Note: I previously covered FLEX LNG (NYSE:FLNG) in February. I extensively discussed the LNG market and LNG carrier propulsion systems (steamers vs. MEGA/MEGI and X-DF). I reviewed FLNG fleet specifications (age and propulsion), discussed the company’s financials, and estimated its value. FLNG has a top-notch fleet of ships fitted with last-generation engines, while keeping liquidity to service its debts and operations. FLNG distributes dividends with an attractive yield above 10%. My conclusion was a Buy rating. I discuss the FLNG 2023 report, valuation, and rating in today’s note.
Fleet
FLNG has one of the best fleets in the LNG segment. The company ships are equipped with the last generations of engines, ME-GA/ME-GI and X-DF. The fleet’s average age is below five years.
The LNG shipping industry operates mainly under long-term TC (time charter) contracts, and FLNG is no exception. The company reported a 51-year minimum charter backlog, which it expects to grow to 71 years with charterer extension options. The table below from the last FLNG presentation represents the company’s employment schedule.
FLNG presentation
Nine of the ships are contracted until 2027, and five until 2029. In 2024, the company reported 94% coverage. Flex Constellations is returning from a three-year TC in March/April 2024. In the last earnings call, the company’s management stated that FLNG plans 20 days of drydocking for her. For 1Q24, FLNG expects to contract Flex Artemis for $75,000 – $80,000/day. It is the only ship employed under flexible rates (variable hire)
FLNG achieved $79,461/day TC in 2023 vs. $72,806/day TC in 2022. The daily OPEX remained relatively stable at $14,500/day. For FY24, the company projects a daily OPEX per ship at $14,900/day. FLNG keeps its OPEX at lower levels compared to its peers, Dynagas (DLNG) and Cool Company (CLCO). DLNG reported $15,172 daily OPEX for 4Q23, while CLCO had $16,600/day.
2023 report discussion
In 2023, FLNG delivered $371 million in revenue, $24 million higher than in 2022. The operating expenses increased by $3.9 million, reaching $68.3 million in 2023. Two factors adversely impacted the company’s bottom line: higher interest expenses (FY23 $108 million vs. FY22 $76.5 million) and declining gains from derivatives (FY23 $18.2 million vs. FY22 $79.6 million). In 2023, FLNG realized a $120 million net income, 37% lower than in 2022. The cash flow statement matches the company’s decreasing net profits. FLNG delivered $175 million operating cash flow in 2023 vs $219 million in 2022.
FLNG pays dividends with attractive yields. In 2023, the company paid $3.125/share, resulting in an 11.8% TTM yield. FLNG pays an ordinary dividend at $0.75/share per quarter, plus special dividends. Its payout ratio is higher than that of CLCO and CPLP.
Koyfin
CLCO brings a higher yield at 15% and a lower payout ratio at 50%. A payout ratio well below 100% adds confidence in the company’s ability to distribute dividends in the long term. Golar LNG (GLNG) is not a perfect fit in the group. The company operates FLNG (floating LNG) and is not involved in LNG transportation. However, GLNG still falls in the LNG segment. So, being on the list adds more details to the picture.
Balance Sheet
As of December 31, 2023, FLNG reported $410 million cash, $788 million long-term debt, and $1,812 million total debt (including a $920 million lease agreement). FLNG’s new fleet comes at a price, as evidenced by the company’s leveraged capital structure, 213% total debt to equity, and 68% total liabilities to total assets.
The table below from the FLNG 2023 annual report shows the company’s debt composition.
FLNG 2023 report
In 2023, FLNG entered into three new agreements: a $290 million credit facility, a $330 million sale and leaseback agreement for financing Flex Amber and Flex Artemis, and a $180 million sale and leaseback agreement for Flex Rainbow. This led to increased YoY interest expenses, as pointed out earlier.
The first debt maturity comes in 2028, with a $375 million revolving credit facility and a $150 million term loan facility. So, FLNG has enough headroom to repay its 2028 debts. The company also has ample liquidity. In 20223, it delivered a $217 million operating income while having to cover $85.6 million in net interest expenses.
Valuation
The table below represents the shipping investor triad: fleet quality (composition, propulsion, and age), value (price to NAV), and leverage (gross LTV). I picked LNG-only companies. Capital Product Partners (CPLP) owns container vessels, too. However, its ambition is to become a significant player in the LNG shipping segment. So, it deserves a place in the group.
Author’s data
FLNG trades at 103% PNAV. For comparison, in February, it scored 106% PNAV. The slight increase comes from a lower market capitalization and increased fleet replacement value. In February, I used a price for a new LNG carrier equipped with last-generation propulsion at $262 million. In today’s estimate, I used the last data from Fearnley’s weekly, which was $264 million. As mentioned, the FLNG fleet comes at a price. FLNG’s LTV is 66%.
Now, let’s look at the EV multiples. FLNG scored 7.53 TTM EV/Sales and 9.87 TTM EV/EBITDA in February. Since my report, the price has dropped by 4.62%, so FLNG’s multiples remain pretty similar.
Seeking Alpha
FLNG is still the most expensive among its peers and trades above its five-year averages. Considering all the variables, CLCO strikes the perfect balance of fleet quality, leverage, value, and dividend yields. Despite that, FLNG still offers an upside potential, given its fleet, dividend yield, and balance sheet.
Investors Takeaway
FLNG is an excellent proposal for income-minded investors. However, the idea comes with a few risks. Declining LNG demand and LNG carrier supply glut are the most pronounced ones.
I like the LNG shipping theme despite the high order book. LNG and nuclear power are urgently needed to progress toward cleaner energy generation. I am bullish on LNG demand in the near term and in the long term. The table below shows LNG demand growth for YTD in February 2024.
FLNG presentation
The left sections illustrate the export changes and the right import shift over the same period. The LNG figures have increased across all leading export countries. On the other hand, India and China achieved a substantial increase in demand, offsetting the EU’s decline in demand. Japan, too, recorded lower imports due to restarting its Nuclear Power Plants.
Let’s look at another potential risk: high order book and supply glut.
FLNG presentation
Seven vessels had been delivered by February 24. Another 62 ships are expected to be delivered by the end of 2024. In 2025, the fleet will grow by another 88 vessels. This is a lot, given the total LNG fleet size of 709 ships (as reported at the end of 2023).
However, the devil is hidden in the details. The top right chart shows that 93% (as a percentage of the order book) of the NB (new builds) are already booked; this means only 7% of the new vessels are on the market now.
The propulsion specs are another decisive factor. Steamers (LNG carriers powered by steam turbines) are significantly less efficient than new builds with MEGA/MEGI and XDF engines. This means they do not comply with environmental regulations.
Almost all steamers were employed under 20+ long contracts in the 1990s and the beginning of this century. In the coming years, most of those contracts will expire. As per FLNG’s last presentation, in 2024, 24 steamers will be redelivered from contracts. In 2025, 25 ships will be redelivered. I doubt they will be employed under attractive terms. The spot rates for steamers can go down to $25,000/day, more than 65% of the average TCE realized by FLNG in 2023.
The outdated steamers will slowly retire, leaving place for the vessels with last-generation engines. In conclusion, I expect strong LNG demand and a resilient market for new LNG vessels over the coming years.
FLNG has leveraged its balance sheet, increasing the financial risk. However, looking at the company’s cash position and operating cash flow/operating income, I am confident in its ability to service its debts. FLNG does not have debt maturities in the next four years, either. The FLNG fleet’s average age is below five years, mitigating the operational risk caused by unexpected repairs and extensive maintenance.
What I like about FLNG is the availability of its ships. This means the company is not in the queue with the other shipowners for new vessels. Its ships generate cash flow now, not then. A quote below from the last earnings transcript illustrates the FLNG strategy to keep its fleet size unchanged.
We had this question now for some time. We’re looking at the market, but we are stewards of the shareholders’ capital, if we contract the ship today, if we’re super lucky, maybe we get a ship in ’27. But the slots availability are now getting into ’28. So that means that we are spending, let’s say, $262 million today to get a ship in ’28. So we are not seeing that money for four years.
It’s not the price, it’s not $262 million because we need to have supervision we might need to draw a loan, a building loan with a bank which needs an interest rate. Interest rate is 4%. They might want a margin, 2%, so that’s 6%. So once you’re taking that into account, the cost of that ship is not $262 million, it’s maybe $285 million or so. That means — is that a better use of our cash than paying dividends?
It is worth mentioning FLNG’s proactive approach to building its fleet. The company ordered ships at prices below $190 million per vessel. As pointed out, if we account for an interest rate of 4% and a premium of 2%, the cost of one new build may reach $285 million.
FLNG is part of my portfolio as an income generator. The company has a top-notch fleet and healthy financials, and distributes juicy dividends. My verdict remains unchanged; I give FLNG a buy rating.
