FLEX LNG Ltd

OSE:FLNG

Earnings Call Transcript 2022-Q3

[Øystein Kalleklev, executive]

Welcome to Flex LNG's third quarter presentation. I'm Etan Kadaka, the CEO of Flex LNG management, and I will be joined by our CFO, Knut Traaholt, who will run you through the numbers a bit later in the presentation. Following the presentation, we will have a Q&A session where you can either use the webchat function or send an e-mail to [e-mail]. If you have any questions, and we will answer some of the questions in the Q&A session following the presentation. Before we begin, we just want to highlight our disclaimer regarding forward-looking statements and the use of non-GAAP measure and there are limits to the completeness of detail we can give in this presentation. So please review also our earnings release together with this presentation. So let us start with the highlights. Revenues for the quarter came in at $91 million, which was in line with our previous guidance of $90 million. Earnings were strong. Net income and adjusted net income was $47 million and $42 million, translating into earnings per share and adjusted earnings per share of $0.88 and $0.79, respectively. During the quarter, freight and product markets were booming, and this affected both short-term and long-term rates positively. During the quarter, we had three ships commencing new time charters. Flex Enterprise and Flex Amber commenced a new 7-year time charters, which we announced in June, and these replaced the shorter-term time charters we had for the ships prior to this announcement. We also had Flex Aurora, which was delivered as the final fifth chips to Cheniere at the end of the quarter. Our CFO, Knut, has been busy refinancing ships and we have recently secured $630 million of refinancing for 4 of the 7 ships we intend to refinance and with these refinancings for only these four ships, we are already surpassing the $100 million target we put in terms of cash release. These four ships altogether will release around $110 million. So, for Phase I and Phase II, we today expect to release a minimum of $300 million of cash release and Knut will give some more details on this shortly.For fourth quarter, we expect slightly better numbers driven by Flex Artemis, which is the only ship we have on a variable hire time charter with spot market booming. We are also making more money on this ship. So revenues for fourth quarter is expected to be somewhere around $95 million to $98 million, also in line with previous guidance of $90 million to $100 million. We have full contract coverage for 2023 and a minimum coverage of 91% for 2024 as we have two ships rolling off charters in the middle of 2024. There are, however, options by the charter to extend the ships. So, the first fully open ship we have available today is actually middle of 2026. So with strong contract coverage, strong financial results and a healthy cash balance, our Board has therefore declared our quarterly dividend of EUR 0.75 per share. So far this year, that means we have declared $2.75 per share in dividends, which is also in line with our earnings per share of 2.76%. If we add Q4, we have paid $3.5 of dividends for the last 12 months, which implies a yield of around 10% with today's stock price. So, as I mentioned, we have a very good coverage. As you can see from our fleet overview, we have two ships, which could possibly come open in 2024. But, as I mentioned, there are options by the charters to extend in these ships. So the first fully open ship is Flex Vigilant 2026 and then we also have three ships coming open or fully open 2027. We do think this is a very good timing. There is a lot of LNG coming to the market in this window and with new building prices going up to the range of $250 million, we do think that these ships will be attractive for recontracting at hopefully even better rates than we have today. As you can see, Flex Artemis, the one ship with a valuable higher structure, which is just lagging up our revenues for Q4 this year. Dividend. As I mentioned, no big surprises there, a consensus estimate for our dividend this quarter is also $0.75, bringing the last 12 months dividend to $3.5 in total. We have gone through our decision factors for how we are planning our dividend in details during the last couple of quarters. As you can see here, it's a lot of green lights. Our earnings are strong. Market outlook is good. We have, as I mentioned, a very strong contract backlog. Our cash position today is $271 million and with the balance sheet optimization program, we expect this cash pile to grow even further. Covenant compliance, we are flying with green flag. We don't have any upcoming debt maturities. We don't have any CapEx liabilities, except of ordinary dry docking for the ships. So, it's no problem paying out these dividends for sure. We are also after several requests by shareholders, introducing our dividend reinvestment plan so those people who would like to reinvest the dividend in new Flex LNG shares will now have the opportunity to do so. So if you look at our P&L, you will see a big number for this year, which is $75 million, which is our gain on interest rate swaps so far this year. We also made $18.4 million on interest rate swaps last year. So, in total, we have actually made $93 million on interest rate swaps since 2021. So why is that? During our Q4 presentation in February 2021, we focused on a couple of factors impacting our business. One, of course, trade war. There was a big trade war with U.S. and China. This has really resulted in cargo flows from U.S. to China drying up during 2019 and flow of cargoes from U.S. to China didn't really resume after the Phase I trade agreement was agreed between China and U.S. in January 2020. We also have deglobalization, which has been a factor for many different industries. This has not really been the case for LNG. As we see more and more countries is entering this industry, both on the import and export side. COVID-19, of course, was very much in focus early 2021 in Western countries. We have mostly put this behind us, but it's impacting China's LNG demand quite a lot with their imports this year being down 22%, which has been fortunate for Europe facing gas shortage. Energy transition is still a very relevant question, making coal history, which economies put up has not really been the case as coal consumption has grown incredibly much due to the energy shortages. ESG is also a focus for us. We are expanding our ESG reporting. We have our annual ESG report according to the Sustainability Accounting Standard Board, where we are also implementing the global reporting initiative and we are now also finally disclosing our numbers for the carbon disclosure project, which will be available with the score in early December this year. And then the last thing, which has been driving our interest rate swap is the free money. Back in February 2021, we said one of the big drivers here is the free money and the money printing. So the remedy, as we said, for COVID-19 was all case in fiscal and monetary stimulus on an unprecedented scale, and we are now seeing the effect of this free and easy money.We asked if this would result in higher inflation and whether the debt super cycle would be replaced by a commodity super cycle and we said that we weren't that really that worried because usually, in a commodity super cycle, energy and commodities are doing well and shipping is part of that value change. Regardless with interest rate at rock bottom level, while inflation was picking up and fiscal monetary easing was being pushed forward on an unprecedented scale. We felt it was prudent to take more coverage for the effect of higher interest rate, and that has resulted in huge gains for us in terms of these interest rate swaps. So, if we look at what has been happening then since we put up this slide back in February 2021, it's really gone very much according to what we were thinking could happen. It actually started already in March 2021 with big fiscal stimuli by the new President Biden with the COVID Relief package, the build-back better plan was, however, reduced by Congress. We also saw the energy shock starting way ahead of the Russian innovation of Ukraine already October 2021, economies ran is covered with the energy shock because Europe was entering our winter with very low gas inventories, driven also by the fact that Russian were holding back flows. And this resulted in the gas price in Europe, doubling the 3 first weeks of December 2021 from $30 to $60 per million Btu, which was really our unprecedented level at that time. In February 2022, the markets also became anxious that this inflation would not be transitory. However, on February 24, 2022, Russia invaded Ukraine, and we had a market route and a flight to quality and long-term interest rate really fell a lot. So in Flex, we actually doubled down on our bets, and we entered $200 million more of interest rate swaps for 10 years at a low rate of only 1.7%. With the war in Ukraine, we also saw a lot of supply shocks affecting a lot of shipping segments and energy sectors. Certainly, energy security, which has been a dormant policy for a long time came back in bulk because of the vulnerabilities we saw after this war in Ukraine started. We also saw that the market started to realize that the Federal Reserve was behind the curve. Finally, in March this year, the Federal Reserve started to hike up its interest rate, first by 25 basis points, then 50% and then, we have had this jump hikes of 75 basis points, driving the Federal Reserve policy rate from 0 to 0.25% to now 3.75% to 4% and the market expecting these rates to peak out somewhere around maybe 5%. So of course, that is also one of the drivers then that we have made so much mark-to-market gains on our swaps. We are also seeing politicians realizing that energy is complex. It's not really a one solution. It's a trilemma. It's about emissions, it's about affordability, and it's about security. So we do see some more realism by policymakers and how to make the energy markets work. And then lastly, the last cover we are presenting is the Europe at Winter Peril. There has been our anxious market that Europe would end up with a lot of gas shortage this winter. I will come back to this in the market presentation. This hasn't materialized because of luck because Europe has been able to source a lot of LNG because of the COVID lockdowns in China, and it's also driven by demand destruction and very favorable winter weather in Europe so far. So also I would also highlight that if you want to have more insight on the energy markets and the winter, I would also recommend the smarter market podcast, where our new board member, Susan, and myself have recently joined to discuss the LNG market more in detail. So with that, I think I'll give it over to you, Knut, for our financial review.

[Knut Traaholt, executive]

Thank you, Oystein. Let's look at the key financial highlights for the quarter. In the third quarter, we delivered revenues of $91 million or TCE of $76,000 per day. The increase in revenues is explained by the three-time charter contracts mentioned by Este and somewhat higher earnings under the variable higher contract for the flex atoms. Operating expenses of $17 million for the quarter or OpEx per day of $14,600. The OpEx is higher than the guided level of $13,000 per day and is explained this quarter by still higher COVID-related expenses, crew changes, and extended handovers. Going forward, as restrictions are lifted, we expect COVID-related costs to slowly go away and with the extended handovers, we have already performed that this cost should taper off and we should return to normalized levels. Interest expenses this quarter is higher due to the increase in interest rate levels, but it is mitigated by our derivative portfolio, and I will return with more details on the derivative portfolio later in the presentation.This quarter, we have extinguishment cost of debt of $13 million, which is related to the refinancing of the Endeavour and Flex Enterprise leases, where the purchase option price is higher than the book value of the debt. If we consider the total refinancing of these two vessels, these costs will be paid back in approximately 2 years, as the new terms are more attractive. This gives us a net income of $47 million or an earnings-per-share of $0.88 and an adjusted net income of $42 million or $0.79 per share. If we look at our balance sheet of $2.6 million that is the 13 vessels, state-of-the-art LNGCs with an average age of 3 years and as a reminder, these vessels and the book values reflected these vessels were acquired at a low point in the cycle. We have a robust cash balance of $271 million and then equity of $890 million, giving us a book equity ratio of 34%.Looking at the cash flow for the quarter. Main contributor is cash flow from operations and working capital. We paid $26 million in repayments, which is, as a reminder, in Q1 and Q3; we pay somewhat higher amortization due to a semiannual repayment schedule under the ECA facility. During the quarter, we realized some of our swaps resulting in a gain of $9 million, and then we have our dividend for last quarter of payment of $66 million, which included $26 million in the special dividend. So, at the end of the quarter, we had $271 million on account. If we look at our interest rate portfolio, we continue to manage that actively. During Q3 and Q4, we have amended and terminated swaps. So, the notional value of our spot portfolio today is NOK 641 million, and in combination with the fixed interest rate lease, we have a hedge ratio of about 47%, excluding any utilization of the RCF. The amendments we have done, we have terminated a number of swaps as we see here in Q3, which released $9.3 million and then continued into Q4 when the interest rate levels were high, we terminated swaps and realized $14.4 million. The plan for the use of this cash is to maintain that on account to continue servicing that interest going forward. We have also amended longer duration swaps and made them shorter. Therefore, we now have a total balance of both cash, lease and swaps, which will protect us going forward for higher interest. If we look at our optimization program and the Phase II today, we are pleased to announce that we have met our $100 million target. We have commitments for financing, which will release $110 million. These include leases and bank facilities, and we also invite new banks to our banking group, where we also then expand our geographical diversity of where we can raise financing. This financing meets all of our priorities and then we have about four vessels remaining for refinancing, where we see the potential to further release about up to $100 million.If we look at the financings that we today announced on the Q2 presentation, we indicated a financing for the enterprise. Today, we can announce that, that has been signed, documented, and drawn by the end of Q3. It's a $150 million facility with a margin of 170 basis points and a tender, which is back to back with the contract. Today, we then also announced a new bank financing for the Flex Resolute, also $150 million with a margin of 175 basis points, also a tanner, which is back-to-back with the contract, and that is expected to be documented and drawn ahead of Q4. We also announced two leases of -- for the Flex Artemis and the Flex Amber with a combined margin of 215 basis points. It's all in all, 12-year time for this and then average repayment profile of about 22 years. We are very pleased with this financing, and we are now considering financing of the Flex Rainbow on the back of the 10-year contract, which then can include Flex Aurora as a replacement vessel for the financing concluded in earlier this year for the Flex Rainbow. We are then also evaluating the options for the Flex Freedom and the Flex Vigilant, and we'll come back with that as soon as we have more news to announce. So with that, I think this is a concluding page of what we are planning to do under the balance sheet optimization program. We are fortifying the balance sheet as we now have a stable contract portfolio with long duration. During the Phase I and II, we free up capital, but we have RCF capacity, so the carry cost of the cash we release is low. With the new financings, we have an ambition to further increase our RCF capacity, and that will support the journey of Flex LNG going forward and safeguard us through the cycles. And with that, I hand it back to Oystein.

[Øystein Kalleklev, executive]

Okay. Thank you, Knut. So let's go back to the market. LNG exports, the first 10 months of the year is up about 5%. It's driven by U.S. despite the shutdown of Freeport, which is now expected to resume exports early next year. U.S. is still growing 11% by 6 million tons in total. Russia, despite all the sanctions and the curtailments of pipeline gas, LNG export growth out of Russia is continuing to grow and is growing 12% in the first 12 months, adding 3 million tons. We also have 3 million tons from Malaysia growing 13% and then 4 million tons from the various other markets.If we look at the import side, not surprisingly, maybe, it's Europe who is absorbing and soaking up a lot of the LNG. They are basically importing all the growth in the market and then also the shortfall in demand from other countries. The most notable being China, as I mentioned, with the COVID restriction and lockdown still in China, LNG imports is down 22% this year. The high price of LNG is also forcing out other countries like Bangladesh, Pakistan, India, where the price of LNG has become so expensive that they are turning rather to coal and other feedstocks for their energy demand. So this demand destruction in other countries and the growth of the LNG market has really saved Europe this year, which is able to grow its LNG imports by 37 million tons or 57% the first 10 months of the year.If we look at the gas can share in Europe, it's been solved by a couple of factors. It's one, the high prices is stimulating energy savings and we have seen especially demand destruction or demand subversion on the industrial side, a lot of the households are still being subsidized, which disincentivize energy savings. So altogether, gas consumption in Europe this year is down 12%, also driven by a very mild beginning of the winter. In October, you saw basically all the big countries in Europe had a very mild start to October, and this has continued so far also into November. So with demand for gas in Europe going down and a glut of LNG hitting European import terminals. To everybody's surprise, I would say, we are actually now in the middle of November with basically full gas storage levels in Europe, which is also creating further bottlenecks. And this despite Russian pipeline gas being reduced significantly, we have seen this being tapering down and now with the explosion of the Nord Stream pipelines, it's basically only small quantities of gas being exported to Europe, ironically enough to Ukraine. Then we have had all these worries about energy or gas situation in Europe for this winter, it seems like it will be solved with full gas levels in Europe. The gas levels in Europe are sufficient to cover about 7 weeks of winter demand so the gas inventories isn't really that big. But next year, I think Europe will face a bit more challenging task. This year, as I mentioned, it's the glut of LNG going into Europe that have sold the solution together with demand destructions and then, of course, Europe has been lucky that China has been shutting down and not competing head-on-head with China for the spot LNG cargoes. Still, as we saw on the last graph, there are still Russian pipeline flows to Europe. How much Russian pipeline flows will go to Europe from Russia next year, that's a big question mark. If you look at the right-hand side graph, we are looking at the change in Europe's gas balance next year and you can still see these 35 million tons of LNG equivalent gas going from Russia to Europe. There's a big uncertainty mark about whether these volumes will be coming to Europe next year and that means Europe will either have to import even more LNG, but there's really not 35 million tons in the market. There needs to be more demand destruction and basically, there is a gap for next winter, which will make also the winter '23-'24 challenging for European consumers. With that backdrop, it's maybe not surprising that gas prices are staying high at elevated levels, not in U.S., where shale resources are bountiful. Prices have come down at very low levels compared to import nations in Europe. And we see here the TTF for the Dutch gas hub prices and then the dotted line here being the Northwest Europe delivered exit LNG prices. So with all this glut of LNG coming into Europe, the import terminals are bottled up and LNG actually has to be sold at a big discount to pipeline gas prices in Europe in order to divest it. So right now, we actually also do see a contango in the gas prices because of the full tank inventories and the fact that wind has been so mild. Of course, the winter is not going to stay this mile for the whole season. So once temperatures are getting closer to 0, gas consumption will go up, and this is meaning that gas for delivery in future is at a higher price than today, and this is also incentivizing floating storage of LNG, which I will also come back to shortly.As we can see, the Asian spot market, the JKM market is also at similar levels to Europe, meaning that we expect prices here also to stay at elevated levels. And with China possibly coming back to the market, there will be more competition for the Europeans sourcing spot cargos. So as I mentioned, the bottlenecks are everywhere in Europe these days. It's on the import terminals and it's also actually these days on the storage tanks. And this has resulted in a huge buildup in ships tied up in floating storage, especially in Europe, but also other countries these days because of the contango structure in the price curve where you can sell your cargoes at a later date at a higher price than today. And today, we are at an all-time high level of around 40 ships being tied up in such floating storage, which is, of course, taking out a lot of ships from the spot market or the general freight market, which is also then making the freight market very tight. So looking at the spot freight market, it's been on such a bull run now that we actually have to change the access to logarithmic scale. We have gone from a slump during the summer; we had a very good spring rally in the spot freight market. Then the Freeport shutdown happened, really send spot market down again. But then with the buildup of ships in floating storage, there has been scarce ships available in the market and this has sent spot freight rates up to around $0.5 million per day and above all seasonal records in the past. However, with such strong rates, it's a reflection of the fact that there's not really many ships available in the market so the numbers of spot fixtures has gone down a lot. And of course, a lot of the fixtures -- which is being done or concluded today are real as well. Basically, charters who are long shipping can optimize the program, release a ship for a short period of time, and relit that in the spot market for shorter-term voyages, where they can make a lot of money as evident from these grafts. So also, the long-term markets been recovering. It's been recovering also because of the fact that new building prices has gone up, and I've talked about it already. The inflation, the yard has a very big order book packed with LNG ships, packed with container ships. So the new building price has gone from $180 million to $250 million so this translates to a $70 million per ship increase. If you have our 13 ships, it's $900 million increase in the value of LNG carrier in a rather short period of time. And of course, with higher interest rates and higher new building prices, you have to have a higher charter rate. So if you look at the 5-year time charter rate for a home delivery, we are now above $130,000 per day. But that said, there's not really that many ships available on a pump basis, as I've shown on the previous graph with the liquidity in the freight market.Looking at LNG flows. These are on the left-hand side, the FIDs of project being sanctioned for green light of new capacity and this also including what we think is the possible of new. There is really no fight between all the export projects to get a green light for the project to add more LNG to the market because the main problem today is a lack of LNG with all the Russian gas, pipeline gas to Europe suddenly gone. This needs to be replaced by a lot of new LNG and so far, Europe been lucky in order to be able to buy the spot cargoes in China has been a way, but with China coming back, we do expect them to start increasing their imports and then there'll need to be more LNG in the market. And actually, what we are seeing is that the Chinese are the ones signing up for the most new LNG. So we do expect a bit muted volume growth this year. It's rather low next year, again, a bit muted on the volume side, the same for '24, but then there's really a big ramp-up of new LNG coming to the market, '25, '26 and then we also do expect quite a lot for '27 once some of these new projects are being sanctioned. This gives us a good timing in the sense that we have ships coming open in '26, '27 so we don't have that much market exposure in '23, '24 when volume growth is muted and where you could have a risk of not the one time mitigating the low ton mileage growth we have seen this year because this year, ton mileage is down, but the freight market has been good because ton times gone up because of congestions and ships being in floating storage. So that's the highlights. I'm going to just run through them quickly again. Revenue is $91 million, in line with guidance. We expect earnings to improve in Q4, driven by a better spot market. So revenues next quarter, somewhere around $95 million to $98 million, also in line with previous guidance. This quarter, we delivered earnings of $47 million or $42 million on an adjusted basis, which gives our earnings per share of $0.88 and $0.79. We are busy on the financing side. As Knut presented today, we are just secured refinancing of four of our LNGs and we're already ahead of the $100 million target for balance sheet optimization Phase II. We do expect that altogether for Phase I and Phase II, we will be able to release more than $300 million of free cash for this refinancing of the fleet, while also improving our financial terms or tenders and other financing terms.We are fully covered for next year. We have very strong coverage. As I mentioned, two ships possibly open 2024, but the first fully open ships is '26 and '27 when we see a lot of new LNG coming to the market and where we will be competing with ships with a much higher price tag than us. So we are very confident we will be able to secure new long-term employment at hopefully, even better rates than we are having today. So not surprisingly then, maybe we are declaring again $0.75 of ordinary quarterly dividend. This gives our dividend so far this year of $2.75 per share over the last 12 months of $3.50 and given our stock price of around $34, this should give you a yield of around 10%. So thank you, and that's it for us today. We will now do our Q&A session, and where both Knut and me will participate. So I hope you have all sent in some good questions. Thank you.

[Øystein Kalleklev, executive]

Okay. Then we are ready for some questions here. I think we have about 20 minutes for questions before we are heading for the airport going to New York for investor meetings. So, if you are in New York, we will be on the Marine Money conference in New York on Thursday, talking about LNG and shipping strategy in general. So I hope you will be there feasible.This time, we have had a lot of questions. We have had a competition here with some giveaways for the best questions and that has resulted in a wave of questions, which we are happy with and we have also given some gifts for those people giving the best question.

[Knut Traaholt, executive]

Yes. A lot of questions, as you mentioned. And I think we kick off like last quarter with questions from Omar Nokta from Jefferies.He starts off with the index linked, the vessel, the Flex Artemis. Can you remind us of how the earnings are calculated? I'm guessing there is a ceiling of around $100,000 and the floor about $50,000 per day.

[Øystein Kalleklev, executive]

Yes. It's much easier before we had more ships on index. Now we only have one ship on index, but still we got a lot of focus on this. So the charter hire is tied to the spot market. There is a ceiling, and it's a floor, and we have communicated the floors around our cash breakeven level. When it comes to ceiling, it's much higher than 100,000. Keep in mind, we are generating $91 million of revenues in Q3. We are saying that this will go to $95 million to $98 million for Q4 of earnings in Q3 for the spot ship. So when we are saying that the earnings are increasing $5 million to $7 million, that's 92 days in we're growing the revenues for that ship, somewhere around $50,000, $60,000 per day, so that means – [Audio Gap] I won't comment specifically on it for competitive reasons.

[Knut Traaholt, executive]

Up with the question regarding the vessels coming open in – [Audio Gap] How does the charters' interest for those vessels...

[Øystein Kalleklev, executive]

[Audio Gap] First available ship you can get is '27 and '27 order book at yards are getting pretty packed. So soon, we are talking interest rates are up. We have hedged a lot of that risk. So that means in order for people to calculate a good return, they basically need maybe 10, 12 years' time charters and probably rate starting. [Audio Gap] As we've shown on the graph, long-term rates are picking up a lot, and we think we can benefit from that. We are having the same ships as MEGI/XDF, the two-stroke, the efficient ships -- so what we can offer is maybe some more flexibility in terms of the duration of the time charter because we have ships coming on – [Audio Gap] -- but I think we can get better rates than we have on average today. And I would say interest is high, given the fact that, yes, the order book is big, but there are very, very few uncommitted ships in the order book. So, we are working on that. We are meeting people. We get there are tenders in the market for these kind of delivery slots that [Audio Gap] -- are the prospects for recontracting ships for longer durations at better rates.

[Knut Traaholt, executive]

And then a question from Anders Westin for the vessels, where the firm period is ending in 2024. So it's a question on the option periods. Is the rate the same? Or are there any adjustments to the rate?

[Øystein Kalleklev, executive]

Yes. I think if you look in our presentation, there's two ships coming open, possibly in 2024. It's the Vigilant. There are extension options for 2 years for that ship so that's the first fully open ship we have in the middle of 2026. And then it's the Constellation, also a similar period, middle of 2024. The charter there can extend the ship for three more years. In general, I would say, option rates tend to be higher than the firm rate. It's an option. We are not there to give away options for free. Usually, if you give an option you want to get paid, and that's usually either through a higher rate on the firm period or --

[Knut Traaholt, executive]

[Audio Gap] And then we have a number of question about fleet development, how to grow the fleet? Do you have any new building plans, plans to expand into FSRUs or consolidation?

[Øystein Kalleklev, executive]

Yes. I think we get this question every quarter. What we have said, we want to be disciplined. We have ships coming open, this '26-'27 delivery, slightly ahead of some of the new buildings for delivery now and also when LNG export volumes is kind of growing tremendously after a bit muted period now from '22 to '24. So our focus then is not running the yard, buying ships at 250, everybody can do that if they have the money. What we want to do is secure employment for the existing ships we have, and that is our main focus and then, of course, having a good return on equity, so we can pay this dividend. We are open to growing, but we just feel new building prices are stiff. If we know investing $250 million in that ship, it would be more difficult for us to pay that dividend and also that capital will be idle to maybe end of 2027, wouldn't generate any return. So yes, the yard ticket price is 250, but also the opportunity cost of tying up that capital for such a long period, we also have to take into account. So if you're calculating, you're losing that dividend for those couple of years, you're tying up that capital. We also take that into consideration when -- as we have said in the past, we are open for consolidation if we find suitable ships. We have a scalable platform. We can easily grow the fleet-wide twice as many ships without recruiting many people, and we have an in-house management, which has delivered fantastic results for us. So, we are open to do it. But our #1 priority is the very good returns for our shareholders and our efficient transport and good service level for our customers. And if we do that, I think we will do well.FSRUs, no, I think that market was dead. It's been resurrected because of the problems in Europe where you have to add a lot of import capacity very quickly so it's been good for those people who have FSRUs. And then, I think there will be a conversion market for existing ships, you can convert them into FSRUs. All modern ships are basically too modern to convert them into FSRU. I think the 160 tri-fuels out there are better candidates for being converted to FSRUs because they are diesel electric, they have four diesel electric motors and you need a lot of electricity as well to generate kind of the regas kits. But, you know, that would be good for us. The more ships that are leaving the existing fleet, the less ships that are in the fleet and every ship you're converting to our FSRU or employing as FSRU that need more cargoes and those will be transported by the existing LNG carriers, including ourselves.

[Knut Traaholt, executive]

Moving over to the market. We have a question from Michael Otten. How do you see -- [Audio Gap] -- for this winter, given the high probability of La Nina?

[Øystein Kalleklev, executive]

Yes, it seems like we will have a triple dip, La Nina now this year. I think it's the third time in recorded history. We have a triple dip. Usually, that means a cold snap in Asia, sometimes also theoretically should be in Europe, even though the winter has started mild, but it's too early to sell your skis. The winter could be coming any day soon. So in general, it should be colder weather. Whether this has an effect on ton mileage, it really depends on whether Asia suddenly they get a cold snap and start importing desperately cargoes because one thing in Asia is the fact that they have very limited storage space. So it's more like LNG in Asia is just in time because they don't have the same underground gas storage levels we have in Europe. So we saw this happening January 2021 with the cold snap in Asia. And suddenly, we had a wave of cargoes going to Asia, and that really resulted in a very strong spot market for freight also in January, February 2021. That could drive up ton mileage. But so far this year, ton-mileage has been very muted because the cargoes are flowing predominantly to -- or the U.S. cargoes up flowing predominantly to Europe. If that switched to Asia, Ton-miles will go up, and we will probably have less problem when all the ships in floating storage is liquidating their cargoes, then those cargoes, then the ton-miles will mitigate the lower on time.

[Knut Traaholt, executive]

Then we have a question on the OpEx and the increased OpEx level in Q3. [Audio Gap]And an explanation for that is that's the new level. I can say that Q3, we still had some COVID-related costs. It's related to quarantine and COVID testing that is phasing off, and we are no longer subject to strict current time and testing as the easing of the restrictions in particular in Asia. We have also had a large number of crude changes and new on signers results, which had higher cost, that should also taper off, and we had also had some supplies, which were expensed in the Q3, but is for the remaining part of the year. So we do believe that we should come back to the guided level around 13,000 monitoring continuously.

[Øystein Kalleklev, executive]

Yes. But also, as we said in the presentation, inflation has been higher than a lot of people expected. Not -- we hedged 13 months before FED started to increase the rates from 0 and actually, we're benefiting from a strong dollar in the sense that we have a lot of cost for the seafarers in local currency and a strong dollar means that they will have the same purchasing power even if you have some inflation.

[Knut Traaholt, executive]

And then moving up to a popular team. It's our cash balance and our refinancing Phase I and II, where we release a lot of cash -- what's your plan to use all this cash for?

[Øystein Kalleklev, executive]

Yes. I think you explained well is because we have the best financing market I've seen in a long time. Last time I've seen something similar to this was 2014 but I think the market for financing today for blue-chip clients as ourselves are even better today than 2014. For those who are second-tier, third-tier, the financing market today is very challenging. So I think for the blue chip guys like us, we have to go back to prior to the financial crisis in 2007 when the Germans were throwing money around everywhere. We find taking the money when it's available and it's attractively priced and where we can lock in that financing for many, many years to come. It makes sense and also, we are coupling that with the revolver, as Knut mentioned, so the carrying cost of force of having that cash is not very high. So it gives us optionality value and also gives our investor comfort that our dividend can be sustainable for a very long time, given our contract backlog, our market outlook and then our various sound cash position.

[Knut Traaholt, executive]

And that brings over to the dividends. A couple of practical questions, when the dividend is being paid. Then I refer to the information that was distributed this morning on the key information related to the dividends for the U.S. investors on New York Stock Exchange. The dividend will be paid on or about 6th of December and in U.S. dollars and for the investors on Oslo Stock Exchange, they were paid in NOK on or about 9th of December. But please see the press release.

[Øystein Kalleklev, executive]

Well ahead of Christmas. So just wait and you will get it so you can spend it on your family or friends.

[Knut Traaholt, executive]

But that gives also questions regarding guiding for this going forward.

[Øystein Kalleklev, executive]

Yes, I got some e-mails today. I'm wondering why we don't have a special dividend. We can't really pay a special dividend every quarter, then it becomes an ordinary dividend. What we have said fairly $0.75 is a comfortable level over time, which is sustainable over a longer time. When we completed the balance sheet optimization Phase I, we raised $137 million of cash. Our target was $100 million. We paid out a special dividend of around $26 million. We are now working, progressing well on the Phase II. Let's see next year what we're doing. We can't really guarantee, special dividend really depends on the market and the opportunities we have. But what I can say is we like dividends. We like to pay out dividends. We are shareholders. We have a big shareholder also in the Fredriksen Group, who appreciate the dividend. So we are paying out basically 100% of earnings, but where we can have optionality of topping that up with special dividends, but we're not going to guaranteeing. What we are saying is we like the ordinary dividend and from time to time, we will evaluate whether it makes sense to juice it.

[Knut Traaholt, executive]

And you mentioned the main shareholder. Is a question there: how involved is the main shareholder in the decision-making in the company?

[Øystein Kalleklev, executive]

Of course, our main shareholder, John Fredriksen, is the most successful shipping investor of all time probably. He's been doing this for 60 years. He's insight is common goal. So of course, he owns 44% give or take of the company. So of course, he has a vested interest in the company and the performance of the company. So, sure, he's heavily involved and he's a fantastic guy to tap for advice as he has seen everything in the past. He has been boom, bust, and so for sure, he's involved and like the business.

[Knut Traaholt, executive]

I think we'll wrap up with a winner question on Twitter from JonSkule, Jon Skule Storheill… Why are the LNG and LPG markets completely detached but still flex and advanced gas management are the same and so great?

[Knut Traaholt, executive]

Thanks, JonSkule. I will see you in the neighborhood with some Flex Kit and soon. Avance Gas, which I'm running as Executive Chairman and our Chief Commercial Officer, Marius Foss, also Chief Commercial Officer of that company. Yes, it's detached but there are some similar drivers. Shale gas, number one. Shale gas has been made U.S. the biggest LNG exporter in the world. On the LPG side, it's by far the biggest. So 50% of the very large gas carrier cargoes comes out of U.S. In LNG, it's less. So there are some similar drivers, although the VLGC market is more a commodity shipping. LNG is more aligner business where it's more about logistics, having long-term relationships, and making sure that the cargo is always on time. On the VLGC, it's a bit different, as mentioned, commodity shipping. Avance gas is mostly there for a spot-oriented company, and I will be presenting Avance Gas results next Thursday. So if you think Flex is a bit boring and you like to have a bit more excitement in due life, you can also invest in Avance Gas listed in Oslo Stock Exchange, which has a lot more spot exposure, which goes up and down. Right now, it's very nice being in the VLGC market with rates at around 120,000 for these ships that is costing a lot less than LNG carriers. So thank you for the question, Jon. And I think we are adjourning it for the day and hope to see you back for our quarterly presentation in February. So that's it for us. Thank you very much for joining.

[Knut Traaholt, executive]

Thank you.