FLEX LNG Ltd. (FLNG) Earnings Call Transcript & Summary

Welcome back, everyone. Very happy to once again be joined by Oystein doing a quick presentation for us, and Oystein, thank you so much for keeping this traditional [ live ].

I'm good to be back Christopher. I guess it's a year since last time.

Perfect. Do you just want to start with the presentation and then we can take the Q&A afterwards?

Yes. Perfect. Sure. So should we just jump into it? Okay. That's good. So the energy crisis, the energy crisis has now become so big and so many headlines about it. It's actually our own Wikipedia page, 2021 global energy crisis. And it's been going on for quite some time. And it's becoming [indiscernible] here in Europe. We had a beginning of October, the crisis went record high and as President Putin, he came to the market and said that promised more supply from Russia, that has not really materialized. So prices are now back at record high. And we have a lot of political complications because people are not really happy about the gas prices. And even here in Norway, the government has now gone in and subsidize the price of electricity, which is at least first time I can remember that happening. So if we just jump to the next page, and we can have a look at some of the reasons there. So as I mentioned, we had very high prices in October. This is monthly aggregate. So it kind of -- it doesn't really show the intraday movement in prices. I think 6th of October was the peak, then the Asian gas prices fall jumped from like $35 to $56 in 1 day, and then they bounce back to around $35 the next day after Putin made his remarks about more Russian gas flows. So -- but now they are back up to almost $40, but this time, it's happening both in Europe and Asia. Europe has been slow to fill up the gas inventories and are now facing a big shortage, and that's driving up the European prices at par with the Asian prices. And usually, the European prices are at a discount to the Asian prices as it's takes a longer your route to transport cargoes to Asia generally than Europe. So that is also creating some implication for the freight market. Tonne mileage is dropping, and that's why the spot market is also becoming a bit softer. But what we should also take into note here, we were presenting our Q3 numbers a month ago. And then kind of the summer prices for Asian gas and European gas was at around $15. Today, they are $10 higher, just 1 month later. So we have really seen the curve being pushed up, not only on the front end but also throughout the whole of 2022. So we have not only a shortage this year, but we'll have a shortage next year as well because inventories after this winter will be so low that restocking demand will be extremely high. And we see that by 2023, we are getting into more normal levels, although still pretty elevated prices above $10, both in Europe and Asia in 2023, which is pretty high prices, and it's higher than the oil contracted price, which is converging at around $10. So if we jump to the next slide. This is a slide from our Q3 report. This is -- you can see the demand growth for LNG from January to October. And we could see that the Asian markets, we're grabbing market share from Europe. Europe was the region where we had some decline also somewhat in India, but a big decline in Europe, and this was caused by the Asian nation being willing to pay whatever it takes to get the cargo. So China growing close to 20%, same with South Korea. And we haven't had this big drought in Brazil. So Brazil has actually been growing tremendously, 350%, 5 million tonnes. This is a country that usually hasn't been importing a lot of LNG in the last couple of years, but this year has been importing a lot. So cargo has been diverted from Europe and have updated the storage numbers now for Europe. Europe is now at 62% fill storage, which is like 20 percentage points below where they usually are then in the event of a cold winter this storages will be empty when we are getting out of the winter. So that's why we have this energy crisis. Europe hasn't been able to push up their inventories ahead of the winter and are now desperate and are now willing to pay also whatever it takes to get cargoes. So if we jump to the next slide. We do see that you shouldn't have -- when you see the spot rates, you're not thinking that you are in a market that is softening. Rates are at around $200,000 per day. If rates were jumping from $150,000 to $200,000 people -- the market would be on fire, but now it's been dropping from $300,000 to $200,000 level. So people are a bit more pessimistic. These are the [ tri-fuel ] rates. So given the high gas prices, it's, of course, a big advantage having an efficient ship, which can also transport more gas. So the MEGI/XDF the modern tonnage is trading at the premium according to Sparks of around $54,000 to these numbers. And these are different indexes. It's the Baltic and the Spark, but still at pretty good levels, but it has softened the last month or so because the European gas prices have been pushing up, and that means that more of this cargo from U.S. has gone to Europe rather than taking the longer route to Asia and actually congestion in Panama has somewhat eased as well. So if we jump to the next slide. But despite the spot market rates softening, we don't see the same thing happening with the term rates. So this is the 1-year term rate from Fearnleys and the 3-year term rate from Affinity, they've basically been stabilizing. So 1-year time charter rate from Fearnleys is at $125, reflecting the fact that [indiscernible] will be very high next year. There will be a lot fewer ships coming to the market next year. Volume growth will probably be pretty high next year as well because U.S. is pushing up with a lot of new volumes and will probably be the biggest exporter in the world already in 2022. I think this is a bit ahead of people's expectations. And then the 3-year rate is above $95,000. This is a pretty good firm rate. We see that we are coming from a market where these rates were basically at around $60,000. They are now a lot better. For us, the last slide I do think I have is just our portfolio. So of course, we've been fixing a lot of ships this year. Now 8 or 9 ships been fixed on longer-term contracts. And then I meaning 3 to 5 years [indiscernible] it will be 8, it will be 9 if Cheniere is taking the option for the fifth ship, which Flex Volunteer. So we do see that Flex Freedom will be going on a 5-year charter in Q1 next year. Constellation is already on 3-year charter and then Ranger and Vigilant, gone to Cheniere for 3 to 8 years, Aurora will go to Cheniere Q3 next year. Courageous and Resolute will go on 3 plus 2 plus 2x charters early next year. Flex Rainbow, we just recently extended by 1 year to Q1, '23. Flex Volunteer is the ship we have in the spot market. So she's been doing pretty well in Q4. And we do expect that to go to Cheniere on a 3.5-year contract starting of Q3 next year. And then we have 3 ships, which has been on index, which we also have got a good benefit from having ships tied to the spot market in end of this year. This is Flex Artemis, which is on a 5-year index, Flex Amber and Enterprise also on shorter indexes. So all in all, pretty good coverage for next year. Really, the only thing we have opened now is a small gap on Aurora during the summer. Flex Volunteer will stay open in the spot market until Q3 next year and where we will figure out whether she will go to Cheniere, which we do expect. And then Enterprise declaration of that option will also materialize soon, but we do expect also hard to continue on our existing charter. So all in all, very good and robust coverage for next year and also into '23 and '24. So that's it from the LNG updates. Markets are going up and down, but still a pretty strong market and outlook for next year with these high gas prices are also very compelling, in my view. So Merry Flex-Mas.