FLEX LNG Ltd

OSE:FLNG

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Flex LNG Q4 2018 earnings presentation. I must advise you this conference is being recorded today on Thursday, the 28th of February 2019.I would now like to hand the conference over to your speaker for today, Mr. Øystein Kalleklev. Please go ahead, sir.

[Øystein M. Kalleklev, Chief Executive Officer]

Thank you, and welcome to the fourth quarter earnings presentation for Flex LNG. My name is Øystein Kalleklev. I am the CEO of Flex LNG, and I will guide you through today's presentation together with our new CFO, Harald Gurvin, who will run through the numbers a bit later in the presentation.A replay of the webcast will also be available at flexlng.com. Flex LNG is an Oslo-listed shipping company focused on the growing market for seaborne transportation of liquefied natural gas. First, a disclaimer with regards to, among others, forward-looking statements and completeness of detail. The full disclosure is available in the presentation, and we recommend that the presentation is read together with the interim financial report as well as our annual report and our latest prospectus, which are all available on our website.So let's jump to the highlights, which there are more of than the cross country relay just finishing a couple of minutes ago. First of all, I'm pleased that we are delivering on the financial guidance for the fourth quarter with reported revenues of $36.1 million in line with the guidance of approximately $35 million. Consequently, we delivered a twelvefold increase in net income of $15.2 million versus previous quarter.During the fourth quarter, we also successfully raised another $300 million of equity in order to expand our fleet from 8 to 13 vessels with the acquisition of an additional 5 newbuildings, bringing the tally of newbuildings to 9 in total.We are today also pleased to announce a $250 million financing of our 2 2019 newbuildings, the Flex Constellation and the Flex Courageous. These 2 newbuildings are scheduled for delivery in June and August, respectively. We find the terms and conditions for this financing attractive, and Harald will provide some more color on this later in the presentation.When it comes to the market, it has gone from very tight in Q4 to soft in Q1. In Q4, market players position themselves ahead of the winter season. LNG players thus built inventory ahead of the winter, but the winter turned out much warmer than anticipated in the key LNG import nations due to El Nino effect in the Pacific. This warm winter resulted in LNG demand being a bit on the soft side. And this, combined with ample LNG supply, have resulted in more cargoes instead of being routed into Europe and thus creating less shipping demand than export to Far East.Due to soft market in Q1, our financial performance in the first quarter is expected to be more in line with third quarter 2018 as 3 of our vessels have been exposed to a fairly soft spot market with lower utilization levels achieved for the vessels in the Pacific region. That said, we do however think market will tighten considerably during 2019, thereby improving the freight market.So I'm just going to run through the transaction we did in October where we placed $300 million of new shares, acquiring 5 newbuildings. All these vessels are modern LNG carriers with the large parcel size and are propelled by an efficient dual fuel, slow-speed, 2-stroke engines, giving very compelling fuel economy compared to older steam and tri-fuel vessels. The purchase price for the vessels was $180 million each with an additional CapEx of $6 million for full re-liquefaction system for each of the 3 new MEGI vessels.There -- this purchase price compares very favorable with newbuilding prices, particularly when taking into account early delivery slots from mid-2020 to beginning of 2021, that also the newbuilding price includes supervision cost, which typically can run into the $2 million, $3 million, and the fact that Flex LNG only pays 30% of the acquisition price before delivery. 30% down payment on these vessels also means remaining CapEx is about $128 million per vessel, which is in line with the $125 million of debt secured for the 2019 buildings today.Before turning it over to Harald for the financial numbers, I would like to highlight our actually most important numbers, which are the operational KPIs delivered by our seafarers and our onshore personnel. In a very short time, we have built up a first-class technical, commercial and operational organization. This would not have been possible without the great relationship we have with affiliated company, [ Quintana ] and our ship manager, Bernhard Schulte.During 2018, our ships traveled the world around 12 times over, making 46 port calls at an average speed of about 15 knots. During these voyages, we did not report a single incident where a worker was unable to perform regular job duties, take time off regularly or assign modified work. Hence, the loss time injury frequency was 0. Nor did we report any incidents resulting in total recordable case frequency. TRCF and LTIF are usually the most important safety measures, and both our figures are 0. The contractors of Shell, which have very strict health and safety requirements, delivered the lowest ever TRCF and LTIF results in 2017 with average numbers of 0.8 and 0.2, respectively. Hence, our results are world-class, and we congratulate the seafarers and our onshore staff for this fantastic performance.Now over to Harald.

[Harald Gurvin, Chief Financial Officer]

Thank you, Øystein. With a record strong market and 4 vessels on the water for the full quarter, revenues came in at $36.1 million, in line with our guidance of $35 million and up from $19 million in the previous quarter. This equates to an average time charter period rate of $95,000 per day, of which the spot vessels contributed about $130,000 per day.The corresponding EBITDA was $28.3 million, more than double the $12.7 million EBITDA in the third quarter.Net profit for the quarter was $15.2 million, up from $1.2 million in previous quarter, while net profit for the full year 2018 was $11.8 million.Then moving on to our balance sheet as per December 31. At year-end, our assets consisted of 4 vessels on the water with a [ booked ] value of $812 million. In addition, we have booked investments of $421 million relating to the 9 vessels under construction, which represents advanced payments made on these.We had a strong cash position of $55 million at year-end, which together with our working capital, gives a total balance sheet of approximately $1.3 billion.Total debt at year-end was $455 million, of which approximately $23 million is due over the next 12 months and thus classified as current liabilities.Following the $300 million equity raise in October, our total equity as per December 31 was $827 million, giving a very strong equity ratio of 64%. As we also -- as we have $270 million available liquidity under our revolving facility with Sterna, we have a very comfortable cushion on our financial covenants where the 25% book equity requirement and a minimum liquidity level of 5% of net interest bearing debt are the most important.Looking at our cash flow, the operational cash flow was positive by $23.4 million for the fourth quarter and $34 million for the full year. For 2018, we invested about $234 million in the 4 newbuildings delivered during the year. In addition, we have made advanced payments totaling $349 million relating to the 7 newbuildings acquired in 2018, of which $275 million relates to the 30% down payment on the 5 newbuildings acquired in the fourth quarter, giving total investments for 2018 of $583 million.Looking at the cash flow from financing, the numbers are a bit confusing as we have drawn our repaid amounts under the Sterna facility during the year, and the 3 years here are presented on a gross basis in line with the applicable accounting principles. But to summarize, we have raised $472.5 million of external funding during 2018 and repaid the full outstanding amount of $160 million under the revolving credit facility with Sterna. In addition, we raised an extra $295 million in new equity in the fourth quarter, giving a net cash flow from financing for 2018 of $594 million. At the end of the quarter, we had cash at hand of about $55 million. In addition, we have the full amount of $270 million available under the Sterna facility, giving a very strong liquidity position.We are pleased to announce that we have secured a $250 million facility for the financing of the 2 vessels delivering in 2019. The 5-year facility will have a 20-year repayment profile and a margin of 2.35%, demonstrating our ability to secure financing at very attractive terms. The breakeven rate for the facility is also attractive at around $45,000 per day for each of the vessels. There is no requirement for fixed employment, giving us flexibility to opportunistically employ the vessels as we see fit, and no financial covenants are directly linked to earnings. The payment due upon delivery of each vessel is $144 million, and the remaining balance will be covered from our available liquidity. The facility is currently in documentation and will be drawn upon delivery of the respective vessels scheduled for June and August.When it comes to our funding and capitalization, we are in a comfortable situation as we raised $300 million of fresh equity in October and our now also secured financing for the 2 newbuildings delivering in 2019. As mentioned, we have $55 million cash and the full amount of $270 million available under Sterna RCF at year end, giving total available liquidity of $325 million.Following the acquisition of 5 additional newbuildings in the fourth quarter, we have investment commitments for newbuildings of about $1.65 billion, or an average $183 million per vessel, which includes the [ 3-year reliquids ] as well as newbuilding supervision. We have prepaid a total of $421 million to CapEx, representing 20% on 4 of the vessels and 30% on the 5 vessels acquired in the fourth quarter. This leaves us with about $1.2 billion of remaining CapEx for the 9 newbuildings in our fleet, equivalent to $136 million per vessel. Adjusted for available liquidity, the number is $100 million per newbuilding. We've already secured financing of $125 million per vessel for the 2 newbuildings delivering in 2019, demonstrating our ability to finance vessels when the market is at fairly soft levels. Given the outlook for LNG shipping, we do think we are very well-capitalized with more than $800 million of equity on our balance sheet following the recent equity offering.Based on our existing financings, our average cash breakeven is around $50,000 per day. This means we have the potential to generate substantial free cash flow for our vessels going forward. A TCE of $100,000 per day means each vessel can generate $18 million of free cash flow. This is free cash flow after OpEx, finance expenses, installments and general and admin expenses, i.e. money in the bank.Right now we have 4 vessels on the water with an additional 2 vessels delivering this year. Middle of next year, we will have 11 vessels. And finally, in second quarter 2021, we will take delivery of the last newbuild and the tally has increased to 13 vessels in operations. This means we are uniquely positioned to generate substantial free cash flow over the next years.And with that, I hand over back to Øystein who will give an update on the market.

[Øystein M. Kalleklev, Chief Executive Officer]

Okay. Thanks, Harald. I will then give a brief update on the market. So during the end of 2018, we experienced a booming market for LNG shipping as market player bought a lot of LNG ahead of the winter season with expectations of strong [indiscernible] resulting in charter rates going into the $200,000 range for the most modern tonnage due to very limited vessel availability. The chart to the left illustrates the spot rate development for the 3 different types of LNG carriers: older steam vessels, diesel electric, and lastly the modern two-stroke vessels, which our fleet consists entirely of. Due to stronger demand, we sold off at strong rates fairly early in the fourth quarter.In the run-up to last winter, we were a bit puzzled that despite limited arbitrage demand, the market was more or less sold off in October and November. This was however due to considerable inventory buildup in Asia with a peak of around 30 vessels being utilized as floating storage in November, as played [indiscernible] market due to pricing JKM for our winter contract having around [ 13 dollars ] during the summer months. Positioning ahead of our season at this scale we have not seen before in the LNG space, but reflects the fact that the JKM market has become much more liquid with trading levels increased 10-fold during the last 2 years, enabling better trading and arbitrage opportunities.Combination of the floating storage has increased vessel availability particularly in the Pacific Basin, which has put pressure on trade rates with rates from modern two-stroke tonnage going from about $200,000 a day to around $60,000] today. However, headline rates masked the importance of ballast bonus and utilization.First, when it comes to ballast bonus terms, the terms are now considerably less favorable than in Q4. In Q4, we typically received [indiscernible] economics, meaning the charters were willing to pay for the full [indiscernible] ballast leg, both hire and fuel costs. This means it's possible to generate higher income than headline TCE rate as you can get paid twice for positioning.Today, our bonus condition are generally more advantageous in Atlantic where typical terms are fuel and 50% the hire on the ballast leg. In the rest of the world, charters will typically pay higher for [ lot ] leg, but only the fuel costs on the ballast leg. This means achieve TCE rates, and then especially for Q1 will be significantly lower than headline rates. With increased availability of vessels, ship owners also have a higher level of utilization risk, meaning more idle days and possibly positioning cost if vessels are ballasted to better position on their own account.So moving on to the LNG market, which is the product we are transporting. In the early phase of the winter market, gas prices both in Europe and Asia moved up to fairly high levels, with even higher fold rates being quoted for the Japan Korea Marker, or the JKM in short, which is a proxy index for Asian LNG prices.During the winter, due to a combination of particularly well-supplied LNG market and less heating demand caused by a warm winter, spot prices for LNG in Asia, measured by JKM, actually peaked at 4-year high of about $12 as early as mid-September, which is actually before the heating season starts. Since then, JKM have dropped by about 50% and are currently creating just above $6, which is 17 months low. However, given the rebound of oil prices, the JKM relative to Brent price is currently on 9%, which is actually 3-year low.The logic behind comparing LNG prices to crude oil prices is that LNG originally displaced oil in [ power-gen ], and the vast majority of LNG offtake agreement, particularly in Asia, are therefore linked to crude prices. As 1 barrel of oil generates 5.8 million Btu of energy, this means energy parity between JKM and Brent is at 17.2%. And this is typically the bottom of LNG prices. Lately, however, JKM prices have actually been very negatively correlated with Brent prices, and [ other ] correlated more or less perfectly with crude prices as these two energy sources have battled for the marginal usage.Due to ample gas supply and increasing carbon price in Europe, Europe had become the marginal buyer of LNG, soaking up an increasingly larger share.While low LNG prices can be negative to short term due to charters willingness to pay for transportation, lower LNG prices spur demand and switch from coal to natural gas. And once you make the switch from dirty coal to cleaner natural gas, you are not likely to go back and thus creating permanent LNG demand.So what was different this winter? I think Bloomberg summed it up very well in the global LNG with the outlook published early October, actually, where they correctly identified the weather after [indiscernible] for the winter market. According to the October report from Bloomberg, they predicted that the warm winter would throw off balance much of the positioning that Asian buyers, especially the Chinese, have done in the run-up to the peak import season. And this is pretty much what happened this winter. The temperatures in the winter seasons 2017/2018 were normal in Asia, while fairly cold in Europe.Despite cold winter in Europe, in season 2017/2018, there was 45 reload cargoes leaving Europe due to the spread between European and Asian gas prices during the winter season 2017/2018. Needless to say, these reloads creates additional shipping demand. This winter season has been much milder than the last both in Europe and Asia, affecting gas demand adversely. Furthermore, there's been a glut of new energy coming to the market, particularly due to the quicker commissioning of Yamal than expected, as well as new U.S. volumes.Given the low JKM price, reloading from LNG to Asia has not been profitable this winter. In the graph to the left, we show the European reloads to the top 3 import markets being Japan, China and South Korea from Europe, although there are also a lot of other destination for such reloads.As our transportation costs associated with shifting a cargo from Europe to Asia, a positive spread which in these markets are needed to compensate for such cost. And the blue and the green lines show the average and maximum corridor] for such spread, which we call the JKM netback. From November, this spread became negative, and this resulted in hardly any reload cargoes and thus affecting shipping them out.Furthermore, given the ample supply of LNG, the low spread between European and Asian gas prices, with negative JKM netback and the vast storage and regasification capacity in Europe, we have this winter seen a big spike in new LNG volumes going into Europe rather than Asia, affecting shipping demands with the ton/mileage.Plus, reported that in the period 1st of October 2018 to 24 February 2019, European LNG imports U.S. and Russia were up 450% and 350%, respectively, compared to the whole winter season last year which last until end of March. And actually, the European imports in December and January was higher than the export to Northeast Asia for the first time ever from U.S.So the next slide is from Australian Bureau of Metrology, illustrating the sea surface temperature normally in the Pacific affecting heating demand in the 3 biggest import nations -- Japan, China and South Korea -- the last 3 months. As you can see from the chart, it's been a fairly hot winter.So next, I will review the supply side of LNG, which is basically demand side for the shipping side. Even though the wave of Australian trends have now been commissioned, we expect Australia to also supply substantial growth to the market in 2019 with production of about 80 million tonnes versus 70 million tonnes in 2018. If achieved, Australia will probably be the largest producer of LNG in 2019. Australian production actually exceeded Qatar's production both in November and December 2018 but fell short in January due to some shutdowns.Growth in the near future is, however, predominantly coming from the U.S. with startup of several new trains being Corpus Christi, Cameron, Sabine Pass, Freeport and Elba during 2019, contributing with 15 million increased volumes from the U.S. in 2019. And about 27 million tonnes we expect in 2020, bringing the total export from North America to 65 million tonnes, and thereby making it the third biggest exporter. These trains also have the added benefit of increasing ton mileage due to the increased sailing distance to end users.In total, the LNG production is expected to increase from about 325 million tonnes in 2018 to about 450 million tonnes in 2025 and around 550 tonnes in 2030. This will be very supportive for long-term shipping demand, and we have seen uptick in new projects being sanctioned recently with green light for [indiscernible] at the end of 2018, as well as 2 U.S. exporters during February alone. We expect a lot more green lights going forward, both in North America, Qatar, Russia and Africa as illustrated by these projections.So our link in the LNG value chain is transportation. The order book for our large LNG vessels is currently 103 according to our data, and of these, 6 vessels are icebreaking vessels constructed for the Yamal project. Flex LNG has 2 vessels for delivery in mid -- in 2019, 5 for delivery in 2020 and 2 for delivery in 2021. All LNG newbuildings are uncommitted as we have so far not pursued longer-term employment but instead waited for the market to heat up before committing to longer-term employment.It's all presented on previous slide. LNG production is expected to go from about 325 million tonnes to about 400 million tonnes in 2021. This represents a 23% growth. In the same period, the LNG carrier fleet is expected to go from about 480 vessels to 580 vessels, representing a 21% growth. Hence, when taking into accounting key [ ton-mileage ] as a result of increased sailing distances and the fact that delivery results are moving into 2022, the markets for seaborne LNG transportation will continue to be tight in the coming years, and Flex LNG is very well-positioned to capitalize on these opportunities.So last slide before wrapping up is our overview of LNG trading for 2019. As mentioned, we estimate incremental production growth of about 33 million tonnes, in line with Shell's recent LNG outlook projecting 35 million tonnes. The new production will mainly come from 3 places, namely U.S. with 15 million tonnes, Australia with 10 million tonnes and Russia with about 5 million tonnes. U.S. and Russia has far longer sailing distances to the key Asian end user markets than the traditional exporters, and the Asian markets represent normally about 3/4 of world LNG demand. So the million-dollar question is who will be the end user of these volumes as this will have big implication for shipping demand.During 2018, about half of U.S. cargos took the long route to Asia. 30% ended up in Latin America, while only about 13% went to Europe. Lately, this mix has altered, with Europe taking a largest share affecting shipping demand. If a normal shipping trading pattern emerged in 2019, vessel demand will increase by about 60 ships, while there will only be about 40 deliveries in 2019 in total. Hence, the market is expected to become increasingly tight during 2019. Even with the continuation of recent U.S. trading pattern, the market will become tighter. Hence, the [ wise calls ] for shipping rates in 2019 is the trading pattern, particularly for flexible U.S. volume. And this is even more the case in 2020 when 80% of new volumes comes from the U.S. Regardless of trading pattern, we think shipping market will be tight due to demand for shipping will increase more than supply in this area.So to summarize, we're happy at the level on our financial guidance with revenues of $36.1 million versus guidance of $35 million. This means we delivered net income of $15.2 million, bringing our bottom line for the year well into the black. During Q4, we outperformed both absolute and relative with spot earnings of about $130,000 per day, evidencing the superior earnings capacity of the modern 2-stroke vessels.We're also very pleased to announce the financing of the 2 2019 LNG carriers, attractive terms and conditions where we have been able to compress margin and increase levels compared to previous bank financing, demonstrating increased blue chip perception of our company in the banking market.Due to reasons described earlier, the market has softened in first quarter compared to the booming fourth quarter, so we do not expect the numbers for the next quarter to be more in line with third quarter 2018 due to lower headline rates and lower utilization levels. We do expect the LNG market to tighten as there is a lot of LNG hitting the market near term and long term. Thus, we expect the underlying demand for LNG and vessels will exceed the supply of vessels coming out from [ us ] in the near term.Furthermore, natural gas has a very compelling growth prospect, and LNG in particular. Not only is gas cheap and abundant, particularly these days, but switching from coal to natural gas also significantly improve the global climate and not least the local climate. With offering of certain modern LNG carriers open for employment opportunities, Flex LNG is very well-positioned to a strong LNG shipping market.So that's it, folks. I will pass the wand back to the operator who will check if there are any questions. Thanks.

[Operator]

We have 2 questions entered so far. [Operator Instructions] Your first question comes from the line of Magnus Fyhr from Seaport Global.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

Just a question. You laid out a pretty positive outlook for the long-term market with the market tightening with more volumes coming on. Can you talk a little bit about the near term? I know you said that the first quarter probably more in line with the third quarter, but how are you positioned with your vessels rolling off here on the spot market into 2Q and 3Q?

[Øystein M. Kalleklev, Chief Executive Officer]

When it comes to the market, what I can say is that the market started to become less active in December when we saw that the heating demand was less. In January, it was totally dry, the market, because you had all these vessels with floating storage, discharging the cargoes, becoming open and they all more or less became open in the same area, which it was the Pacific region. And traders, portfolio payers were long on shipping, so the cargoes coming to the market was mostly sold FOB to traders with -- who were long on shipping, and thus that didn't really create any freight demand for the spot market. So generally was very dry in the Pacific. I would say in Atlantic, it's been fairly active. If you have an Atlantic vessel, you've been able to utilize it well. And we had Flex Rainbow open in Atlantic and she's been sailing all the time, of course at lower charter rates. But the Pacific for us, it's been more impacted by this, by the fact that there was plenty of ships in that region, and certainly the trading pattern where U.S. volumes started to flow to a much greater extent into Europe. And of course what we see now is that during the last parts of February, we do see more requirements, we see more action in the spot market. We do see that some people, including ourself, have ballasted vessels into the Atlantic to chase better opportunities there, rebalancing the market to a greater extent. So it's hard to kind of predict when you see the bottom of the market. Could very well be that we've already seen it. But we do see more activity, more inquiries. And where a very warm winter means less heating demand, but if this called El Nino element continues, which the people do predict, it will become a fairly warm summer, which will create a lot of cooling demand on the ACs. So it could very well be then that you would need slightly higher natural gas consumption during the spring and summer months, which would be of course positive for LNG shipping. So we are and remain very positive. There are fewer ships coming out than cargoes during 2019, almost regardless of the trading pattern, as far as we can see.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

Thank you. I guess I need to watch the replay on the cross country. I was not aware of that.

[Øystein M. Kalleklev, Chief Executive Officer]

I messed that up for you.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

Anyway. So the vessels, are they month to month on the spot market or are they some that roll later, or what's the timing there if you can comment on that?

[Øystein M. Kalleklev, Chief Executive Officer]

Now of course the spot market depends on the voyage. So if you're doing long-haul, going from U.S. to South Korea, that a long trip can take you 60, 70 days. So that's basically 2 to 2.5 months. If you are doing short term, let's say Papua New Guinea to China, of course that's only -- the whole trip is much shorter. So we are doing a bit of both. We have 1 vessel on time charter, which has been extended to middle of 2019. This is the Flex Endeavour. So she will be redelivered back middle of 2019. We have a new time charter starting up with [ Anelle ] middle of 2019 so -- where we get much better economics than the existing time charters for Endeavour. And then all the vessels we are trading in the spot market on a variety of short and long-haul spot voyages. And of course we do have ongoing discussions all the time about more month to month and longer-term charters, so wouldn't rule out that we are doing T in 6 months special. But we remain very bullish on the rates, so of course we don't want to sell our ships on term business, which we think -- when we think it would be better to be exposed to the market.

[Magnus Sven Fyhr, MD & Senior Shipping Analyst]

Okay. Very good. And just one more question, if I may. Can you comment anything -- we know that you've been talking about listing in the U.S. Can you give us an update there whether timing and any color would be great?

[Øystein M. Kalleklev, Chief Executive Officer]

No, that's a very good question, and I'm looking forward to coming over and visit you in the U.S. in a time very shortly. It's that the timelines remain the same. So what we will do now is we have delivered our Q4 report. We will file our annual report according to the requirements here in Oslo. Then the annual report will get put into our U.S.-style form, which of course we already built up the skeleton. So basically putting all the numbers in there, getting the sign-off and file it to the SEC. And then of course it depends on the timing of SEC. There's been a lot of people in the SEC are having a time off due to the shutdown, and I know there's been documents piling up for all this newbuild and all the IPOs that planned for 2019. But we do think it would take about a month. That's the normal process for SEC review. Once that is done and that they have accepted our prospectus, we are ready to file during the spring part of this year. And of course we are not there to do IPO in the traditional sense. We are out to do a direct listing, which means that we will get a ticker, but of course we are not issuing new stocks. We already issued those stocks. Those were raised in October. We issued those to our regional listing. But we will start the time for our [ shares registration ], and we do hope that we will attract some -- a bigger investor base being listed in the U.S. where also people who have money to invest in U.S. stocks are able to invest in our company.

[Operator]

Your next question comes from the line of Gregory Lewis from BTIG.

[Gregory Robert Lewis, Managing Director]

And not really to dwell on this, but just given some of the volatility in rates and the fact that there are -- the utilization is down. Utilization started falling over at the start of the year. As we think about -- you provided some loose guidance around Q1. Based on the fact that you expect Q3 -- Q1 to look a lot like Q3, should we assume that as the year started, you had some vessels on pretty attractive rates that carried through into Q1 to sort of keep you guys in the black in terms of earnings?

[Øystein M. Kalleklev, Chief Executive Officer]

I think we -- thanks, Greg. Good to talk to you again, and glad you could join the webcast now when we are doing it in a more friendly time zone.

[Gregory Robert Lewis, Managing Director]

Yes, thank you for that.

[Øystein M. Kalleklev, Chief Executive Officer]

I think we actually -- we had provided a slide in our Q3 report where we showed our position going into Q1. It was very easy to give a firm guidance on Q4 because we already sold out all available days. So it was more a question about whether we had some downtime on some of our vessels and some of the ballast bonus calculations. But for Q1, we had 3 vessels becoming exposed to the spot market fairly early in January. I think for the Atlantic vessel, that's been performing fairly well. The issue has been with the vessels in Pacific where the market was totally dry in January and started to improve in February, but then you are hurt by lack of utilization on those vessels and also cost of repositioning vessels. So I wouldn't say we had a lot of kind of wind in the sail into the quarter. We had 1 vessel on firm time charter, so that's kind of a basis, but the other 3 vessels went more or less off their existing charters early in the quarter where we have to reemploy them. And that's been challenging for everybody in the market because I've seen the position lists a couple times a week and they've been pretty packed with ships.

[Gregory Robert Lewis, Managing Director]

Okay. And then just -- you have the 2 vessels delivering this summer. I guess at this point, the expectation is that we're going to take these vessels and put them into the spot market. Was that -- is this a strategic decision by Flex to really just focus in the spot market? I'm sure you know, there have been a lot of multiyear charters that have been sort of out there. I mean as we think about you guys positioning the fleet, is this just really going to -- beyond the initial vessel that you have on time charter, should we be thinking about you guys primarily as a spot operator?

[Øystein M. Kalleklev, Chief Executive Officer]

No, I think we are more what we would call opportunistically. We have [ $840 million ] or something in the balance sheet and a very good liquidity situation. So we have the luxury of being able to take actually a position on the market. So what has been our kind of guiding principle all the way here is we think the market will tighten. We have bought vessels at what we think is rock bottom prices, and we have got them at very good delivery slots when we think the market will heat up, which we have predicted fairly well because the market's been booming in Q4 and we think it will start booming again during 2019. And then, of course, if you have that belief and if you have the money to afford to take that position, you don't really want to put your assets on long-term charters early in the cycle because this cycle has just started. It's a bit longer cycle than other shipping segments. So what we will position ourself for is the opportunity to play a balanced portfolio of contracts when the market is hot, and that means we will probably have some spot exposure. We will probably have a combination of what I would call [ mobile units ] contracts where we have some guaranteed volumes every year, which gives us less utilization risk in the spot market. We'll probably have some medium-term charters, and also I wouldn't rule out taking some long-term charters because we have very high spec vessels. And if you are a portfolio player or oil company or [indiscernible], you have vessels holding off contracts which are [indiscernible]. You might very well want to replace them with modern tonnage. And we are then the obvious company to go to, to start discussing such term business. And that happens from time to time. And we have such ongoing discussions, but we need to see the right numbers to commit for medium and long-term charters, given how we look at the market.

[Gregory Robert Lewis, Managing Director]

Okay, great. And then just one more for me. You have a couple of those newbuilds that are being built at the SME. Does that potential merger impact -- does that impact or delay potentially these vessels, or is that not really something we should be concerned about?

[Øystein M. Kalleklev, Chief Executive Officer]

Their merger of --?

[Gregory Robert Lewis, Managing Director]

The shipyards.

[Øystein M. Kalleklev, Chief Executive Officer]

Yes, I think the shipyards are waking up to the reality that eventually the Chinese will be more active in the LNG market as well, so it's better to consolidate early, make some money than rather everybody losing money every year. So it's not like these shipyards have been making money. There are some big project contracts coming in though from Qatar, probably needing around 60 vessels -- 40 for the Qatar expansion, 20 for Golden Pass. [Indiscernible] vessels, and then a lot of these other new projects. So in order to be able to make some money on this compact, it's better to consolidate, have less competition. We think it will drive up prices. For us, of course it would be good for our net asset value calculation. It will be good for long-term term business because if you're bidding then on a higher new billing prices, the term business rate has to be higher, which is good for employment opportunities. So given that we are fairly long in shipping with [indiscernible], we don't really mind that the ship billing price goes up because that increase our NAV and will put upside pressure on charter rates.

[Operator]

Thank you. There are no further questions in the queue.

[Øystein M. Kalleklev, Chief Executive Officer]

I think we have one question left from the web, which I think I have to read this now because it's fairly long. Let's see if I read this correctly. In 2018 -- 329 million to find this equity for [indiscernible]. In 2018, [indiscernible] investors. You envision that on average [indiscernible] about 200 [indiscernible]. Okay. This was a bit hard to understand. I think it's related to our funding. But what I think what we have said is that we have 9 newbuildings left. We have financed 2 newbuildings now based on $250 million. That means we have 7 newbuildings left, and they have our own $130 million in remaining CapEx. So that means we need to raise somewhere in that range of that. However, we also have a backup facility, the Sterna RCF. So our plan is to create -- to do a combination of bank loans and lease to finance the remaining CapEx. And then we also think we will create a lot of free cash flow from operations, given how the outlook look. So that's our financing strategy for the remaining 7 newbuildings to be financed. Those are not for delivery before middle of 2020, so we will probably not start initiating financing from them before after summer. Okay, I think that's it.

[Operator]

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all now disconnect.