FLEX LNG Ltd

OSE:FLNG

Earnings Call Transcript 2022-Q2

[Operator]

Hi, and welcome to today's Flex LNG webcast, where we will be presenting our second quarter results, as well as discussing the latest development in the company and in the LNG market.

[Operator Instructions] Before we start, I will remind you of the disclaimer, as we will provide some forward-looking statements. We will utilize industry-specific non-GAAP measures like TCE and figures like adjusted EBITDA or adjusted net income. Additionally, there are limits to the completeness of detail that we may provide in these presentations. So we therefore recommend that you also review our earnings report for additional information.

So without further ado, I hand over the floor to Oystein Kalleklev, the CEO of Flex LNG management, who will guide you through today's presentation together with our CFO, Knut Traaholt.

Go ahead, Oystein. The floor is yours.

[Øystein Kalleklev, executive]

Hi, everybody, and welcome to Flex LNG's second quarter investor presentation. We are pleased today to deliver strong numbers. Our revenues of $84 million were $10 million higher than in Q1, and in line with the guidance of approximately $85 million. Net income and adjusted net income came in at $44 million and $33 million respectively, where the main difference is the gains we have recorded on our interest rate swaps.

Earnings per share and adjusted earnings per share came in at $0.83 and $0.61 respectively, giving us a strong profit for the quarter. And we, in June, announced 3 new contracts, 2 7-year charters, and 1 time charter of 10-year with very good counterparties. This added 24 years of backlog and we now have a backlog of a minimum of 54 years with the new contracts adding about $750 million of new revenue backlog.

With our strong earnings visibility, we are also reiterating our revenue guidance for the second half of the year. Q3 revenues are estimated to be around $90 million, while we expect Q4 revenues to be somewhere in the range of $90 million to $100 million, i.e., numbers for the second half of the year will be even better than the first half.

The quarterly dividend is $0.75 per share. But in this quarter, we are also adding a $0.50 special dividend. So in total, we end up at a dividend of $1.25 per share. We have recently concluded our balance sheet optimization program, where we raised $137 million of cash and we are now distributing some of this cash or excess cash back to our shareholders. With our distribution, the last 12 months of $3.5 per share, this implies an attractive dividend yield of around 10%.

Let's touch upon the recent contracts. As I mentioned, we added 3 new contracts in June. Two new 7-year time charters for Flex Enterprise and Flex Amber which already commenced on July 1, and will be running until the end of the second quarter of 2029. We also fixed Flex Rainbow on a 10-year charter, which will start in direct continuation of our existing time charter, which is lapsing in January 2023. i.e., this ship is covered until the start of 2033. Altogether, this added 24 years of backlog. As I now mentioned, our backlog is now 54 years with additional extension options which could further increase this backlog.

We have been busy fixing out a lot of ships recently. Prior to COVID, we had only fixed 1 ship, we fixed the Flex Artemis on a variable time charter in the autumn of 2019, and that ship was delivered on that contract in August 2020. During 2020, the market was very depressed, also affecting the long-term time charter rates and we decided to rather play the spot market and wait to fix our ships when the market improved.

So last April, we fixed 5 ships to Cheniere, Flex Endeavour, Flex Ranger, and Flex Vigilant, all commenced the time charter last year, Flex Volunteer commenced time charter with Cheniere during the second quarter, and Flex Aurora will commence the time charter with Cheniere at the end of the third quarter this year.

In May, last year, we also fixed 2 ships, Flex Freedom, and Flex Constellation. Flex Constellation for a time charter, where we delivered that ship to the charter in May, and then Flex Freedom for a 5-year time charter where we delivered the ship to the super major in the first quarter of 2022.

Last autumn, we also fixed out 2 more ships, Flex Resolute and Flex Courageous, which were delivered to the charter at the beginning of 2022. These contracts are for 3 plus, 2 plus, 2 years, but we are very confident that these ships will sail under these time charters for a total of 7 years. And then as I mentioned, we recently fixed 3 more ships, Flex Amber, Enterprise and Rainbow on 24 years of total contract duration. This means we have a very strong charter backlog.

During our May presentation, for the first quarter, we put in 3 stars in this overview, we put in our stars on Rainbow, the Amber, and Enterprise as these ships were coming open in the market and we were very confident on our ability to fix these ships out on attractive new charters. So for Flex Amber and Enterprise, we replaced the variable time charter these ships had and we replaced them with 7-year fixed higher time charters as mentioned, while Flex Rainbow is fixed forward for Q1 next year and then for a duration of 10 years, bringing that ship into 2033.

Our spot exposure has thus also been reduced quite a lot. In Q2, we had 3 ships on the Variable Hire Index, Amber, Enterprise, and Artemis. We also had about 1.5 ship in the short-term spot market. This was Flex Aurora, which we fixed on a 5 to 7 months multi-month time charter and where she will be delivered to Cheniere at end of Q3. Flex Volunteer, Cheniere agreed to take early delivery and this ship was delivered to Cheniere in the middle of Q2 after servicing the spot market.

Going forward then, most of our income is fixed rate higher. So our earnings visibility is very predictable. The only ship then exposed to the spot market is Flex Artemis, which is on our variable higher time charter linked to the spot market and which is lapsing in August 2025 with further extension option by the charter.

So let's talk a bit about the dividend. We have put up in the past our list of the key decision factors influencing our Board when we are making the appropriate dividend level. As you can see, our adjusted EPS has been picking up. Q2 is usually the weakest or softest quarter in LNG shipping, as this is the low season of the market with our increased fixed rate higher contract or Q2 numbers for this quarter is actually stronger than the Q1 numbers. This is the fourth time we are paying out an ordinary quarterly dividend of $0.75. After we fixed 9 ships last year on attractive contracts, we hiked the dividend to $0.75 and we are continuing paying that quarterly dividend. In addition, this time, we are also paying a special dividend of $0.50, bringing it to $1.25 per share, because as I mentioned, we have been through a big refinancing phase where we have boosted our cash balance to $284 million at the end of the second quarter. So when we are looking at these decision factors, we said last May that we expected all these factors to turn green by the second quarter, and so they have.

Our earnings are strong. The market outlook is good. We have a fantastic backlog. Our liquidity position with $284 million is very strong. We are passing all the financial covenants with flying colors. We have no upcoming debt maturities, near term, and all the ships have been delivered. So CapEx liability is only related to the ordinary dry docking of the ships, which we will have fall off next year, but such cost is about $3 million per ship.

Other consideration is a bit more difficult to kind of assess but with ahead aggressively fighting inflation and cool down of the Chinese economy and fairly volatile financial markets, we still keep this factor at like win. Nevertheless, we are paying a very juicy dividend for this quarter.

So with that, I think I'll hand it over to you, Knut, for a financial wrap-up.

[Knut Traaholt, executive]

Thank you, Oystein, and let's have a look at the financial highlights for the second quarter. Revenues came in at $84 million, and as mentioned $10 million higher than the first quarter of $75 million. This equates to a time charter equivalent per day of $70,700. This is significantly higher than the second quarter of the previous years and, as already mentioned by Oystein, the second quarter is normally a seasonally low quarter in LNG shipping. So the higher result is explained by our fixed-rate contract portfolio, we have a higher number of vessels on fixed-rate contracts.

We have the 2 new 7-year contracts for the Amber and the Enterprise that will go from variable higher contracts to attractive fixed-rate contracts. So the seasonality effect in the coming quarters and the coming second quarters will be significantly lower.

If you look at the operating expenses, they are at par with the first quarter and the OpEx per day is at about $13,000 per day, which is at the guided level we have previously announced.

If you look at the interest rate expenses, they are also at par and that's partly explained by our interest rate hedging portfolio, which we see on the second line, which is a gain on derivatives of $40 million for the quarter on top of the $32 million for last quarter. I will come back with more details on the derivative portfolio on the next slides. So that comes into a net income of $44 million or $0.83 per share, and an adjusted net income of $33 million or adjusted EPS per share of $0.61.

If you look at the balance sheet, that remains robust and clean. We have 30 in-state-of-the-art LNG vessels with an average rate of 2.6 years at the quarter end. As a reminder that this fleet has been acquired and the book value reflects that these were acquired at historical low prices, and it's only adjusted by regular depreciation. Our balance sheet, as already mentioned, has a rock-solid cash balance of $284 million. And if you look at equity of $910 million, that equates to a book equity ratio of 34%.

If we look at the cash flow for the quarter, is mainly affected by the refinancing activity that we did in the second quarter. That is a conclusion of the balance sheet optimization program Phase 1, but we released $111 million during the quarter. That boost our cash balance to $284 million.

As a reminder, amortization in Q1 and Q3 are higher. So it's a bit lower amortization this year due to the semi-annual repayments under the ECA facility.

If we then go to the next Phase of the balance sheet optimization program, we have completed Phase 1. We have one vessel left for delivery, that is Flex Endeavour under the $375 million term loan and the RCF facility, this year will be delivered back to us and under that financing, now during September.

For Phase 2, we have started this with the Flex Enterprise. We have bought back on our existing fixed rate sale and leaseback structure and we have refinanced with cash. So she is probably the only unencumbered 2-stroke LNG vessel in the world for the moment.

We have initiated various financing dialogs, and we are in advanced stages for a $150 million bank loan facility, which is back to back with the contract -- 7-year contract with the super major.

Now we are considering further refinancing. It's, one, for optimizing our debt funding, but also to free up an additional $100 million in cash. Our priority is to extend our repayment profiles and improve the pricing under the facilities that reflect our credit profile, but also the credit profile on the underlying contracts. And now we are further seeking to push out debt maturities and improve leverage to release the $100 million of cash.

We have a number of facilities that we are addressing, and after the Enterprise, we will consider all of this, it could be an amendment and extension of existing financing or play in refinancing. But all in all, this is what we will spend time on for the next quarters, and we hope to do revert shortly with more updates on this.

So let's take a look at our interest rate hedge portfolio. We have a combination of fixed rate leases for the Flex Volunteer entered into in December last year at an all-in rate of 4%. In addition, we have a portfolio of interest rate swaps with a notional value of $853 million. Historically, this has been LIBOR swaps and in Q1, we entered into $200 million in 10-year interest rate swap based on SOFR.

During the second and third quarters, we have amended and extended some of our LIBOR swaps of additional $250 million, and swapped this for 10-year SOFR-based swaps at attractive levels.

If you look at the SOFR portfolio, that is on average remaining duration of 8.9 years at a 1.9% fixed rate. That is attractive compared to the 10-year swap rate of 3.1%. And also for the LIBOR swap portfolio, which has a shorter duration of 2.8 years compared with the 2-year swap rates of 3.7. Overall, this gives us a hedge ratio of 63% on the total debt, excluding any utilization of the RCF. It gives us a solid foundation for an increase in -- a further increases in long-term interest rates.

And with that, I hand it back to Oystein for an update on the LNG market.

[Øystein Kalleklev, executive]

Thank you, Knut. We have certainly been ahead of the curve compared to the governance of the Federal Reserve. We started worrying about inflation with all this fiscal stimulus and have entered into a very good portfolio of interest rate hedges, which have so far this year gained $46 million. So good job on those swaps.

So let's talk a bit about the market. Global LNG volumes is up about 5% in the first 7 months of 2022. As in the past, most of this LNG export growth is driven by the U.S. The U.S. is contributing about half of the growth in the first 7 months of the year with 6 million tonnes additional exports.

Russia, despite all the sanctions for Russia, Russia is still increasing its LNG exports, particularly from Yamal, and of course, there are really no sanctions on Russian gas. So Russian gas will continue to probably grow. And as we have seen on the oil side, the Russians have been able to offload some of the volumes to Asian buyers if the European buyers are not interested.

The other bracket here is mostly Australia and Malaysia, which have added about half of these 4 million tonnes, and that brings us up to 232 million tonnes of exports in the 7 first month of the year. More interestingly is on the import side, where Europe has been gobbling up LNG spot cargoes on an unprecedented level. So far this year, about 2 out of 3 U.S. LNG cargoes have ended up in Europe compared to 1 in 3 last year. In some sense, you could say Europe has been lucky because the cool down in the Chinese economy driven by COVID lockdowns has resulted in lower demand from China and Chinese imports this year is down by more than 20%, so their import is down 9 million tonnes and European buyers have just been able to get access to these cargoes which would have been a lot more difficult if the Chinese economy was running at normal capacity.

If we're looking then more into the European gas crisis, Europe came out of this winter with very low levels of gas, and this was further aggregated by the Russian invasion of Ukraine in the end of February, which kind of put the panic in the markets. European gas consumption in the first half of the year is actually down 10%, but this is mostly driven by pipeline export, especially from then Russia, and pipeline gas flow in the third quarter so far is down 75% compared to the levels in 2021, and actually, the levels of imports from Russia were pretty low in 2021 in Europe compared to the prior COVID levels.

Nevertheless, given the rapid increase in LNG imports in Europe, European gas inventories have actually been bought back to the normal level and we are seeing the inventory levels approaching 80% coming into September. However, the gas crisis is not been alleviated. With the reduction in the Russian pipeline flows, Europe will face a difficult time during the winter as there's not enough LNG in the market to replace the Russian pipeline flows.

So if we look then at pricing, the price of LNG has rocketed. These are the numbers from close-off Day Monday when the TTF, which is the Dutch gas hub price hit $84 per million Btu. This is close to $500 per barrel of oil equivalent. And we also seen the German 1-year forward electricity price equating to somewhere close to $1,000 per barrel of oil equivalent.

The glut of LNG into Europe has, however, created some bottlenecks. So we see the widest spread between LNG and pipeline gas prices in Europe ever. So the price for our LNG cargo delivered x-ship in Northwest Europe is $60. So a $24 spread compared to the pipeline gas price. The European gas price, this is also driving up the spot price for LNG into Asia, where the JKM, which is the Asian benchmark price is more or less on par with the LNG price in Northwest Europe.

Even though the Henry Hub now is at a 14-year high of around $10, it's immensely profitable to export these cargoes from U.S. to either than Europe or Asia with arbitrage of around $200 million per cargo. But keep in mind that about 2/3 of all the cargoes are still being sold on long-term contracts at a discount to oil. So that gives a price of around $12 per million Btu. And these cargoes are mostly shipped into Asia, and Asia is mostly tapping the spot market for marginal cargoes in the peak season, which is usually the winter. So we are certainly in for interesting winter.

If we then look at forward prices, high gas prices are here to stay. The future prices are way above the oil price linked contract price. So in the bottom of the graph, you can see the Henry Hub price. It's at a 14-year high now of $10. But given the vast shale resources in U.S., the future pricing is leading to our lower price in the U.S. The gray line here is the price for LNG sold on a long-term contract linked to oil, which is still at a fairly low level when you are comparing to the spot prices on the European Gas hub TTF and JKM, which is the Asian spot price for LNG.

Lately, Europe as I mentioned, has been the main driver for the price increases and prices are at a premium to Asia. And this premium is also why the spot market was very soft in Q1 following our very strong spot market in Q4. The high price in Europe has incentivized export from the U.S. or the Atlantic area into Europe rather than to Asia, which entails longer sailing distances and thus absorb more shipping capacity. However, as I mentioned, there is a big spread between the gas price in Europe TTF and the LNG price in Europe. So we do see some cargoes being shipped to Latin America and Asia, as there is really not enough capacity to import these cargoes into Europe.

So high gas prices actually reinforce higher earnings potential for our modern LNG carriers. All LNG carriers are about 60% more efficient than the older steam generation, and they are substantially more efficient than the diesel-electric or tri-fuel ships that were very popular 10 years ago.

We have highlighted our sensitivity on the charter rate given different LNG prices. Keep in mind that LNG ships mostly utilize the LNG on cargo as fuel as we are utilizing the boil-off from the cargo, thanks to fuel the propulsion of the ship. And having more efficient ship means that you have a bigger cargo to sell at your destination.

So if we are looking at, for example, prices today are $55 per million Btu, if a spot steamship is making $15,000 per day, which is basically its OpEx level, you can add a premium of $104,000 per day for a tri fuel ship, because this ship is much more efficient, and generally a bit larger than our steamship. But you can add another premium on top of that of $71,000 per day for our 2-stroke ship like a MEGI-XDF, bringing the charter rate to $190,000. Of course, these are theoretical numbers based on the fuel consumption and the cargo parcel size, but this means that in theory, with a $55 LNG price where a steamship is making $15,000, you could pay $190,000 for our modern ship.

So all in all, a tight LNG market even increases the premium that all ships can command in the market.

So let's have a look at the spot market. The spot market was super strong in Q4, where we actually saw the highest spot rates ever for LNG ships. But as I mentioned, we had this shift of trade from Asia into Europe with the European gas crisis and this resulted in a lot shorter sailing distances. The sailing distances fell 15% from Q4 to Q1, and this released a lot of ships available in the market, driving down freight rates at the start of the year. However, the market bounced back rather quickly. Usually the spot market bounces back around the middle of March, we bounced back a bit quicker this time and the market recovery were very strong with rates above $100,000 during May, into June, before we had this close down of the Freeport LNG export plant in U.S. The Freeport LNG export plant has 50 million ton of annual production. So this resulted in a loss of around 15 to 17 cargoes on a monthly basis, thus releasing a lot of -- especially relets in the market. And with more ships available in the market, freight rates plummeted back to around $60,000 to $70,000 before now recently bouncing back strongly again to $120,000.

Some of the bounce back was probably explained by the expectation that people would start up again loading from October. This has now been pushed back to November as we learned yesterday. This might delay the uptick a bit by a month or so. But the future rates for LNG spot rates are super strong for Q4 where we can see probably rates in the $200,000 range again. And then also explain why we have a bit range in our Q4 revenue guidance as we have one ship linked to the spot market.

So let's have a look at the term market, which has remained strong the whole period. The term markets have been less volatile and ready from even in this period with spot market weakness. One-year time charter rate for MEGI-XDF ships are above $170,000 per day. The 3-year rate is, it's around $140,000 per day. So these are extremely high period rates for modern tonnage. And of course, as I mentioned, driven by a tight LNG market, high LNG prices where these modern ships are commanding a high premium.

Another factor is the new building prices have really been picking up. We did our investment in ships in 2017 and 2018 when new building prices were at around $180 million per ship. The last year also we have seen a big increase in the price of LNG carriers, driven by higher material prices, both nickel and steel, higher labor prices but also a much tighter balance at the yards because of the glut of orders not only from LNG carriers but also from the container ship which is making yard slots fairly scarce.

Today, if you want to order a ship, you are talking 2027 deliveries. So actually, the delivery time, for LNG ships in Norway is longer than most of the upstream LNG export plants. With a price now approaching $248 million for our new building, which is the price SSY is pegging now in the recent report. This has also driven up the 5-year time charter rate. With higher CapEx, you need to have a higher rate to defend that investment and 5-year rates have almost doubled during the last 18 months from the mid-60s now up $110,000 per day, which also gives us comfort on the further re-contracting of our fleet.

Looking at the fleet structure, as I mentioned, there have been a lot of LNG orders and the order book is now around 250 ships. This is driven by 2 main factors. One, being the replacement of older tonnage, which is inefficient, as I've previously illustrated. And the second factor was, of course, is the high growth of LNG exports coming from especially from 2024 and onwards. And all the new ships for this trade is the new type, the MEGI-XDFs. The purple ones there are the specialized ice ships for the Russian Arctic trade, which doesn't really usually trade in the ordinary LNG carrier market. But we do see here that is a lot of steamships still in the market and I will come back to that also shortly.

So looking at the order book, as I mentioned, around 250 ships, but very few of these ships have been ordered on speculation. Almost all of them have been ordered towards new contracts or fleet renewal. So out of these 250 plus ships, only 30 ships are available for new charters, and very few of them in the period until 2025. So that gives us some comfort in our ability to also re-contract our ships once they are coming open.

Heading back to the steamships. We have had this graph with the dinosaur for a couple of years now. These ships are too inefficient to continue to trade for the longer term. A lot of ships are coming off existing legacy contracts, typically legacy contracts with a duration of 20 to even maybe 25 years. There are already 36 steamships open in the market with an average age of 28 years, and then there are rolling off 100 steamships from contracts by 2027, and these ships will face a very hard time going forward, not only because of the high LNG price, making them economically obsolete but also because next January, we have new IMO regulation, which we called EEXI and the CII, which will put a much more stringent requirement on the efficiency of ships, and we think this will result in a very big spike in attrition of older steamships, which will be replaced with the newer type ships.

As mentioned, the global gas crunch is also creating interest for new volumes. We have seen an uptick in contracting for LNG. We have had during the last 18 months, about 100 million tonnes of new volumes being signed up. And with the gas crunch in Europe, you should think that the European buyers were the big buyers. But actually even though China has a reduction in LNG imports this year of more than 20%, they are signing up almost half of these volumes because the LNG story in China is in its early phases. This year, actually, Japan was probably importing more LNG than China and there are living more than 10x as many people in China. So China will continue to grow once they are getting control with the COVID and are reflating their economy. We do also expect European buyers to be signing up for more SBAs as they need to replace a huge amount of Russian pipeline gas with LNG and probably also then renewables.

So we have a list of some recent contracts. I'm not going to go through all of them, but for sure, there is a new wave of new LNG export capacity coming.

So then, let's finish with the first Slide, the Q2 highlights, I'm just going to repeat them. Revenues $84 million, $10 million higher than Q1, in line with our guidance. Net income of healthy $44 million. Adjusted for these derivative gains we came in at $33 million, translating to $0.83 or $0.61 of earnings per share respectively.

We have recently announced 3 new contracts, adding further backlog to our fleet, which now has 54 years of firm backlog. Our revenue guidance remains the same as we recently updated. $90 million of revenues we expect in Q3, slightly higher than in Q2, and then we believe Q4 will be the strongest quarter, $90 million to $100 million of revenues we expect depending a bit on the spot market affecting the 1 ship we have on index.

So with that, we are also happy to announce today our biggest share dividend ever, $1.25 per share including the $0.50 special dividend. This gives a $3.5 dividend, the last 12 months our yield of around 10% which we think should be attractive for our shareholders.

And with that, I conclude today's presentation. We will now open up for some questions. So please use the chat function at any time or send the e-mail to [e-mail], and we will try to answer most of the questions shortly. Thank you.

[Operator]

Okay, thank you, everybody, I hope you enjoyed the presentation. We are now going to do some of the chat questions. So Knut, maybe you could start.

[Knut Traaholt, executive]

Yes. And thank you all for the questions. I think we can start off with a question from Omar Nokta from Jefferies.

So we now have a sizable revenue backlog, and the highest visibility since the company was created. So what's next for Flex? Are you happy to continue operating with your existing market footprint or do you see opportunities for expansion?

[Øystein Kalleklev, executive]

That's a good question. Thank you, Omar. Of course, we are mostly driven by what is good for our shareholders. Of course, I think we can easily scale our company for a size, which is at least double easily. But you know, kind of investing in ships now at the price which we have just shown ahead of close to $250 million for a ship, ships are due for delivery into 2027, and if we're then spending $270 million of cash on -- now $250 million of cash, and that cash will be tied up until 2027. We don't really see it as a very attractive investment choice given also the rather large order books. So we rather prefer sending some of the money back to our investors in special dividends. Energy prices here in Europe are sky high. So maybe a special dividend will be good timing for that today. Of course, that is organic.

We are also open for consolidation. I think we have a very good stock. The stock is -- the biggest market cap of any LNG shipping company in the world. It's fairly liquid both in Oslo and New York. So of course, we could be open for consolidation where we are rather kind of acquiring ships through the issuance of new stocks to those people who have maybe private ships. And so we are flexible in nature. We are looking at opportunities. But if we are to grow, it has to be accretive.

We like the dividends, so if you are doing something, we also have to make sure it's good for existing shareholders. We're not going to pursue growth just to grow our fleet and build a bigger empire. We're very happy with the status today and we can certainly continue just operating with the existing fleet if we deem that to be more effective than growing.

[Knut Traaholt, executive]

Yes. And a follow-up from Omar, on the demand side of it. So if you've been approached by the U.S. LNG export projects, the fast track that you to come on stream in the second half of the decade, any approach either for existing or new buildings?

[Øystein Kalleklev, executive]

Of course, we are in constant dialog with a lot of the charters. We have a lot of repeating customers. For the fast-track project, we don't really have any ships available. Fast track, as I mentioned, the earliest ship available is the middle of 2024. There are certain option sale, so the first fully open ship is middle of 2026. So we are focusing on those ships, seeing if there are opportunities to even add duration to existing contacts, like we just did with Amber, Enterprise, and Rainbow, because we find the term rates quite compelling, and they create a good value for us, locking in that cash flow.

[Knut Traaholt, executive]

And then his final questions, I can take. It's on the balance sheet optimization program Phase 2. If the $100 million plan unlocking of cash, in addition to the cash you have, would raise the financing -- would rise from the financing of an unencumbered vessel. So just specifying that in Q2, we had a cash balance of $284 million, then into Q3 we bought back the Enterprise. So she is unencumbered now. Once we refinance her, if you take the -- she was bought back at $137 million and then we refinance her again with $150 million. So the $13 million there is included in the $100 million?

[Øystein Kalleklev, executive]

And also may be worth mentioning because we have this accordion feature on the $375 million loan, where we could add our 4 ships. So what we were considering was to add Enterprise to that facility, increasing it to $500 million. But what we can see now with this new contract for Enterprise, we can finance even better, our $150 million rather than $125 million and lower margin as well based on our long-term contracts. So we are therefore optimizing and not utilizing that accordion feature.

[Knut Traaholt, executive]

So that leads into similar questions regarding our cash balance and our capital allocation strategy going forward. So maybe you can say what is our capital allocation going forward? And how will we use the cash balance?

[Øystein Kalleklev, executive]

Yes. We get this question quite a lot, how to spend it, basically. What we see is that the last 18 months, we are basically going from 100% spot exposed, until April last year, all the ships were either on index or short-term TC. So with kind of the fixed signal of 12 ships, as I've shown in one of the slides, we have really taken down the credit risk and improved our credit profile. This enables us to tap into very the attractive debt both in terms of leverage, margins, duration, and also putting in revolver facilities where the cost of having access to this cash is very low.

For example, the recent $375 million facility, $250 million of that is structured as a revolver, which means the cost of having that credit line is only 0.7% per year. And if you've been in shipping for a while, which we have been, you know the optionality of having cash is huge in shipping because that's always something happening. So that's why we are now utilizing our strong balance sheet and credit profile to raise cheap debt, and then we are struggling in a way that it doesn't really cost us a lot of money to carry this debt. But where we are then having the ability to draw credit lines on quick notice, for example, if we find some good opportunities. And in this instance, for this quarter, we have also sent back some of the excess cash to our shareholders through our special dividends.

So capital allocation is basically, we have a fleet today. We will only grow if it's accretive for our shareholders and we will focus on paying very healthy good dividends for our shareholders.

[Knut Traaholt, executive]

And that leads into a couple of questions regarding our dividend. So can you give any guidance on future extraordinary dividends or alternative uses of excess cash?

[Øystein Kalleklev, executive]

Yes, okay. We kind of made the decision last year when we had contracted out 9 ships in that period from April to November, we've taken on the risk that we hiked our dividends to $0.75 on a quarterly basis, equating to $3 a year, which we found like our attractive long-term sustainable dividend. However, as we have gone through the balance sheet optimization for reasons I have explained, we have ended up with a lot of cash. So that's why we are sending back a special dividend. We are not going to guarantee any special dividend. That's why we're calling it a special dividend.

But from time to time, if we do see that we have excess cash, we might send it back. This will depend on a couple of things, it will depend now on finalizing the Phase 2 of the balance sheet optimization, where we already started with this $150 million loan which Knut mentioned, it will depend a bit on market conditions, are we continuing through the contract ships on a longer duration, and then also kind of the financial markets as well. Actually right now, with this kind of strong position, we don't mind volatile financial markets because that can create opportunities. So we're not going to guarantee special dividends. But you can assume that we will always be shareholder-friendly.

We have also invested in this company, and we also like dividends. So we will continue paying at very healthy dividends, special dividends will happen when -- for more on, on-off occasions I would say.

[Knut Traaholt, executive]

Okay. And then to round up on the questions on the cash, there is a question on our working capital requirement. And then we can say that we have financial covenants relating to our cash balance as the triggered now is a 5% of the net interest-bearing debt, so it's about $75 million and we have previously guided that we have sort of a management comfort level around $100 million.

[Øystein Kalleklev, executive]

And also just on the working capital worth mentioning, working capital in LNG shipping is negative. So it's a bit different from the tanker business, and the bulk business. Tanker and bulk business you do voyage charters. So you get paid when you're discharging your cargo. On LNG, all their contracts are time charter. This means we get paid in advance, so our working capital requirement is actually negative because we always get paid early and we pay our bills later on. So working capital is not really something we are required to hold, we are financed by our charters. So working capital then only relates to the kind of the cash covenants imposed by the backs.

[Knut Traaholt, executive]

Okay. It leads over to another question regarding new buildings, and new building orders. So how is your risk reward assessment of ordering a new building at current elevated prices? Can the current charter rates defend the investments?

[Øystein Kalleklev, executive]

It's a good question. We have shied away from it. Maybe that's wrong now. When we see prices are approaching $250 million, maybe we should at $220 million. It's really gone up very quickly. It's driven by commodity prices, labor prices, and the fact that the yards are very much busy these days also container orders and LNG orders, and this is pushing up the old prices. Even though their prices are going up, they also not really making a lot of money. So the margins are fairly within us.

So we think today it's hard to defend ordering ships at around $250 million for delivery in 2027, and that's why we are all focused on our existing ships trying to extend the duration on those, and we have found that to be more attractive.

[Knut Traaholt, executive]

We have another question on more of the operations and how is the Ukraine crisis impacting supply and demand, and your tanker traffic.

[Øystein Kalleklev, executive]

Ukraine is not an exporter of LNG. No LNG is exported in that region, where you have a conflict today. The Russian -- this is mostly affecting Russian pipeline exports to Europe, where you have a tug-of-war between Russia and Europe. Russia holding back volumes, finding excuses to halt it. And that is of course creating a lot of demand for LNG, not only in Europe but worldwide.

On the LNG side in Russia, you basically have 2 export regions, it's Yamal, the Arctic, where you have Yamal and Arctic LNG too, and then Sakhalin on the east side of Russia. So the direct effect on LNG shipping is it does not really have any direct effect It's indirect through the shutdown of Russian pipeline flows. The most -- okay, that's commercial. If you think from the operations view, that is one direct consequence and that is all the Russian seafarers which is finding it hard to find employment today because of the sanctions, we are not able to pay the Russian seafarer. So you have a lot of Russian seafarers who are out of a job because of this conflict. So that's very unfortunate and it makes recruiting harder.

[Knut Traaholt, executive]

And then a final question is a bit on the future, but are our LNG ships able to transport hydrogen in 5 years this may be needed?

[Øystein Kalleklev, executive]

Yes. I think you have to wait a lot longer than 5 years. But the simple question is no. We transport very cold cargo, it's LNG, minus 162 degrees. So minus Fahrenheit. If you're going to go to hydrogen, you have to be a lot colder. Liquid hydrogen is minus 253 degrees. So it's 90 degrees colder, it's only 20 degrees from 0 kelvin, the absolute coldest you can go in the universe. So this will require totally different ship. One thing is of course the temperature, and other factor is that hydrogen is the smallest molecule in the universe.

So this molecule could easily escape the kind of piping or the cargo containment system and hydrogen is extremely flammable. So this put on totally different aspect on the safety, that's never really been any accident with the LNG ship. But for hydrogen, it's a much more complex cargo to transport temperature-wise, leakages, flammability, and also the fact that hydrogen is not really dense. So you need in order to transport the same amount of energy, you need a lot more ships. So, no, hydrogen is not something we are planning to transport on all ships, whether it's efficient.

Most of hydrogen is produced from natural gas. Natural gas prices are high, that is also driving up the hydrogen prices because basically hydrogen is converting natural gas to hydrogen in a very inefficient process. You could also make it the green hydrogen rather than blue hydrogen, then you would need a lot of electricity, inefficient process making hydrogen through the Haber-Bosch process. So electrolysis and Haber-Bosch is for ammonia. So but if you're doing the electrolysis process, then if you look at electricity prices are in Europe, this is not really viable today.

One of the other ways of transporting hydrogen, which is slightly easier is, as I mentioned ammonia. So basically, you're making hydrogen, you're drifting the hydrogen with nitrogen to get ammonia, which is easier to transport, but which had some certain drawbacks. It has drawbacks in terms of toxicity. So it's a little -- its toxic in terms of corrosion, and actually, even though it's explosive, it's hard to ignite. So you need a lot of pilot fuel. So we will stick to LNG. I think cleaning up LNG would rather involve carbon capture systems. So I think that's the most viable path forward.

[Knut Traaholt, executive]

Okay. Then with the high LNG prices, Flex versus fuel by LNG?

[Øystein Kalleklev, executive]

Yes, that's a very good question. Yes, almost all the time, once we pick up a cargo, we take this super cool cargo onboard and keeping something at minus 162 centigrade, it's quite difficult. We have a boil-off of around 007 on our ships. So it means that every day you're losing 007% of the cargo in the boiler but we're not losing it. We are using it as propulsion. We are burning this LNG natural gas and fueling the ship.

So it's actually you're getting into an area if you had a lower boiler, you will have to force it up. Then you come to the discharge port, then you have to make a decision. What you usually do is you keep some of the cargo on board, which we call the heal, because then you can keep the cargo tanks cold. You can't load LNG into our ship unless it's minus 130 degrees in the cargo tanks.

So if you're stripping out all LNG, that first of all, that will take a lot of time. So the import terminals are already congested today, so if all the ships are going to heal out all this -- they are going to get even bigger bottleneck. So and especially in Europe, you don't really have that option today. But let's say you are doing it, let's say, you are healing out because the gas price is so high and you're burning very low-sulfur oil on your ballast like, that creates another problem and that's the bottleneck on the export plant because if you are arriving at the export plant with your cargo tanks warm, you need to cool them down. So we have to do what we call a gas up or cool down or cool down, where you have to add LNG in small amounts, spray it in the cargo tanks, get the temperature down to minus 130 before you can load LNG.

And this again takes a lot of time and birthing space on these terminals are limited. So it's not very often that actually people heal out even though in economics, it sounds very good. So for most of the time, laden and ballast, we burn LNG.

[Knut Traaholt, executive]

And then, I think we can wrap up the 2 final questions in one. It's a big topic. What will happen to the steamships, and how will our vessels be impacted by EEXI and CII regulations?

[Øystein Kalleklev, executive]

Yes, okay. We have been talking about this for -- at least, I have been talking about this for 5 years. That's a big business opportunity for us. Because we have modern ships, the steamships already inefficient. In all other shipping segments, steamships propulsion has gone away for a long time. So the new decarbonization rules are going to push these ships out of the market, but also the high LNG prices. It's not economical to run these ships anymore. On that, less ships in the market means usually supply and demand, higher rates for the existing ships, and we will benefit there as I've also shown with this graph of the term rates given the new building prices.

So we are full of compliance, kind of, as I mentioned, our ships are around 60% more efficient than the steamships. So we are flying kind of this EEXI and CII requirement with flying cargoes. These are the most efficient ships in the market.

[Knut Traaholt, executive]

Okay. That concludes the questions. So thank you for watching and…

[Øystein Kalleklev, executive]

Yes. I hope you liked the new format. We try to make it a bit more viewable, and we will be back in November on the same format. So hope to see you again then. Thank you very much for staying with us.

[Knut Traaholt, executive]

Thank you.