FLEX LNG Ltd

OSE:FLNG

Earnings Call Analysis

Q2 Revenue Down, Better Outlook for Q3 and Q4

In the second quarter, FLEX LNG reported revenues of $84.7 million, slightly down from Q1 due to seasonal factors and drydockings. Net income stood at $21.8 million, or $0.41 per share, while adjusted net income was $30.4 million, or $0.56 per share. The company expects Q3 revenues to rise to around $90 million as all ships return to operation and higher spot rates kick in. A strong backlog and new financing boost their outlook, with numbers expected to be even better in Q4. They continue to declare a quarterly dividend of $0.75 per share, totaling $3.125 over the last 12 months, offering a 12% yield.

Revenue Performance and Financial Metrics

In the second quarter, FLEX LNG reported revenues of $84.7 million, aligning closely with their guidance of nearly $85 million. This quarter saw a slight decrease compared to previous quarters, attributed to seasonal factors affecting certain ships. Net income was recorded at $21.8 million, translating to an earnings per share (EPS) of $0.41, while adjusted net income stood at $30.4 million, or $0.56 per share. The adjusted figures filter out unrealized gains and losses on derivatives, providing a clearer picture of actual performance. The adjusted EBITDA for the quarter was approximately $63.2 million, impacted slightly by higher operating expenses. Overall, these numbers demonstrate solid financial health despite seasonal fluctuations.

Charting a Forward Course with Contracts

Flex LNG continues to build a robust backlog, with 47 years of firm contracts that have the potential to grow to 66 years. Recently, the charter for FLEX Constellation was fixed for 10 months with an Asian LNG buyer, ensuring utilization until the end of Q1 2025, with options extending into 2026. The company has strategically extended contracts for several ships, optimizing their fleet and ensuring favorable terms for the future. This proactive management of contracts positions the company well in a market where long-term demand for LNG transport is poised to grow significantly.

Expectations for Future Performance

Looking ahead, FLEX LNG anticipates an increase in revenue for Q3, projected at around $90 million, buoyed by all ships returning to service. Historically, Q4 tends to be the strongest quarter for the company, with expectations of higher earnings due to favorable market conditions, particularly for spot market-linked contracts. Guidance for time charter equivalent earnings was provided at approximately $70,000 to $75,000 per day, aligning with market trends pointing towards improved rates.

Optimizing the Balance Sheet

FLEX LNG is actively engaging in balance sheet optimization, having successfully secured $387 million through refinancing initiatives. By the second half of the year, further refinancings are expected to liberate an additional $97 million. The company is transitioning some of its debt structures to take advantage of current market conditions, with a focus on maintaining favorable financing terms. This intelligent approach to managing debt reinforces their financial stability and capacity for future investment.

Market Dynamics and Growth Opportunities

The LNG market exhibits promising growth, particularly as global energy dynamics shift. The second quarter experienced a 1% year-over-year growth, with strong contributions from the U.S. LNG exports—leading ahead of Australia and Qatar. Asian markets have shown resilience, particularly India, whose imports surged by 25%. The management noted the potential for U.S. projects to gain momentum post-moratorium on export licenses, particularly following the political landscape in the upcoming elections. With exit strategies for older steamships anticipated, FLEX LNG is positioned to benefit as the market prioritizes modern and efficient tonnage.

Dividend Stability and Shareholder Returns

FLEX LNG remains committed to returning value to shareholders, declaring a quarterly dividend of $0.75, leading to a trailing twelve-month total of $3.125 per share, which translates to an impressive yield of around 12%. This consistent dividend payout, supported by strong cash flow and liquidity (proforma cash balance of $467 million), underscores the company’s financial health and dedication to shareholder returns amidst expanding operational capacity.

Earnings Call Transcript 2024-Q2

[Øystein Kalleklev, executive]

Hi, everybody, and welcome to FLEX LNG's Second Quarter results presentation. It's August 14. And I'm Oystein Kalleklev, CEO of FLEX LNG Management. And I will be joined, as usual, by our CFO, Knut Traaholt, who will run you through the numbers a bit later in the presentation. Before we begin, I just want to highlight, we will do our presentation and followed by a Q&A session, where the best question today can win a summer pack, consisting of the Just Flex It T-shirt. We are already preparing for Oslo Marathon in September. I might be on Gastech, not able to attend this year, but Knut he will run this year. He promised me. FLEX on the beach street, FLEX on the beach sandals, and then, of course, the FLEX cap. So, before we then start the presentation, just to remind you that we will be providing some forward-looking statements. So, there are limited details, and we will be using some non-GAAP measures. So please also read the earnings support together with the presentation.

Let's kick off with the highlights. Revenues for the quarter, $84.7 million, which was in line with what we said, close to $85 million was our guidance. This resulted in net income and adjusted net income of $21.8 million and $30.4 million, respectively. Just a reminder, the difference here is in adjusted net income, we only include the realized gains and losses on derivatives. While in the net income figure, we are also including unrealized numbers. So, earnings per share came in at a healthy $0.41 or $0.56 on an adjusted basis. Of the major recent events, we also touched upon this in our earnings report back in May. We have fixed one ship on 10 months charter. So, we had, as some of you might recall, we had FLEX Constellation being redelivered back from Charter end of Q1 last year. And we then decided to take in Drydock early as this is our low period of the market.

We completed the dock according to plan and budget and took it back in the market in the middle of April, where we traded a hotspot for a while. We managed to get cooled down slots so we could get the ship back in cool condition. And then after our spot voyage, we fixed on this 10-month Charter with a large Asian LNG buyer. Redelivery then is end of Q1 2025, but where the Charter has the option to extend this Time Charter by 1 year to 2026. So that means we are fully covered 100% charter cover for the remainder of the year, also a very high coverage going forward, as I also will touch upon a bit later in the presentation. As some of you also recall, we have been doing an extensive balance sheet optimization phase for some time. And we had one phase where aim was $100 million. We did our balance sheet optimization 2.0 and then 2.1. And correct me if I'm mistaken, Knut, I think we raised $387 million on those refinancing, and we actually have a very good financing situation. But we are not idling because of good financial structure. We try to optimize and find better terms.

As I said in the Q1 presentation, we had an extension of FLEX Endeavor from 2030 to 2032. And with that attractive backlog on that ship, we were able to secure a very attractive Japanese operating lease on that company. And we also amended our bank loan, and we have thus secured $430 million of new financing with our net proceeds from these financing of $97 million, which Knut will tell you more about. During this quarter, Q2 is more or less always the softest quarter. We try to plan our drydockings during this quarter. So, we have FLEX Constellation, as I mentioned, in dock, and FLEX Courageous, also taken out from our TC out of operation in dock and back on TC. Both ships were done at 17 days each, 3 days below our guidance of 20 days. Cost of docking around $5 million according also to our budget. And that means we do expect revenues and earnings to pick up in Q3. We have all the ships back in operation, 2 ships were out of the market for some time in Q2.

So, with all ships back in operation, somewhat better spot market affecting the one ship on variable hire. We do expect revenues to pick up to around $90 million. Time charter equivalent earnings also to increase a bit and the same then goes with EBITDA as most of our costs are fixed in the short term. So, with our very healthy backlog, which I will touch upon a very strong financial position, good outlook. Once again, we are declaring $0.75 of quarterly dividend. Dividend last 12 months is $3.125 per share, implying a running yield of around 12%. So just a reminder here on the guidance, we guided between $70,000 to $75,000 on the TCE rate delivered in the middle of that. With the level spot on the revenues, we had close to $85 million, $84.7 million is as close as you get to $85 million. And then adjusted EBITDA, we said close to $65 million, $63.2 million, a bit lower because OpEx is slightly higher in Q2 than Q1 due to timing effects that Knut tell you more about.

And then as I said, we expect higher revenues and earnings for Q3. And probably, usually, Q4 is the strongest quarter for us. We have 1 ship on index linked to the spot market and Q4 tend to be the high season in the spot market. As mentioned, drydockings we had scheduled for this quarter was completed according to both plan and budget. I mentioned the backlog. So, there's been one change recently. We have some ships on very long duration charters, FLEX Rainbow, 2033. We recently extended FLEX Endeavor from 2030 to 2032, but the charter has the option to extend to 2033, and we utilize that added backlog on that ship to refinance the ship on better terms. Vigilant, we last year extended to 2031 where the option is to 2033. And then we have 2 ships to ‘29. We have the FLEX Freedom, to 2027 with option to ‘29. Resolute and Courageous, we announced in Q1 that those 2 ships were extended from ‘25 to ‘27 as expectation. And we do expect these ships also to be declared until '29.

Due to the contract structure of these ships where you have a front-loaded firm rate compared to the option rate, which we will also find more details about in our earnings support where the remaining ships in our portfolio have about 18% higher. Option rate, this doesn't apply for these 2 ships, and it has a bit revenue recognition effect, although not a cash flow effect. FLEX Volunteer, Aurora, 2026 with option to ’28. Then we have FLEX Ranger fully opened ‘27. And then, as I mentioned, Constellation fixed now until end of Q1 ‘25, where the charter has option to keep until end of Q1 '26. So that's our first fully open ship with Ranger coming back of that in '27 and we have some ships in '28, '29, which we think is a very good window of having ships open for reasons I will explain a bit later in the presentation.

Then the last ship, FLEX Artemis, it's on a variable higher index charter, where it's linked to the spot market where typically revenues are highest in Q4 and then Q1, Q3 tend to be a bit similar, and Q2 being the softest quarter. Here, the charter has the option to keep that ship until 2030. So, with the healthy backlog, a high level of income visibility, 47 years of firm backlog, which may grow to 66 years is -- we have a fairly predictable cash flow. Last 3 years now, we've paid out $528 million of dividends, consisting of the ordinary dividend, $0.75 per quarter plus some special dividends in the past. We're topping those dividends up. And as we have said and touched upon a lot of times in the past, the dividend decision factors, I'm not going to go into too much detail. The change we have had. We upgraded market outlook, for reasons I will tell you in the market section.

Spot rates are up, but that's not really the driver here. It's really the fact that term rates have been picking up. Where we take this back to green. As I said in last presentation, we were intending to have the color yellow also in Q4 '23 when we reported in February, but we got a bit color blind here by all the green lights and forgot to do it, but we're upgrading this again to green, so green colors on most of the decision factors in terms of the dividend and $0.75 once again declared bringing the trailing 12 months dividends to $3.125.

And then I think I hand it over to you, Knut, on the financials.

[Knut Traaholt, executive]

Thank you, Oystein. Revenues for the quarter came in at $84.7 million, slightly down from the first quarter, but as explained by Oystein, this is due to the seasonal lower period, impacting the variable hire contract for FLEX Artemis and also the spot operations for FLEX Constellation. In addition, we had fewer operating days as we had a number of ships in dry docking, reduced resulting in off-hire. That returns into a time charter equivalent per day of $72,400. And if you look at the vessel OpEx, as we commented on the Q1 presentation, we were a bit low compared to budget, but that is timing effects of our expenses. So, we're slightly higher this quarter, but please note the full 6 months average of $14,600 and we are, in that sense, in line with our budgets.

When we look at net income at $21.8 billion. That is $0.41 per share. In the report, you will see that we had realized gains from a derivative portfolio of $6.8 million, and we had unrealized losses of $3.4 billion. In the adjusted numbers, we adjust out the unrealized gains and losses. So, for this quarter, the $3.4 million and also the slight [ effects ] gain. And then we also add back the cash gains that we realized on the amendment of an interest rate derivative swap in April. As announced in the first quarter presentation, we reduced the duration of 2 swaps, 1 for Q1 and 1 for the second quarter, and that's adjusted into the numbers. So, we get an adjusted net income of $30.4 million or $0.56 per share. Looking at our cash balance, we are $38 million from operations and $9 million of change in net working capital. We reduced our debt by $27 million in scheduled installments and here also the cash from the termination of the swap and then paid dividends of $40 million. That ends up at a cash balance at the end of the quarter, $370 million.

And as we note here, as the mentioned, refinancings, so are expected to be concluded in the second half of the year, we will free up $97million. And I'll come back to the refinance a bit later. On our derivative portfolio, we have reduced the duration of it. We've maintained the short-term high coverage, which is in line with our expectations of the long-term interest rate development. When we now add a Japanese operating lease, we will also have a fixed rate element of that. And in August, we also amended a so-called mirror swap structure where we now have added $100 million and used the positive value from the mirror swap structure to reduce the fixed interest rate. And as you see there, it's 6 years starting in 2026 at attractive 82.5 basis points.

On the refinancing, they started off with a new contract or the extension of the FLEX Endeavor contract, which make attractive for a lease financing and in particular, this JOLCO financing structures. We have raised then $160 million for that. It's at near about 10 years lease financing, and that will release about $48.5 million. This is a structure where we have a fixed rate element and a floating rate element. And on a blended basis, we have a loan margin here of about SOFR plus 130 basis points, which is very attractive. On the back of that, we are then refinancing the 2 remaining vessels of the old $375 million facility. We are extending the duration and also increasing the leverage somewhat. That will release $48 million. As you see, we are matching the terms of the recent $290 million facility, where we have now a margin of SOFR plus 185 basis points.

In total, this will release $97 million, and we expect to conclude these transactions in Q4. If we look at the debt maturity profile, we see that we are now prematurely addressing our 2028 maturities. We are pushing them out. So, we have remaining a maturity in ‘28 of $103 million and then spreading out the remaining maturities.

And with that, I hand it back to you, Oystein.

[Øystein Kalleklev, executive]

Thank you, so you don't want your summer kit for your holiday with Madonna. So okay, let's look at the market. So, this is the overall product market for LNG, quite muted growth in the quarter up just about 1% year-over-year compared to last year with U.S. being the main go-to engine now solidly behind -- ahead of Australia and Qatar, 43 million tons in the first half of their, versus 41 million and 40 million for Australia and Qatar. Interesting to see that despite the conflict in Ukraine, Russia is still growing and expect them to grow even more so now with -- we have seen 2 loadings on the Arctic LNG-2, the new liquefaction plant where they have been able to source older steam tonnage for this project to do the loadings as we alluded to in our May presentation, where we said that we thought that our shadow fleet of LNG ships will develop based on the discussion we had with different market actors and interest in the S&P market.

So not really surprising for us to see that rather a bit surprising that some people didn't expect this to happen. So, we had a lot of time to prepare for this, and we are basically following the recipe for the petroleum market where they have been successful in keeping oil barrels flowing to friendly nations typically India, China, Brazil, so it's really the BRICS. So we do think that the Russians will find also willing buyers for these LNG volumes. On the import side, we have mature Asia being Japan, Korea, Taiwan, growing 4%, driven mostly by coal shutdowns. And of course, lower prices also helps. Europe had a mild winter with high inventories coming out of the season, somewhat muted energy demand and then reducing its imports by 20% year-over-year, which means more cargos are flowing again back to Asia. China growing where steadily 10%, driven by low prices compared to other feedstocks. India, even more so, 25%, impressive growth in India. Thailand has been growing for a long time now, 11% and rest of world also good growth, 28%. So, we do see more shift of cargoes to Asia, which I will come back to here shortly.

If you look at it graphically, we will see the U.S. LNG export share going to Europe, which increased dramatically once you had the uncertainty with Russian flows to Europe and even more so when you had the innovation, stayed at very elevated levels. The energy situation in Europe is more manageable these days and prices have come down, which is enticing Asian buyers back to the market with the Asian importers being bigger, again, than Europe, which used to be the case in the past. As you can see here in European gas demand, year over year change, we do see some pickup in industry, but power generation residential is quite muted. And also, gas storage levels at around 85% is quite high compared to the past, the 10-year average solidly ahead of that.

And then as I mentioned, Asia is where we see the growth, which is generally positive for shipping flexible cargos all the way to Asia via Panama. Yes, it's about twice the distance than going to Europe, but a few LNG ships utilize the Panama Canal, Panama authorities have had discussions with LNG exporter to try to find ways to entice them to use the Panama Canal, but a lot of people are trading orders Cape of Good Hope, which means that ton-mile goes even more quick since Suez Canal is not really a feasible route this time. So, if you have a U.S. cargo going from U.S. to Europe, typically, rule of thumb is about 5,000 nautical miles going to China, 10,000 nautical miles going to China via Cape of Good Hope, 15,500 nautical miles. So, it's really a big driver of ton mileage, which is good for the shipping market and which is also why shipping market have -- the sentiment has turned in the recent months.

So, you do see here on the right-hand side, Asian LNG import is up in the high range of historical demand and much higher than last year. Recent trend lately, again, about Russia, we have had a somewhat surprising invasion of Ukrainian troops quite far into Russia, all the way to Kursk, not that far away from Moscow, and these are creating uncertainty about Russian pipeline volumes that go into Europe, they’re still quite a lot. It's also still a lot Ukraine in transit, as you can see here on the left side of the graph, affecting potential purchasers like Austria, Slovakia, Moldova. And that's been firing up the European gas prices recently as there is more concerned about supply situation.

But then we also see a similar response in Asia. Asia also want the LNG. They have been through a heat wave where cool demand has shot up and we actually see a similar increase then in the JKM, which is the Japan, Korea Market or the Asian spot price. And this really needs to be higher than the European gas price TTF in order to make the cargo economics so that you are willing to take the longer route to Asia rather than just selling the cargo into the European market. Henry Hub prices still at low levels, making this spread between U.S. domestic gas prices and international gas prices very attractive for those people with a contract that can ship the cargo from U.S. to either Europe then or Asia.

So, as I mentioned, spot market has also turned up recently. We do follow the seasonal pattern here. So, coming from fairly good levels at the start of the year when we are in the winter season and then you have the lull in the shoulder months, let's say, March, April, where you hit the bottom and then trending upwards right now to stock the modern type of LNG ships, $80,000, $85,000 and the dotted line here represents the future prices, where we do see levels of yes, $130,000, $140,000 in the peak winter season. That's why we also think that our numbers will be the best in Q4, affecting the one spot ship we have. All our levels are lower than we've seen in the past. It's still historically very high levels once you're getting above $100,000 more ship owners with a spot ship is quite happy.

But what we have been more -- which we think is a more positive sign is the trend in the term rate. So, for some time now, we have had a soft spot market, which have dragged down the rate curve, where short-term rates been lower than long-term rates. But that has changed. So, while long-term raise 10-year charters. These are typically for newbuilds economics around $95,000 a day, which is needed in order to defend an investment of, let's say, $260 million at yardstick price, plus the lead time typically 3.5, 4 years and the financing cost of that kind of lead time. So, 5-year rates now ticked up slightly ahead of the 10-year rate, which I think bodes well also then for the ships we have coming open ‘26, ‘27, ‘28, where we can recontract ships hopefully at better levels than what we have today and thereby increasing our revenues down the road.

In terms of the order book, still it's quite a lot of newbuilds for delivery near term. This is one of the reason, or the main reason why we have taken protection by having a very long backlog in near term until '26, '27, '28, where we think market condition looks better because then we have been through this massive order book. Of course, the order book is for 2 reasons. It's a lot of new projects coming to the market which needs and require ships. And then it's the general phase of out of the older steamships that are uneconomically, which needs to be replaced, and there are still a lot of these ships, which eventually will be phased out of the market. Positive to see now that with the high prices of new builds and the long lead time, very seldom you see any speculative contracting. The contracts being done are mostly for Qatar for the planned expansion and renewal. And then ADNOC was recently in the market, securing quite a few LNG ships for their expansion and renewal projects. So less than 7% of the ships in order, around 350 of those are speculative open.

If you look at the steam ships, we just on the left-hand side here, like a scatter graph where you will see the redelivery of these steamships. So, as we said in the past, most of these steamships were built against 20, 25-year charters, back-to-back typically with the LNG purchasing contract. And typically, these ships were built around 2,000. So, these ships are now rolling off existing legacy contracts, and we do not expect the vast majority of these ships being able to extend those contracts. So these ships will be phased out of the market because they are not economically because of the inefficiency and the size of these ships. So here we see all the ships being redelivered in near term and the age of this ship. And some of these ships are rather old. And then as I touched upon, we have seen buyers linked to Russia, picking up a couple of these ships for their trade in order to lift the volumes from the sanctioned Arctic LNG-2.

If we look at the right-hand side is economics for the ships, given the inefficiency, the rates for the ships are much lower than for the modern tonnage. In terms of the product market, despite the moratorium by White House, U.S. export licenses coming into force in January, we still see a lot of activity in terms of buyers committing to long-term offtake agreements. And even doing so in U.S. because most buyers feel confident that the moratorium will be lifted regardless of who will win the election, as there is a lot of projects ready can create economic value for the country, exports, which generate a trade surplus, and not really trade surplus in general for U.S. but at least an improved trade situation and also jobs. So, we do see people signing up not only to Qatari volumes, but also in U.S. projects that are being put in a bit of a limbo right now, but where people are signing up because I think this moratorium will be lifted, depending a bit on who wins election, either later this year or probably next year if the Democrats wins.

So good to see that the volumes are quite healthy, 48 million tons contracted in first half of the year, which is not far off the previous year despite this moratorium and the duration of these contracts on average 14 years. So, as I mentioned then, there's a lot of projects in the U.S. ready for being greenlighted once the moratorium is lifted, despite not any U.S. project being sanctioned in the first half of year, we saw project other places. Of course, Northfield West in Qatar, 16 million tons, which is why they are contracting more ships. In the United Arab Emirates, the 10 million tons, which we also expected and why ADNOC, Abu Dhabi National Oil Company is out in the market also contracting LNG ships, one project in Canada and one in Oman, bringing the FID volume to 30 million tons in the first half of the year. And once we get the moratorium lifted, there's a lot of volumes that can be sanctioned very quickly in the U.S.

And while we are waiting for this, as I mentioned, these projects are signing up more offtake agreements, which means that once the moratorium is lifted, they are ready to go because they have the required contract coverage to FID those projects. So that is underpinning the third wave of LNG. We will see a lot of growth in the market from ‘26, ‘27, ‘28, where we have most of our ship open, so we can benefit from this growth in the market. We can benefit from the replacement of steamships and the fact that term rates today are higher than what we have in our portfolio today. So, we can reprice the portfolio. And as Knut mentioned, interest rates are also on the way down expectations. So, interest expenses is actually our biggest cost component. So, if interest rate drops, that will also be beneficial for free cash flow. So, growth will then come from Qatar and U.S. And I think we are well positioned to capture that growth.

So, with that, I think we just summarize the presentation. We delivered numbers according to our guidance, $0.56 of adjusted earnings per share, which is the measure which takes out the unrealized effects of the derivatives. We have secured 1 new contract for FLEX Constellation. We have some new financing that Knut has talked about, which are very attractive in our view. We have done the drydocking schedule for this year. Next year, we will have 4 ships for drydocking, 3 in ‘26 and then 0 in '27. So, we have this on a regular basis. Every 5 years, we take the ship out of service. This year, we've been able to do that on 17 days in average.

Revenues is expected to pick up in Q3, driven by all ships back in operation, higher spot rate on one ship. And then we think numbers will be probably better in Q4. We'll come back with the guidance on that when we are reporting in November. And once again, we're declaring an ordinary quarterly dividend of $0.75 per share, giving you $3.125 on a trailing 12-month basis, 12% yield, and we are well covered to pay that dividend with our proforma cash balance of $467 million, I believe it was. And then, of course, the backlog I showed you earlier today.

So, with that, I think we conclude the presentation, and Knut might have some questions on his laptop.

[Knut Traaholt, executive]

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

[Øystein Kalleklev, executive]

I think it's easy to say something, but we are a bit data-driven as well. So, we do see that rates have picked up on the term rates. Spot rates, of course, is not unusual that spot rates picks up. They usually pick up, they bottom out typically in March, April and then they go up. But we do see also the term rates picking up far and we are once in a situation where shorter-term rates of 5-year rates are higher than 10-year rates, which is how the market should be in a balanced way. If somebody can commit to taking a ship for 5 years at the same rate as a 10-year, most people will commit to taking 5 years other than 10 years. Typically, people want a discount if they're taking a commitment of 10 years rather than 5 years. So, we are getting a bit better balance in the market.

We do see increased inquiries for term rates. It's not really surprising because there is this roll-off of steam tonnage I've shown earlier today, that steamships on legacy contracts being rolled off, people don't want to keep those ships. They want to renew them with much more efficient ships that we have shown in the past. Fuel efficiency per cargo ton lifted on our ships is about 58% better than our steamship. So that means that it's not only good economics, it's also good for the environment. So, when people are committing for a 5, 10-year charter, they don't want steam technology. They want the new ships. So, we do see more inquiries for that for fleet renewal and also some of these projects we are now signing up SPA contracts are also starting to locking in shipping. So, I think that goes well for our strategy here, trying to fix that wind on their term where we have seen muted growth of the market in terms of volumes and then having our ships available ready for the next wave of LNG.

[Knut Traaholt, executive]

We touched upon in the presentation on the Russian shadow fleet. So, a number of questions here. How do you see that impacting the LNG shipping market. Is that their ability to grow to a large fleet? And how that will impact the global trade.

[Øystein Kalleklev, executive]

This is not a new phenomenon. This is a well-developed situation on the tanker side, both the crude tankers and the product tankers. But also on the LPG side, Avance Gas as well, the shadow fleet on the VLGC is very big there. We're talking up to 15% of the fleet being in this captive shadow rate. For that particular trade, it's Iran, China. On the petroleum products, it's typically Russia, India, China, maybe Brazil. On the crude, it could be Venezuela, Iran and then Russia. So, it's a lot of read-throughs from the other markets. It's basically the same thing happening. All these ships are being taken up by the affiliates with the Russian counterparties, and they go into a captive trade. Once that ship goes into that trade, they will never come back to the regular trade. It will stay in that trade. If they have insurance at all, it's with our Shady counterparty.

And this is our way of the sanctioned party to avoid the sanction and being able to generate revenues on the products. So, it means that you could have some steam tonnage that we thought might be scrapped will go into that trade. But this is basically also tend to replace those ships that the Russians were trying to buy, a lot of icebreaking ARC7 ships, which were sanctioned and they are not delivered. So, they have to find a way to arrange that logistics without those ships that they contracted. So, it doesn't really affect the net fleet growth because some ships are not being delivered and some ships that we thought would be scrapped, they might go into this trade, and we will never be in this kind of trade. Most serious actors will not be in that trade. But it just changed the dynamics because we haven't had the shadow fleet in LNG in the past, but it seems like this is something that will happen now and with a lot of similarities to the tankers and the VLGC side.

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

[Knut Traaholt, executive]

Then we are transitioning over to more to the trading pattern of the global fleet and a normalization in the Panama Canal operations. But still, most of the ships are trading to the Cape of Good Hope. Do you see any trend back to a normalization with transit to Panama Canal or continued that the Cape of Good Hope will be the preferred route.

[Øystein Kalleklev, executive]

I think the booking schedule in Panama is not really always suitable to the LNG trade. It's very rigid. A lot of things can happen in the market. You book a slot and you have a cargo, suddenly prices moves and you rather want to send that cargo somewhere else. Or in terms of you’re ballasting a ship, and if you're going a Pacific Ocean when you're ballasting on that ship, there's really no place to pick up a cargo except for U.S. If you're ballasting from China to the Atlantic, you can pick up a cargo in Australia, you can pick up cargo in the Middle East, West Africa, so it gives you a lot more optionality to fix that ship on a cargo, while if you go into the Pacific route, you only have just one option. So, the canal authorities have been in dialogue with LNG players to try to find a system that incentivize them to use the canal more, but we still see that people just don't -- they don't like the rigidity and also, there are costs associated with using the Panama Canal.

If you have a lot of slack in your program, for example, you have a commitment to deliver cargo, you have a natural boil-off. So, kind of some of the fuel had a sun cost. So, if you are using the Panama, you're paying them the toll, you go through, you come to China and then you are waiting for 10, 14 days in order to discharge. You will not stop the boil-off. So, you have to consume that. And then it's not really any cost of going the longer route, you save the Panama fees, and you're just burning the same basically amount of LNG. There are some differences there because some ships have equipped relic system. We have 4 ships with the partial relics, 3 ships with the full relic. So, if you have those kinds of ships, very advanced ships, you can use the Panama, you can go to China, you can idle there and you can reliquefy part of the boil-off and then get that back to cargo, so to reduce your fuel. So, it's really a bit also dependent on the specification of the ship in that trade.

[Knut Traaholt, executive]

And then a follow-up to that, as you see more and more cargo going to Asia and also taking the long route to the Cape of Good Hope. The ton-mile effect of that versus the fleet supply coming over the next...

[Øystein Kalleklev, executive]

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

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

[Knut Traaholt, executive]

Then to Europe and EU ETS. How do you see that play out for the modern 2 strokes versus the steamers and the tri-fuels?

[Øystein Kalleklev, executive]

I can start with the question. You are more in charge of the implementation on our side for it, but I can just give you some broad idea. So of course, for this year, ships trading into Europe will have to buy CO2 carbon permits or basically the ETS for the emissions they are creating. And of course, this is being implemented over a couple of years with a higher threshold you have to buy every year. Eventually, this will be 100% of the documented emissions you have on 50% of the trade. So, if you're going from U.S. to Europe, there's 2 legs in that trade. It's the laden leg and then it's the ballast back. So that's why you're getting to 50% because you have 50% in Europe and 50% in U.S., which don't have this EU ETS. So, the price of this is EU ETS, of course, is volatile, can be EUR 100 or EUR 60. So, you have to measure that emission you are creating. And then it's not offsetting it because it's not a carbon offset, but you have to pay for that permit of the document in CO2.

So that will cater cost of emissions, which I think is the best way of dealing with global warming. If people pay for it, they have a real monetary incentive to do it, much better than having Bureau cuts, making a lot of rules and giving out a lot of subsidies, better put a price on it and behavior will change. So, we are generally in favor of this. We like CO2, and we think it should be implemented more worldwide. It will be a competitive advantage for us. As I said, we have a fuel consumption per ton cargo transported, about 58% lower than our steamship. That means the steamship has to buy a lot more of this carbon credits in Europe, not offset, but to pay for the permit of emitting.

So first, you have the steamships they have an economically, as I mentioned, on the fuel consumption, they are small, and then you have this carbon penalty on top of it. So generally, we like it. It's good for us and then Knut has been in charge with adapting our time charters because this is not our cost, this is a cost pass-through. We gross up on these taxes. So, this is for the charters account, which has to pass it on to the consumer who eventually pays for this. So that means under our time charter, we get paid a fixed fee. We run the ship and they will pay for all costs associated with that trade being Panama Canal, ports and fuel. So, we guarantee a fuel consumption, and that is what we allow to utilize.

And then when taxes come on top of it, taxes related to the trade, they will also pay for that. So, we implemented that so that we are sending them documents. This is the CO2 we are meeting. This is the CO2 we have to buy. Here is the invoice, please either refund us or provide us with those carbon credits, so we can hand them over to EU organ in charge of this. Or do you have something to add then?

[Knut Traaholt, executive]

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

[Øystein Kalleklev, executive]

Yes. Now I think, of course, if time points will have the positive effect for LNG that we think this mortarium will be lifted very quickly. Of course, there's a judge already in Texas, who have decided that this is not allowed. So of course, that decision in a court in Texas, I don't really will affect this. But I think if Trump wins, it will be repelled quite quickly. If Harris wins, it will take some more time. But I think in any event, it will happen is they put this in January in order to attract more boats from kind of green boats. This is a good case for them, especially after permitting oil drilling in Alaska. They had to do something, and this looks good on a tweet or whatever. And then eventually, there's so much gas in the U.S. because this can create so many jobs that -- we do think that the reason will prevail. And eventually, they will slowly say that, okay, you can start issuing permits again.

And of course, there is a lot of pressures from other nations as well to -- on U.S. politicians to allow this both allies in Europe and Japan are pressing on new politicians to repel this moratorium, and I think that will happen regardless. And once that happens, a lot of these projects have been filling up with new LNG offtake agreements. So, once it's lifted, they are more or less ready to go and will kick off the next wave of U.S. LNG.

[Knut Traaholt, executive]

Then we'll round up a couple of questions on FLEX and strategy. How do you view the outlook for growing the fleet and the company being M&A, second and tonnage in new buildings.

[Øystein Kalleklev, executive]

I thought you were going to say how to spend it. That's usually -- Now as we said repeatedly, we have 13 ships. The last ship we got delivered was May 30, 2021, FLEX Vigilant. So of course, we are happy to grow, but we have to grow profitable. We're not going to grow just to have a bigger fleet and a bigger revenues. It has to be accretive. It has been hard to find good growth prospects in the last couple of years because of the skyrocketing newbuilding prices going from the low when we purchased the ship at $180 million to $260 million. So, it's a very big ramp up in prices. Not only have the prices gone up, but also lead time gone out from 2.5 years to suddenly 4 years, and that cost a lot of money when interest rates is about 5%.

So, I just have to repeat what we said in the past. I think we demonstrated for some time now that we are not going to pay to grow. We're going to do a discipline. Right now, I think the order book is already so sizable. We don't really need more orders. And I don't find it very attractive, $250 million, having to wait to 2028, I don't find that attractive compared to paying dividend in this period of time. So, I think we need to -- if we are to grow, it's more natural to do that through consolidation. We are the world's biggest listed LNG shipping company by far. We have a modern fleet. We have a good track record. More or less, all the ships or the LNG ships in the world, it's about 650 on the water, 350 under construction. That's 1,000 LNG ships. Almost all of them are owned privately.

We have 13 ships, CoolCo have 13 ships, Awilco has 12 ships. The rest of the ships are in private hands. If you are a private owner, you have a good fleet, you want to go public, cash in, have a better position having a stock rather than a private ownership. You should reach out to us. Don't call Morgan Stanley or JPMorgan, they will charge you a hefty fee to take your company public, rather call us, and we can maybe consider giving you some shares in FLEX for the ships you have in your private account.

[Knut Traaholt, executive]

Then there's a question on balance sheet optimization and what you can expect going forward? Are there more in the pipeline? I guess I can take this on, the 2 financings we are announcing today is basically triggered by the 500-day extension on the contract with Cheniere, and also availability of an attractive financing package in Japan. Concluding that, that means that we also then have to address the 2 other vessels or have the opportunity to address them as they are fairly low levered. This was the first transaction we did in the balance sheet optimization program for the bank financing. So, they have amortized and values has also improved with the banking market. So that concludes those 3 ships. As you also saw, we are then also in discussions with some of the banks to convert a term loan tranche to an RCF. So, we maintain our $400 million of the bullet on non-amortizing RCF capacity.

For a next refinancing, that will most likely be subject to contracts, and the long-term contracts and the availability of attractive financing. We are very pleased with the package we have today. And I also want to mention that with the JOLCO we're introducing a new bank to us, which we are very pleased with working with in this process and look forward to expand business with as well. So, for now, it will trigger for more refinancing is probably a new contract.

[Øystein Kalleklev, executive]

Yeah, I think it has to be interest rate derivatives optimization, which is next. Now we have run through, we were way ahead of Fed. We started doing a lot of swaps early '21, '22 when rates were low, well ahead of a year before Fed started to hike rates. That trade has generated $127 million of profit since 2021. We have monetized and crystallized most of it. I believe balance sheet now is around $35 million of unrealized gains, so $127 million. So, most of the gains have been realized and crystallized. Rates are now picking down again. We have plenty of trading limits. So, we will be opportunistic to have to see if there are levels which are attractive to lock in a higher hedge ratio, we have been anticipating a pivot from Fed, peaking of hedge ratio in Q2. Long-term interest rates have fallen a lot since the employment figure in U.S. 1.5, 2 weeks ago. So, we will monitor that development and see if there are opportunities to hedge rates at attractive levels as they have been going down quite a lot recently. And typically, we try to use windows where there are distress in the market like the Silicon Valley Bank collapsed to secure good terms for our shareholders.

[Knut Traaholt, executive]

That concludes the Q&A. And announcement of who wins the FLEX kit.

[Øystein Kalleklev, executive]

You can have a look at the name.

[Knut Traaholt, executive]

We have one very active shareholder investor asking questions. And it's a number of questions reaching all of the topics, and it's [indiscernible].

[Øystein Kalleklev, executive]

So, then you will have the FLEX LNG kit. Before concluding then. I just want to again, thanks to the technical team and our crews who have done, once again, a fantastic drydocking of Constellation and Courageous. It's the sixth drydocking we have done now in the last 2 years, oh, actually 1.5 year all according to time and budget. So, we're very happy with that, very high technical quality on our team. And then we will be back in November with our Q3 numbers, which we have guided today. So, we don't expect any surprises in November. And in the meantime, you can enjoy the $0.75 per share of dividends, which I think will be payable at the end of the month. Okay. Thank you, everybody, for listening in.

[Knut Traaholt, executive]

Thank you.