International

Flex LNG Ltd. Says Challenging First Half Market Conditions Had a Negative Impact on Financial Results, To List on NYSE In June

Flex LNG Ltd., Friday reported unaudited results for the quarter and three months ended March 31, 2019.

Highlights:

• Reported revenues for the first quarter 2019 of $19.1 million, compared to $36.1 million for the fourth quarter 2018.
• Reported operating income of $3.0 million for the first quarter 2019, compared to $21.5 million in the fourth quarter 2018.
• Reported net loss of $3.4 million for the first quarter 2019, compared to net income of $15.2 million for the fourth quarter 2018.
• In April, the Company signed a $250 million secured term loan facility for the financing of the two newbuildings delivering in 2019.
• In April, the Company signed a $300 million sale and charter-back transaction with Hyundai Glovis Co. Ltd. (“Hyundai Glovis”) for the vessels Flex Enterprise and Flex Endeavour.
• On May 30, in relation to the proposed listing of the Company’s ordinary shares on the New York Stock Exchange (the “NYSE”) under the symbol “FLNG”, the U.S. Securities and Exchange Commission (the “SEC”) declared the Company’s registration statement on Form 20-F effective.

Øystein M Kalleklev, CEO comments:

“First half of 2019 has been challenging due to the disruption in the LNG trade caused by a unseasonably mild winter, a glut of LNG hitting the market as well as shift in trading patterns favouring shorter hauls to Europe. We in Flex LNG have deliberately elected to sail against the current to be able to position us for the shift in currents expected to take place in the second half of the year. With tighter market and significant contango in the gas market we are upbeat about the outlook for owners of uncommitted two stroke LNG carriers. Furthermore we continue to strengthen the organization with insourcing of ship management with the aim of delivering the highest standard in terms of customer experience. Additionally, our US listing will give us access to a larger and deeper capital market which is advantageous in such a capital intensive shipping segment as LNG transportation.”

Business Update

In May, the Company announced that it had publicly filed a registration statement on Form 20-F with the SEC relating to the proposed listing of its ordinary shares on the NYSE. The Company’s registration statement on Form 20-F was declared effective by the SEC on May 30, 2019. No new securities will be issued in connection with the listing, and trading of the shares on the NYSE is expected to commence in June 2019. Following the listing, the Company’s ordinary shares will be listed for trading on both the NYSE and the Oslo Stock Exchange under the ticker “FLNG”.

In April, the Company signed a $250 million secured term loan facility for the financing of Flex Constellation and Flex Courageous. The facility is expected to be drawn upon delivery of the vessels from the shipyard, scheduled for June and August 2019, respectively. In April, the Company also entered into a $300 million sale and charter-back transaction with Hyundai Glovis for the vessels Flex Enterprise and Flex Endeavour. The transaction is expected to close in the third quarter 2019. Both the $250 million term loan and the transaction with Hyundai Glovis remain subject to satisfaction of customary closing conditions.

The Company currently has four vessels on the water and nine additional newbuildings under construction, which are set for delivery between 2019 and 2021. With such scale, Flex LNG has the ability to be present in all three major basins providing for enhanced customer relationships, increased vessel utilization and shorter distance to load ports. The Company’s vessels currently in operation and under construction are expected to meet charterer’s preferences for the substantially improved unit transportation cost of larger and more fuel efficient vessels. The Company’s fleet presents a diversified portfolio of two stroke vessels with both MEGI and XD-F propulsion systems. Seven of the vessels are also equipped with Full Re-liquefaction System (“FRS”) or Partial Re-liquefaction Systems (“PRS”) with associated improvements in boil off rate.

Results for the three months ended March 31, 2019

The Company reported a net loss of $3.4 million and loss per share of $0.06 for the first quarter 2019, compared to net income of $15.2 million and earnings per share of $0.38 for the fourth quarter 2018.

Vessel operating revenues were $19.1 million for the first quarter 2019, compared to $36.1 million in the fourth quarter 2018.

Vessel operating costs, which include voyage related costs, broker commissions, claim expense, technical operating expenses (such as crewing, insurance, lubes and repairs & maintenance) and charter hire expense amounted to $8.3 million in the first quarter 2019, compared to $6.0 million in the fourth quarter 2018. The increase in vessel operating costs was primarily due to vessels being off-hire in the first quarter, with associated positioning and idle costs, partly offset by reduced claims expense in the first quarter compared to the fourth quarter 2018.

Administrative expenses were $1.9 million in the first quarter 2019, compared to $1.8 million in the fourth quarter 2018. Administrative expenses in the first quarter 2019 and fourth quarter 2018 were impacted by costs related to the on-going US listing process.

The Company’s cash and cash equivalents decreased by $9.5 million to $45.6 million in the first quarter 2019 (Q4 2018: $38.5 million cash inflow). The operating cash outflow in the first quarter 2019 was $3.6 million (Q4 2018: $23.5 million cash inflow), while change in working capital was negative by $6.2 million, partly due to lower hire prepayments received. In the first quarter 2019, cash used in investing activities was $0.0 million (Q4 2018: $274.4 million cash used) and cash used in financing activities was $5.9 million (Q4 2018: $289.4 million cash inflow), which related to the repayment of long term debt.

Finance update

In April, the Company signed a $250 million secured term loan facility from a syndicate of banks for the financing of the two newbuildings Flex Constellation and Flex Courageous. The financing is expected to be drawn upon delivery of the vessels from the shipyard, which is currently scheduled for June and August 2019, respectively. For further information please see Note 12: Subsequent events.

In April, the Company announced that it has entered into a sale and charter-back transaction with Hyundai Glovis for the vessels Flex Endeavour and Flex Enterprise. Under the agreement, the Company will sell the vessels for a gross consideration of $420 million, with a net consideration of $300 million adjusted for a non-amortizing and non-interest bearing seller’s credit of $120 million in total. The vessels will be chartered back from Hyundai Glovis, on a time charter basis, for a period of 10 years. For further information please see Note 12: Subsequent events.

The Flex Endeavour and Flex Enterprise are currently financed under the $315 million secured term loan facility, and upon closing of the transaction with Hyundai Glovis, the Company will prepay the two tranches relating to the vessels, totalling approximately $194 million. The transaction is thus expected to have a positive cash effect of approximately $100 million, net of fees and prepayment of related debt.

LNG Market Outlook

During the first quarter 2019, spot LNG freight rates plummeted from the record levels seen in the previous quarter. Asia winter demand came in lower than expected due to an unseasonably mild weather in northern Asia, coupled with Japanese nuclear power plants restarting as well as an oversupplied LNG market due to start-up of new LNG production. Asian LNG prices moved lower, trading closer to or at par with key US and European LNG markers, preventing arbitrage opportunities between the markets. Despite significant growth in liquefaction and exported volumes, sailing distances and utilization where challenged by muted trade in the quarter.

Global nominal liquefaction capacity reached 393 million tonnes per annum (“Mtpa”) in the quarter according to IGU. Total trade reached a historic high of 316.5 million tonnes in 2018, of which 31% or 99 million tonnes was classified as Non-long-term trade, illustrating the LNG markets gradual move towards shorter term structures and arbitrage driven moves. Total LNG trade rose by 28.2 million tonnes in 2018, the third largest increase ever.

Preliminary tracking data from KPLER point towards a 15% increase year-on-year for global LNG exports in the first quarter 2019. The combined exports from Australia, Russia and USA reached 32.6 million tonnes, representing a year-on-year growth of close to 30%. In the same period, the three largest importers Japan, China and South Korea imported 47.25 million tonnes of LNG, representing a slight decline of ~3% compared to first quarter 2018 primarily due to lower heating demand.

According to industry sources, 12 LNG carriers and one FSRU were delivered in the first quarter of 2019. 13 new LNG orders were reported in the same period. By the end of the quarter, there were 471 vessels above 125,000 cbm in the global LNG fleet, excluding FSRU’s. The order book at the end of the quarter amounted to 107 conventional vessels, of which 44 were reported as ‘uncommitted’. 23 conventional LNG carriers are scheduled for delivery in 2019, 37 in 2020, 39 in 2021 and 8 in 2022.

The global liquefied natural gas market is expected to grow substantially in the coming years. Total proposed liquefaction capacity is at 843 Mtpa, more than double existing facilities. Over the next two years about 60 Mtpa of liquefaction is expected to come on-line. In the same period, 2019/20, about 120 Mtpa of additional liquefaction capacity is expected to reach final investment decision with the majority in Canada and USA.

Demand is expected to grow firmly as China in particular continues to focus on energy efficiency and improvements in air quality in key metropolitan areas. Economic policies in the country are to an increasing degree focused on environmental advances rather than pure economical growth. Chinese LNG imports grew 41% in 2018 to ~53 Mtpa. US LNG tariffs have so far primarily affected the Chinese sourcing of LNG, not the country’s growing import volumes, up 28% compared to the first quarter 2018.

Outlook for LNG shipping demand, albeit showing slow growth in the first quarter 2019, remains sound due to new liquefaction capacity coming on-line in the western hemisphere, coupled with robust demand growth in the eastern parts of the world. Traditionally market analysts have estimated shipping demand to increase by 1.3 LNG carriers per new million ton of liquefaction capacity per annum. Recent liquefaction growth in USA and Russia yield a higher multiple as the distance from supply to key markets are considerable longer implying tonne miles growth.

Flex LNG expects the market for energy efficient modern LNG carriers to improve going forward, as mere seasonal effects fade, and the markets stabilize. The long term projections for the industry are well supported, and Flex LNG is very well positioned to capitalize on the global shift for cleaner energy.

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