get what is the EV with the remaining CapEx being treated then as a debt. And then, of course, our market cap is not book equity. The book equity is around $820 million. I haven't really checked the stock price too much today, but it's around $500 million. So if you add $500 million, $700 million and the remaining CapEx $934 million, you get the enterprise value and you divide it by 13 ships then would arrive at around $165 million per ship.

[Unknown Analyst]

Okay. But when you did the sale and leaseback transaction of these ships, aren't they in effect sold? They're not your ships anymore, so as a denominator in NAV -- yes, please go ahead.

[Øystein M. Kalleklev, Chief Executive Officer]

But we would treat that as a financial lease. So we put that debt obligation on our balance sheet as ordinary debt, and we depreciate the ships. And the reason why we can also do this is the fact that we have purchase options, the lessor has the put option. So, of course, for all practical purposes we do intend to buy these ships back. Usually, the ships -- the Glovis ships, they have a purchase price of $75 million when they are 10 years old -- 11.5 -- 10 year after lease, whichever, when they're 11.5 years, so it's very likely we would utilize that option to buy them back, and they believe they also have a put. And for the booked lease there is also a put/call structure at 50% of the $157.5 million, which then should be around $78 million when the ships are 10 years old. So we do expect that old ships will be brought back at either the end of the lease or potentially during the lease because we also have options to buy them back during their life of lease.

[Unknown Analyst]

All right. And perhaps one more quick question. Until recently, you mostly talked about the strength of the spot market and Flex 1 to be chattering the ships in the spot market. I believe this is the first time you start talking about long-term contracts. So what's changed in the last -- in your strategy that you are now looking more at long-term contracts?

[Øystein M. Kalleklev, Chief Executive Officer]

It's not really a change and perhaps I think we have been trying to handle this year-after-year, but it's not coming through. So I think I have to make a slide of this type. So what we have decided to do is just pay our ships short term while the market is improving. So when we started getting vessels in 2018, it wasn't really a good shipping market until the end of the year. Then, in 2019, it's been a bit disappointing first half of the year, and it's heating up now. So what you typically would try to do is to charter your ships on a longer-term contract when the spot price is higher than the day rate price. So right now, of course, still after the spot prices have rebounded to $75,000, the one year TCE is still higher than the spot price. So what we try to achieve here is to chart as arrears to our backlog once the spot prices go above the day rate charter and also as we are adding more ships. It's okay to operate high big ships in the spot market, but next year we get high ships for delivery, and it's a bit more challenging having 11 ships or 13 ships in 2021 exposed to the spot market. So we're gradually building backlog as we are building a fleet. And this is one of the reasons why we also last year decided to integrate our ship management system. This is not a process that is very quick to do. So by Q4, we expect to have in-house ship management, which makes us a bit better positioned in terms of securing longer-term employment. So it's always been our strategy to add backlog to the portfolio as we are having fleets and as the market is becoming tighter with spot prices at higher levels.

[Operator]

And there are no further questions at the moment. So please go ahead. Speakers, please go ahead.

[Øystein M. Kalleklev, Chief Executive Officer]

Okay. Doesn't seem to be any more questions. So then I thank you, everybody, for participating and wish you continuous happy days.

[Operator]

Thank you so much. That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please continue to stand by.