Flex LNG: 11% return to navigate tough markets (NYSE: FLNG)
Flexible LNG (NYSE: FLNG) reported earnings for the first quarter of 2022 on May 11. The company’s first quarter was certainly a disappointment compared to rates earned in the fourth quarter, but it wasn’t as bad. as it seems. The main adjustment of the quarter, on interest rate swaps, looks cautious by management. In addition, the dividend remains high and safe, which alone is a reason to own stocks in the current market turmoil.
Flex LNG reported net income of $56 million for the first quarter, or $1.05 per share. A significant portion of net earnings ($32 million or $0.45 per share) is attributable to gains on interest rate derivatives on their debt. Excluding this amount, Flex reported adjusted net income of $24 million for the quarter. This is significantly lower than a year ago or even last quarter, mainly due to a weaker cash market. This is partly explained by the increase in European demand, which causes the average sailing distance to drop to “4,200 nautical miles in the first quarter of this year”, thus increasing the supply. The company’s average time charter equivalent was “$62,627 per day for the first quarter of 2022, compared to $95,908 per day for the fourth quarter of 2021.”
Despite a somewhat lower cash market this quarter, which resulted in lower TCE and overall earnings, the company is still very profitable and overall it was a strong quarter considering the market situation.
Balance sheet update
Nothing too exciting happened with the company balance sheet in the first quarter, other than interest rate swaps. The company’s debt decreased by about $28 million in the first quarter, from $1.633 billion at the end of 2021 to $1.6105 billion at the end of March. The company’s cash balance also decreased by $27 million, but remains at a very healthy level of $174 million.
The company’s cash balance is expected to improve in the second quarter thanks to ongoing financing efforts (as seen above). By the revenue call,
$111 million will be released following the conclusion of the Ranger, Rainbow, Constellation and Courageous financings. And in the third quarter, we will refinance the existing lease of the Flex Endeavour, the third vessel under the $375 million bank facility. As the bank drawdown amount for this vessel is slightly less than the existing lease, the net effect is negative $12 million, resulting in net cash of $100 million, freed up under the balance sheet optimization, which is expected to materially close tomorrow. The growing cash balance adds to our already healthy and strong balance sheet.
As mentioned in the earnings analysis above, the company made significant gains on derivatives (interest rate swaps in particular). And frankly, given the tightening regime the market seems to be predicting from the Fed over the next few months, these swaps are starting to look like a pretty good deal for the company (that was equivalent to $32 million in gains plus $16 million in April alone).
The company has a total of $876.25 million in variable interest debt covered by these swaps, for a weighted average interest rate of 1.25%. Between this and the company’s fixed-rate debt of approximately $440 million, approximately $1.316 billion (~82%) of the company’s $1.605 billion debt is protected from rising rate risk. – although this will change slightly in the second quarter as the Endeavor is about to be refinanced (one of the vessels currently financed by fixed interest).
The good news for Flex is twofold: the company has 98% of its turnover for 2022 already contracted and the spot and futures markets seem to be improving.
Company management has expressed confidence in securing its three vessels whose charters end before 2025 (marked by Flex with beautiful shiny gold stars) at higher rates given the market’s willingness to pay a premium per relative to spot rates for added certainty, especially as a stronger spot market. is scheduled for the second half of 2022.
As for the company’s earnings projections, given such high contract coverage, there aren’t many surprises. Sequential improvements are expected quarter over quarter through the end of the year as strong export growth coupled with relatively light newbuild deliveries of just 27 vessels is expected to create a tighter market.
The ongoing conflict between Russia and Ukraine continues to fuel instability in European and global energy markets, particularly gas. The recent measures taken by Russia to sanction European energy businesses and Ukraine stopping pipeline flows made the situation even more tense and pushed prices up. As de-escalation seems unlikely, demand for LNG can be expected to increase.
Implementation pending EEXI environmental regulations in 2023 and the extension of the carbon market to ships by the EU are optimistic for Flex. Flex has a very recent and environmentally friendly fleet; other companies may have to scrap some of their older vessels or face higher costs under new regulations, which is bullish for supply. A die greater risks to maritime transport of LNG remains the high level of new construction. Fortunately, the increase in LNG exports over the next few years should occupy a significant share of these vessels rather than leading to a gross oversupply.
Moreover, the delivery of the ships is already scheduled for 2026 and beyond, as the yards have filled up until 2025, so the glut will not strike immediately or suddenly if it occurs.
When I calculated Flex LNG’s forward dividend of $3.00 per share in March, a number of people were skeptical. But now the outlook seems clear. Flex LNG yields 11% and it’s here to stay (unless the stock price goes up). The company has now paid $0.75 per share for three quarters and management has again clarified its policy,
We prefer to have a stable dividend level rather than adjusting up and down every quarter. This means that we sometimes pay out more and sometimes less than earnings, but in the longer term this subsides and we aim to pay out all of our earnings over the cycle, as we have also done in the past, such as you can see it. to glide. Additionally, we – given our forward order book, we also expect lower earnings volatility than we have seen in the past.
With a healthy cash balance of $174 million, that payout seems pretty secure, and the high yield is a welcome sight in a market where capital gains are quickly wiped out.
Evaluation and conclusion
I think not much has changed on the evaluation front. A price target of around $31.9 per share, as stated in my first article, seems well justified (hell, the company broke that level at the close on April 14). Flex continues to be a major revenue generator and pays out a monstrous dividend; the first quarter may have been a bit of a surprising underperformance according to some investors, but the underlying structure of the business remains intact and strong. Flex has excellent charter coverage for the remainder of 2022, spot rates should improve, the dividend is still large and clarity on environmental regulations towards the end of the year could further shed some light for the company .