FLEX LNG Ltd

OSE:FLNG

Earnings Call Transcript 2024-Q3

[Øystein Kalleklev, executive]

Third quarter results presentation. I'm CEO, Oystein Kalleklev, and I will be joined later in the presentation, as usual, by our CFO, Knut Traaholt, who will walk you through the financials. Before we begin, I just want to remind you that we will be providing some forward-looking statements, some non-GAAP measures, and of course, there are limit to the completeness of detail. Before we kick off the presentation, just to remind you that you can send in questions for the Q&A session either by using the chat function or send e-mail to [e-mail]. And as usual, we have a gift for the best question. This time, we do actually have 2 gifts. We have our Flex LNG perfume. We have 2 versions, His Money and Her Money. So it's a perfume with the scent of dividends, which I believe everybody likes. So let's try it out. Yes, that's a good start. So send in a question to will be the lucky winner of this perfume. So let's kick off with the highlights. No big surprises on the revenue numbers. Adjusted EBITDA. Revenues came in at $90.5 million, in line with guidance of approximately $90 million. This resulted in net income and adjusted net income of $17.4 million and $28.7 million, respectively. Just to remind you, adjusted net income numbers, we only take in the realized gain and losses on derivatives. During this quarter, interest rate fell a lot until early September when Fed cut 50 basis points, and we utilized that opportunity to increase our hedging portfolio significantly. So the $10.7 million we had in unrealized losses in Q3, we gained more than that just in October month alone. This gave an adjusted earnings per share of $0.53 for the quarter. Recent events, we announced last Thursday that we are already starting the fixing season for 2029 with new contracts for both Flex Resolute and Flex Courageous, where the charter takes these ships firm for 2029 to 2032, but where they have option to keep the ships all the way to 2039. And I will give some more details on this. We also have one ship being redelivered, not a big surprise given where the market is, which I will cover later in the presentation. So we will be expecting her to have her back in March next year. We've also done some more financings, banking on the big backlog we have, and Knut will present the 2 refinancings we have done since last time, 3 ships altogether, $430 million, giving us net proceeds of $97 million and a very healthy cash position, pro forma cash of $450 million, which is about 35% of our market cap today. Next quarter, it's going to be a bit odd quarter. For the first time ever, we are not going to guide Q4 numbers higher than Q3. And this is due to the soft spot market, which is affecting the one ship we had on index. All the other ships are on fixed rate higher, but we have one on index where she will be trading at the floor level for most of Q4. And thus, we expect revenues to be close to $90 million in Q4 rather than the $90.5 million we booked in Q3. EBITDA also slightly less during Q3. However, with a huge backlog totaling now 50 years minimum, which may grow to 82 years with option declaration, we have a very healthy backlog, very good earnings visibility, $450 million of cash. So we're declaring our 13th consecutive ordinary dividend per share of $0.75 per share. And even though we now are at $3 in trailing 12 months dividend, down from $3.125 from last quarter, we still have a very attractive yield of 13%. So just a bit more color on the guiding. As you can see here, very much spot on the levels we guided. TCE rate $75,400 compared to guiding of $75,000 to $77,000. As I mentioned, we have one ship on index, expect slightly less income on that ship in Q4, dragging our numbers down a bit, but not much, which would be the case if we were fully spot exposed. For the full year, we're also giving you a guidance there. TCE down this year to $75,000 per day, revenues $353,000 to $355,000 and then adjusted EBITDA of $271 million to $274 million. Let's kick off with some more color on the two recent extensions. As I mentioned, we have fixed those ships. We announced these ships on our charter in November 2021, where the charter took them on a 3 plus 2 plus 2 structure from 2022 to 2029. They already declared the first option to 2027. And given this extension from 2029, we do also expect them to take the next option declarable Q1 '26 and then with a new firm period to 2032. As we said in the statement when we issued the press release, we have fixed for longer period at higher rates than the prevailing rate for the 3 plus 2 plus 2 structure. The new structure is similar to the previous structure, 3 plus 2 plus 2, where the 3-year firm period is front-loaded, which resulted in, for those of you who read our quarterly report, resulted in a negative revenue recognition effect when those options were declared, but we do expect a positive revenue recognition effect once we're getting a firm period to 2032 from these contracts. And we do think it's likely that these ships will stay with the charter for a longer period, most likely to 2036, but it could be all the way to 2039. So another big addition to our backlog. If we're looking then at our fleet portfolio, we have updated then with 2 stars. It's the Flex Resolute and Courageous. You do see here the charter has an option to take them from '27 to '29, which we think will be the case, and then they will be firmed to 2032, possibly all the way to 2039. We also have some other long charters, Flex Rainbow 2033, Endeavour 2032, we utilized that long-term charter on that ship to recently do our Japanese lease, which was executed on October 3, which Knut will tell you more about. Then Flex Constellation was on a 10-month charter delivery in May. We wanted to stay out of the spot market this year given the number of ships for delivery. We managed to fix our until March '25 with an option. The option was out of the money, so we'll have her back and we will look at trading opportunities for these ships now that we will have her back in March. Next ship fully open will be Flex Ranger also March 2027, which I will come back to, but we think that is an ideal time to get ships back in the market because market balance looks much better once we are getting into '27, '28. So with that backlog, 50 years minimum, as mentioned, that is also supporting our dividend. Once again, $0.75 ordinary dividend, bringing the total now to 13 consecutive ordinary dividends of $0.75 per share. We also paid some special dividends during this period. So the total dividend is $569 million in 13 quarters, which is close to 45% of our market cap in just 3 quarters. And if we look at the decision factors for our dividends, which we have covered also in the past, we have one yellow sign. I think we were a bit too early last time when we upgraded it from yellow to light green during the summer. The summer market was surprisingly healthy. We saw rates at around $85,000 in middle of August, which is historically a good rate, but then the market fell off a cliff starting in September. And we are now in a market which is pretty poor if you are looking at the spot market. But longer term, as evidenced also by the new contracts we are announcing, the market for longer-term demand is still very healthy, and we have a light green on this. The rest of the items here are pretty straightforward. We have a good cash flow. We have a lot of backlog visibility, cash and covenants, and we don't really have any near-term debt maturities. So with that, I think Knut can go through the financials before I'm reverting with the market section.

[Knut Traaholt, executive]

Thank you, Oystein. And as already mentioned, revenues for the quarter were $90.5 million. From an operational point, it was a strong quarter with 100% technical utilization of the fleet. And if we look at the 9 months, the revenues of $265 million. That translates into a time charter equivalent for the quarter of $75,400 or for the 9 months, close to $75,000. If we look at the OpEx, we are at budget at $14,900 per day and slightly improvement from last quarter. For the 9 months, we are below budget at $14,700. And today, we guide that OpEx is around $15,000 for the full year. And that's where we expect scheduled maintenance of some of our engines during the period. And also, we have experienced higher crew change costs basically since we have less vessels going to Europe. So more of the crew changes are done in Asia, which is more expensive. Adjusted EBITDA of $70 million for the quarter and $204 million for the 9 months. And as Oystein mentioned, in the adjusted numbers, we take out noncash items and primarily these are unrealized gains and losses from our derivative portfolio. So in this quarter, we have adjusted out $10.7 million and also about $600,000, which is write-off of debt issuance cost in connection with our refinancings. Our cash position, as already mentioned, pro forma balance of $450 million that came from $48 million from operations, $27 million from scheduled amortizations. And then we have completed the 2 financings. First, the $270 million facility that was closed in September that refinanced all 3 vessels out of the old $375 million facility. And that was then leaving the Flex Endeavour debt-free at the quarter end. That's why we then have $63 million as a repayment within the quarter. And as you can see, post quarter on the 3rd of October, we completed the lease financing, the Japanese JOLCO where we then received $160 million. So then net of dividend payment of $40 million, quarter end was $290 million, but pro forma balance at $450 million. If we look at our hedge portfolio in August and September, we saw that 5-year interest rate swaps fell about 50 basis points, making it attractive to utilize some of our positive value in the existing portfolio and amend and extend and thereby adding more durations. So we see here a significant change and also improved in our hedge ratio. Now we have now $635 million of swaps with a weighted interest rate of close to 2% with a duration of about 4 years. That gives us a good hedge in this environment where there's large fluctuations in the interest rates. And as we also mentioned here, there is a combination of our interest rate swaps and fixed rate leases. And if we look at it a slightly different way, here, we have present our net interest-bearing debt, also split in what is hedged through our swap portfolio, the $635 million, and what we have of fixed rate leases or fixed rate components in our Japanese leases. That leaves us with a floating exposure of $552 million. This is a reminder of our financial position, what we call the fortress balance sheet. We have a large contract backlog, which secures stable cash flow. We have refinanced and have $400 million in available cash. Our RCF capacity has now increased to $414 million, which is then is a cost-effective way of managing this cash balance. We have limited CapEx liabilities. That is for the 5-year special surveys. And our first debt maturity is 2028. And that is a strong support for the commercial and financial flexibility of Flex. And with that, I hand it back to you, Oystein.

[Øystein Kalleklev, executive]

Thank you, Knut. Yes. Let's look at the market. So as you can see on this slide, it's not really growing quickly. 1% growth. Historically, LNG export volumes have been growing 6% to 8% every year. Last time we actually saw 1% growth in the market was COVID 2020 because the demand was low because of the shutdowns. Now actually, it's a bit different. We have 1% growth, but it's not really demand. Demand is strong as evidenced from the LNG prices, but it's really the supply, which is the bottleneck with projects coming on stream, some of them later this year and then into '25 and '26. So we see a wave of LNG coming next year with much higher growth factor for the export next year, we estimate around 6% growth next year. So this is also one of the explanations why the spot market is trading poorly. U.S., Australia, Qatar are the big exporters pretty flat. We still see Russia despite the conflict in Ukraine, they are still managing to grow their exports. On the import side, Europe came out of the winter season with high storage levels, have been able to source less LNG this year, which has opened up the market for other players like China growing healthy 10% and then India at 18% growth. So volumes have been shifting out of the Atlantic from U.S. to Europe to rather U.S. to Asia, which is generally good for ton mileage, especially when the volumes are not utilizing the Panama Canal and not the Suez Canal, but still the number of ships being delivered is outpacing ton-mileage demand. Looking at Europe in a bit more detail. As you can see here, import levels are below last year. because storage levels have gone up with almost full storage levels going into the heating season. today, around 93% full storage levels in Europe, which put Europe in a more comfortable situation than in the past. Although that said, the agreement between Russia and Ukraine for transport of pipeline gas to Europe is maturing on new year. So we will expect to see less Russian pipeline gas to Europe from 1st of January. As you can see here, actually, Russian pipeline gas have contributed positively to imports to Europe so far this year. Norway had a big maintenance season last year and is contributing positively and then LNG is the swing factor. So depending a bit on how cold the winter will be in Europe, we expect storage levels to be lower when we come out of the winter season this season. And that's also why LNG prices are staying at a pretty high level down the curve. Looking at Asia, it's a bit different picture. They have been picking up on imports when European buyers have been less eager to buy, especially then the flexible U.S. LNG. And you see here the mature market, Japan, Korea, Taiwan, pretty stable. China up, as I mentioned, 10% and then pretty healthy growth from the South Central Asian nations being India, Pakistan, Bangladesh, where we see higher growth. Canal inefficiency has been a big driver in the last year or so. We had a drought in Panama, which reduced Panama transit. Water level in Panama is back to normal and operations is back to normal, but we see LNG shippers avoiding the canal to most extent. These are a bit various factors for this. It's a bit about the flexibility of the Panama. It's also about the price, especially now with shipping costs being so low, it makes sense to actually bypass the canal in rather than paying the tariffs. And then the other canal being Suez Canal, it seems here like Suez Canal is coming back. However, this is basically cargoes going Suez Canal on the north side into Egypt, which have turned from being an exporter to importer and then Jordan. So these are not really regular transit via Suez Canal. It's rather that they're using Suez Canal to supply Jordan and Egypt with LNGs. So in general, this is positive. Our LNG ship from U.S. going to China via the Cape of Good Hope is about 15,500 nautical mile rather than around 10,000 nautical miles utilizing Panama Canal. But as I mentioned, it's not sufficient to add ton mileage compared to the numbers of ships for delivery this year. Then a team we have been touching upon the last 2 quarterly presentations is the emerging dark fleet of Russian LNG. We mentioned it earlier this year. And since then, the Russian has been busy buying up secondhand tonnage and actually loading also 8 cargoes from the Arctic LNG-2 project, which is up and running with the first of 3 trains. As far as we can tell, they have been loading 6 cargoes and taking these cargoes to their 2 huge FSUs. They have one in Murmansk and one in Kamchatka, which can carry a rather big size in terms of volumes. So we have seen these ships loading cargoes, but not been able to sell the cargoes. So compared to crude oil and petroleum where the dark fleet and the dark trade is massive, we see that the sanctions from U.S. is being much tougher here. U.S. and Europe for that matter, has been reluctant to really enforce sanction hard in the petroleum and the crude market because people don't want higher oil prices, especially not prior an election. So on the LNG side, the same rules doesn't really apply if these cargoes are not entering the international market, it will not really affect the Henry Hub in U.S. And also, this is a smaller market, which means that it's easier to get the visibility and to stop these ships from selling their cargoes. So this is something we are monitoring. And as we put in here, it's the dark evader, which is a moniker for this kind of trade. It will be interesting to see now. We've seen that the Russians have been able to get a power station for the Arctic LNG-2 plant, so they can start firing up the Train 2. But as far as we can see today, feed gas to the the plant is shut down and they are not really producing cargoes now because they're not able to sell them in the international market. Let's turn to the spot market. And as mentioned, rates are softening, and they are down to very low levels, levels we have never really seen in the fourth quarter before. And why is that? It's really about the numbers of ships for delivery, and we see this in the upper left-hand side with this red dotted bubble, where we see the number of ships available. So typically, when you come to August, September, the market gets tighter. You might have floating storage if gas prices are in contango, meaning that they are higher later in the year than spot, which can typically drive up to 30, 40 ships in floating storage. This year, we have high gas prices, but they are not in contango. So it means you are disincentivized to do floating of the cargoes. So a number of available ships have been building up also with the scheduled deliveries of ships. So this means that the market is amply supplied with LNG ships, rates then rather than picking up in September, they have been going down. Right now at around $25,000 for modern tonnage, which means fuel tonnage is at $10,000 and all the steamships are basically being priced out of the market. With ample liquidity in the spot market in terms of number of ships, it's not surprising also to see the charters leaning back fixing ships on spot basis rather than term with the numbers of spot voyages this year compared to previous year, picking up a lot from 157 fixtures from Q1 to Q3 last year to 278 this year. So at least the spot market is liquid, but rates are poor, and we expect the market to stay poor for the remainder of the year. So that will have some implication for the steamships. So we have said this in the past that there's been a huge technology change in terms of the ships. We started off this industry with steamships. Most people understand that steam power is not really efficient. That's why you don't see them often. 15 years ago, we started to see diesel electric ships or the tri-fuel or dual fuel diesel electric ships. And then about 8 years ago, the first modern dual-fuel 2-stroke ships came to the market. So we still have a lot of steamships in the market. In total, the fleet is around 200 ships. So we've put the different ships here in the pie chart with the Dinosaur, there actually are 21 quite modern steamships. These are a bit more modern steam in terms of efficiency, but they are all having this disadvantage of having a very inefficient propulsion system. Why are they still in the market? Because a lot of these steamships were fixed on 20-, 25-year charters, and they are rolling off these charters in the coming years with about 75 of these ships being returned from long-term charters in the next 24 months, and we put up all the numbers of ships with redelivery dates here in the chart with the big Astrid hitting them and what we expect will happen here is a mass EEXI inction. So EEXI means energy efficiency for existing ships index. which is part of the IMO rules to reduce greenhouse gas emissions for the shipping sector. And these ships are now technically and commercially obsolete, and we do think scrapping activity will take up and which we do think we'll rebalance the market in the 2027. I will come back to that. In terms of new building prices, they are staying at stable levels, supported also by the flurry of container orders, which are still hitting the yards. So the yards are more or less back to 2028. Prices are down a bit from peak, but still, we see people still ordering at close to $260 million for ships delivery typically in 2028. which is also then together with the higher interest rate environment, keeping the long-term rate steady at $85,000 per day, which is what you need to have in a long-term rate in order to make these kind of investments. So looking at the order book today, it's around 300 ships for delivery. What we see is there's very limited of uncommitted ships. Most of the ships at these prices are built towards a long-term contract. So of the 300 ships for the delivery, it's only about 20 ships which are open. And as you see, when we're getting to 2028 onwards, there's really no speculative ordering because these prices are discouraging such contracting. A lot of the ships are for Qatar. Qatar has a huge project expanding their capacity. Today, they have a nameplate of 77 million tonnes. They're going to go to 126 million, and they are also alluding going all the way to 140 million tonnes. So they need a lot of ships. So these are really ships for their new volumes and also for replacing some of the older steamships they have in their fleet. We also have a lot of non-Qatar. These are related mostly to fleet renewal of the steamships, as mentioned, but also for the new export projects coming out of U.S. and other countries. And as you can see here, uncommitted 7% of the fleet. Looking at the supply side of the market, the export growth, we are in a period now with, as I mentioned, low export growth, but that will pick up from next year where we expect export growth to be 6%. And then going forward in '27, '28, annd as I will touch upon, we do expect a new wave of U.S. LNG once the LNG export moratorium in U.S. has been lifted, which we think will happen very early next year with Trump in the White House. Looking at then the supply side of the market and the demand side, demand side here being export growth and then the fleet. So these are numbers we have had from the Q3 LNG report from SSY, the broker. It's, of course, some assumptions here when making this balance. It's about how much scrapping demand. Historically, there have been very limited scrapping demand. But as mentioned with all these steamships coming off charters. In this kind of market balance, we assume 53 of the 75 ships to be removed from the market. This could be more if the market stays soft, it's very expensive to take a steamship through a 25-year special survey. But in general, we see that the market is balancing out '27, '28, depending a bit on scrapping and depending a bit on these new export projects when they are coming to the market, whether there will be any delays as such. So last slide before concluding is something that a lot of people are asking us these days is the effect of our Trump win in the election. There was a land slide with 312 electrical college mandates for Trump, all the swing states turning red. He's been very vocal that regulation for the oil and gas industry will be eased and also very vocal that Biden moratorium, which came in January this year on not handing out any more export licenses to these LNG projects, that moratorium will be lifted very early once he take office. It's about 90 million tonnes of U.S. project that has been put in legal limbo because of the moratorium. A lot of these are close to FID. They signed up a lot of offtake agreements for the volumes they intend to produce. So we do expect a wave of FIDs for U.S. LNG projects next year, which will support demand for shipping from '28, '29 once these projects are starting to produce. There is, however, one risk here, which I think most people are aware of. Trump is not really a free trading person. He has a bit different view to trade, where it's more a zero-sum game. And the last time he was in office, there was a trade war with China, where they eventually agreed in a trade 1 phase to be buying more goods from U.S., primarily than oil, LNG, soybeans and such, where this kind of increase in trade has not happened. EU is also running a trade deficit with nitre surplus with U.S. and where we have seen EU already now signaling that they are open to be buying more LNG from U.S. in order to substitute a lot of this Russian gas that has disappeared from the European market. So this is still uncertain how aggressive this change in trade policy will be. We, as people in the maritime and shipping industry, we like trade. So we rather like to have a level playing field, international rules for trade. So we could see some substitution effects there, Europe buying more LNG from U.S. and then the jury is still out how this will evolve with China, which has become one of the big importers of U.S. LNG. So then before concluding and heading into the Q&A session, I'm just going to remind you the highlights, numbers in line with what we have guided, no big surprises. Earnings per share adjusted for the unrealized losses and gains, $0.53. Interest rates have been picking up in Q4. So we expect a big reversal in the mark-to-market losses in Q3. We have done some new charters and now fixing all the way until 2039. We have a very robust financial position, as Knut mentioned, $450 million, 35% of our market cap in cash. We expect Q4 to be a bit softer driven by the softer spot market impacting the ship we have on index, but still $3 trailing dividend last 12 months gives a very attractive yield of 13%. And as mentioned, with the backlog and the financial position we have, we can pay this dividend for a very long time to come. So with that, I think we head over for the questions.

[Operator]

We have a number of questions. And maybe we can start off with the last topic on the U.S. elections and Trump being President. And you mentioned lifting of the permitting moratorium and shipping demand in 2028. For these projects, when do you expect they will start ordering for long-term contracts?

[Øystein Kalleklev, executive]

Of course, today, there is already a lot of U.S. projects that are getting close to export. So these are Plaquemines, Golden Pass, et cetera. So these people who have started those projects, they have, of course, secured shipping for the volumes coming, but they are typically not all contracted ships for the next wave of projects. Some of these projects being expansion projects of existing infrastructure. So there, we will see if it's 90 million tonnes of new volumes coming to the market probably from '28 to 2030, that means a lot of shipping requirements. Yards are pretty packed with orders today. So we do expect some of these new projects will just go into the market for existing tonnage given the sticker price on new builds and source ships, which will then be supportive of the shipping balance from, let's call it, '28 and onwards.

[Operator]

And then we have a number of questions on the contracts, the one we have just announced for the Courageous and Resolute. The charter is fixing those ships pretty far in advance. So the question is, one, is this a specific project related? Or what are the motivation for the charterer to fix these ships now?

[Øystein Kalleklev, executive]

It's far in the future. It's not project specific. It's for our portfolio. It's a super major. So our super major typically have a lot of different projects and they can allocate the ships to those various projects they are involved in. Why we're fixing this far into the future? It's a bit related to the fact that we have the ships on charters with the existing charter. They are very happy and satisfied with the service they are receiving. It's not only about having the right ships, but it's also the service, the full quality around it from the operations of the ships on the ships, the technical support, the operational support. So I think they have been a satisfied customer, and we have evidenced this several times in the past, we have existing charters that are extending ships with us. So that's one factor. The other factor is also there are a lot of new environmental regulations. So when we started this company or started contracting ships for this company a while back, I've been doing now. I think it's my 29th quarterly presentation. But then it was like we contracted the ships because of the technology change, the low prices and the ships came into the market where we had U.S. suddenly becoming the biggest exporter. At that time, we had what we call the MEI premium where we said these ships are more fuel efficient and they have a bigger parcel size, and that should command a premium in the market of, let's say, $10,000, $15,000 compared to the previous generation of ships. What has happened since then is we have had EU implementing carbon pricing, EU ETS from 1st of January this year, which means that you have to pay for the CO2 emissions you have when trading into EU. They have also communicated this will also happen for methane emissions. And the price of methane emissions is still unclear. What is clear is the mega ships, both these ships being extended from 2029 are mega ships and mega ships have by far the lowest methane emissions, which means that this tax will be the lowest you can get when trading these ships. Then 1st of January next year, we will have fuel EU Maritime, which is another system. EU loves to make rules. So if they can make more, they prefer that than making simple easy rules. So all this paeti of rules means that also here, we have ships. They are more than efficient, well run. You have less CO2 tax, but you will also get the most, call it, fuel EU maritime subsidies on these ships because these ships will be generating surplus under the fuel EU maritime systems for at least 10 years to come, which means that these are ships you want to keep in your portfolio if you are satisfy charters.

[Operator]

And then moving on to Constellation. And Nils Thomas is asking what's the ideal strategy for her short-term pain until the market tightens or longer-term charter at the current market rates?

[Øystein Kalleklev, executive]

Yes, it's a good question. In 2020, when market was pretty tough, the last time we had 1% export growth, we had all our ships in the spot market. So we are perfectly able to handle that, especially now when we have such a strong balance sheet and liquidity position. So we will just do what is best for our shareholders and look at, okay, can we fix this on our long-term charter? We do think that the market will improve as we've shown in the graph, get the ship back in March '25. We do expect 2 years in the future, the market will look quite different. So then it's a question how much can we make then trading the ship for 2 years in the spot and then try to fix the ship term. This is, of course, also a bit more dynamic. So it's not like the spot market will be poor for 2 years, and then it will be good and then term rates will go. People will see that the market is tightening. So you could see that maybe next year, spot market will be maybe not that attractive, but that we will see that improvement in the term rates as we are getting closer to that inflection point in the market supply balance. So it's too early to say. We just got a notification that the option was not declared and the option was not declared because it was out of the money because rates have gone down. And the low spot rates are also pushing down, let's say, the 12 months term rates. So this option was for 12 months. So once I get back here in February next year, maybe we have a better idea what we will be doing. We find trading it spot. We're not going to give it away on a term rate just to take it out of the spot market. So let's see. Too early to tell.

[Operator]

And then the 2 next vessels in line is the options for Aurora and Ranger. What's your view on those options?

[Øystein Kalleklev, executive]

It's Aurora and Volunteer. Ranger is fixed until March '27. Aurora Volunteer are fixed until Q1 '26. We will be notified in end of next year whether those options will be declared. We have already announced this is a 1 plus 1-year option. So if the charters elect not to extend them, they will also lose the last option, and that option is from '27 then into '28. And as we have illustrated here on this supply balance, we think the market will start to get pretty tight in '21, '27. So if they don't declare it, they also lose that last option. So that is way too early to tell whether those options will be declared or not. In any case, then we will get the ships back in '26, and we do think that the term market will firm up in '26 in anticipation of a tighter market from '27 onwards. So I'm not losing sleep on that.

[Operator]

Then you mentioned a bit on MEGI and XDF technology. And one of our bankers in ABN AMRO asked more your view from a sustainability and cost efficiency. There is the MEGA, the XDF which is the low pressure and then you have the MEGI, the high pressure. And if you look at the order book, there's slightly more for the low pressures. So anything to say around.

[Øystein Kalleklev, executive]

Yes. Maybe I can take a short recap of the history here because we started there with the mega ships. The first mega ship was end of 2015, and they came full blast from 2016 onwards. Mega ships are fantastic ships. You take the boil-off pressure, you put them into the boil off and you put them into a high-pressure compressor and you push that pressurized boil of gas into the combustion chamber of the 2 engines and you get almost perfect combustion. So it's both efficient in terms of the efficiency ratio or the thermal efficiency, but also in terms of the combustion efficiency in terms of methane slip. So MEGIs today have a guaranteed methane slip of 0.2 gram per kilowatt hours, which is almost nothing. However, it's a bit complicated. You have high pressure in the engine room and these compressors are huge and very costly. And some of the ships, we actually have 2 of these compressors. And we have altogether 9 mega ships, 2 without Relix system, 4 ships with partial Relix system where we have a big compressor and then 3 ships with a full Relix system where we have also have 2 compressors. So it's a huge investment in these compressors. So some of the charters said, okay, couldn't we have just a simpler system. So rather than having 300 bar pressure on the boil of gas, let's try to make a system with more cappuccino pressure, 15 bar, which was the XDFs produced by WinGD. And a lot of people went for that system because you don't need these pricey compressors and it's less complicated. So what happened then is that we had a switch to XDF. And of course, there's really 2 engine manufacturers for these ships. It's MAN, which have the MEGI and the MEGA and then it's WinGD with the XDF system. So MAN then also made a low-pressure system called the MEGA in order to grow the market share. But what has happened since then is there's been a lot of more push for environmental regulation, pricing the CO2 emission, will start pricing the methane emission and also then giving subsidies or credits through the fuel EU maritime system for implementation next year, which means that relatively competitiveness of the MEGI has improved markedly because the methane slip on MEGA and XDF is somewhere around 1 to 2 grams compared to 0.2 grams on the MEGI. So that means that we've actually now seen owners going back to the MEGI even though they are slightly more pricey because they have a better combustion and a better environmental profile. So I hope that explains it. And then, of course, like every new system, you typically have some initial problems and the MEGA has had some problems with vibrations and handling of the boil of gas and MAN have no told the market they will discontinue making those engines and rather focus on the MEGA ships. And there, we are very well positioned with 9 out of our 13 ships having that engine already today.

[Operator]

Then we have some questions on capital allocation, dividend sustainability and share buybacks.

[Øystein Kalleklev, executive]

Yes. Let's start with the dividend sustainability. We had a bit softer this quarter. We had $0.52 adjusted EPS we $0.56, I believe, last quarter. So we are not 100% at the $0.75 level. However, we have $450 million of cash. We don't need any cash to run this business. We are being prepaid every first day of the month, we get the charter hire. We pay our bills later in the month. So you could actually run this business without any money. The only reason we need money is that you have some banks and they like to see you having some money on the account. So if there are some weaker market, you can burn some of that cash. That doesn't really apply to us because we make money every quarter given our charter backlog. So in terms of the financial covenants today, we need to have around $70 million of cash. So just simple mathematics then. So $400 million surplus cash. We're paying $40 million every quarter. So even if we had made no money, which is unrealistic given the charter backlog, we could sustain that dividend for 10 quarters. 10 quarters, then we are well into 2027, where we think the market also will improve. So we will be eating a bit of that cash surplus now to take us or bridge us to 2027, '28, where we do think that we can get better rates on some of the ships. And also, we have already seen some improvements in terms of interest costs, which is actually our biggest cost element is interest cost. We have now been able to push up our hedging ratio at a very favorable time in September. And then also Fed has already cut 75 basis points. Whether they will cut in December, another 25, I'm not sure yet. But still, interest rates have come down almost 1 percentage point from the peak, which for us with net debt of $1.4 billion is $14 million a year in saved interest expenses also. So what we'd like to do is just to keep that dividend. We can afford it. We have a good backlog. We have a good financial position. We've already seen interest rate coming down, which improves our cash. And then we do see that rates or the long-term rates, as we've shown there at $85,000, we are currently trading this year at $75,000. We can also get some better rates on some of these ships down the road. And hopefully, then our adjusted EPS and our dividend per share will start to match a bit better than they are doing this quarter and the next quarter. Buybacks, let's see. It's interesting, and I wouldn't rule it out. We will have to look a bit at the market. We have one dominant shareholder, Geveran Trading, which have about 43% ownership share, which means that we only have about 57% float, which makes us a bit reluctant to buy back shares. But we have done it in the past so we're not ruling out doing it in the future. And we also have a dividend reinvestment plan. So if you guys, as investors are not happy with the share price, you are getting a 13% yield now, which you can put in our dividend reinvestment plan and utilize that to buy back the shares yourself rather than us doing it for you.

[Operator]

Then we'll round it off with 2 more of the market questions. It's about the Panama Canal, which has been mentioned, but also are you losing sleep from possible peace in the Middle East and normalization in the Panama Canal?

[Øystein Kalleklev, executive]

I'm not losing sleep because of peace in the Middle East. That would be great. I don't think it's going to happen any day soon. In any case, the conflict in Middle East is not really impacting this market a lot. There is some geopolitical risk premium maybe in the oil price and gas prices. Remember, it's really about the Qatari volumes not being able to go via Suez to Europe. They have to go through Cape of Good Hope. Those volumes are not that huge. So it's not like if Suez Canal opens up, it's going to change everything because it's not really that big effect. Panama Canal, we see it. Panama Canal is back to normal operations today. So it's really the inflexible booking system and the cheap shipping freight that means that people are avoiding it. So no, I think it would be nice to have some piece in the Middle East.

[Operator]

That concludes the Q&A. So from the questions list and also from a frequent participant.

[Øystein Kalleklev, executive]

We have 2 gifts. So BN that was Emil Kasten, wasn't it? Yes. So let's make his Christmas a bit better. So let's give him the Her Money perfume, so he can give it to his wife and become very popular. Maybe she gets taste of dividends smell and he becomes a shareholder as well. And His Money perfume, we give to?

[Operator]

Thomas Novotni.

[Øystein Kalleklev, executive]

That's good. He has the UP LNG Index. So you should check that out as well. So thank you, everybody. We will be back in February with Q4 numbers. I hope you will tune in then as well. Thank you.