Flex LNG Ltd. Form 6-K Summary
Business context and reporting period
Flex LNG Ltd. filed a Form 6-K in November 2022 containing unaudited U.S. GAAP condensed consolidated financial statements and management’s discussion for the nine months ended September 30, 2022. The company owns and operates fuel-efficient fifth-generation LNG carriers. Its fleet comprised 13 vessels as of September 30, 2022, with primarily long-term charter coverage. Shares trade on the NYSE and Oslo Stock Exchange under “FLNG.”
Financial performance and key metrics
| Metric | 9 months ended Sep. 30, 2022 | 9 months ended Sep. 30, 2021 |
|---|---|---|
| Vessel operating revenue | $250.0 million | $228.9 million |
| Operating income | $139.6 million | $123.9 million |
| Operating margin | 55.8% | 54.1% |
| Net income | $146.6 million | $92.8 million |
| Net margin | 58.6% | 40.5% |
| Basic earnings per share | $2.76 | $1.74 |
| Net cash provided by operating activities | $166.5 million | $135.5 million |
| Cash, cash equivalents and restricted cash at period end | $271.2 million | $138.2 million |
Revenue increased $21.1 million, or approximately 9.2%, supported by additional available vessel days, fleet growth and a higher proportion of vessels on improved long-term fixed-rate charters. Operating expenses included $47.2 million of vessel operating costs, $6.9 million of administrative expenses and $54.0 million of depreciation.
Interest expense increased to $52.1 million from $41.9 million, reflecting higher debt levels, fleet expansion and higher LIBOR and SOFR rates. The company also recorded a $14.4 million extinguishment-of-debt charge and a $74.8 million gain on derivatives, compared with an $11.0 million derivative gain in the prior period. The derivative gain was primarily attributable to increased interest rates and the resulting increase in swap fair values.
Net debt was $1.694 billion at September 30, 2022. Total debt was $1.713 billion, consisting mainly of floating-rate debt and lease financing. Equity was $891.0 million, and vessels and equipment, net, totaled $2.288 billion.
Cash flow, financing and liquidity
- Operating cash flow increased by $31.0 million year over year to $166.5 million.
- Investing cash flow was approximately neutral in 2022, compared with $265.9 million of vessel-related spending in 2021; no newbuilding deliveries occurred during the 2022 period.
- Financing cash flow was negative $95.6 million, including $146.1 million of dividends, $68.7 million of scheduled debt repayments and significant refinancing and prepayment activity.
- The company completed or entered into several refinancing transactions, including the $375 million facility, the $320 million sale and leaseback and the $150 million Flex Enterprise term facility.
- As of September 30, 2022, the company reported compliance with all financial covenants. Key requirements include a minimum 0.25-to-1.0 book equity ratio, positive working capital, minimum liquidity and collateral maintenance tests.
- The company had 16 interest-rate swaps with total amortized notional principal of $710.0 million at September 30, 2022. These swaps partially reduce exposure to floating-rate debt but do not eliminate interest-rate risk.
Material changes versus the prior comparable period
- Revenue increased approximately 9.2%, and net income increased approximately 58.0% versus the first nine months of 2021.
- Operating margin improved to approximately 55.8% from 54.1%, while net margin increased materially because of the larger derivative gain.
- Interest expense increased approximately 24.3% as debt and benchmark interest rates rose.
- The fleet increased from 10 vessels in early 2021 to 13 vessels, increasing operating expenses and depreciation but also expanding revenue capacity.
- Cash, cash equivalents and restricted cash increased $70.0 million from December 31, 2021.
- The company recorded a $2.9 million favorable out-of-period adjustment to vessel operating expenses and other current liabilities for previously overstated technical ship-management fees. Management concluded the prior-period errors were not material.
- Several vessels moved from variable-rate or sale-and-leaseback arrangements into new fixed-rate long-term charters or refinancing structures, including Flex Amber, Flex Enterprise and Flex Rainbow.
Guidance, outlook, commentary and risks
The filing does not provide quantitative earnings or revenue guidance. Management states that the majority of the fleet is employed under long-term charters, while spot-market and market-indexed exposure remains subject to volatile LNG carrier rates. Fixed-rate charter coverage is intended to reduce exposure to seasonal and spot-market fluctuations.
Subsequent to quarter-end, the company received credit-approved term sheets for a $150 million refinancing of Flex Resolute and approximately $330 million of sale-and-leaseback financing for Flex Amber and Flex Artemis. These transactions were subject to final documentation and customary closing conditions, with completion expected in the first quarter of 2023.
On November 14, 2022, the board declared a third-quarter cash dividend of $0.75 per share, payable around December 6, 2022. On November 15, 2022, the company entered into an agreement for a potential at-the-market offering of up to $100 million of ordinary shares; no shares had been sold under the program as of the filing date. A dividend reinvestment plan for up to $100 million of ordinary shares was also proposed.
Principal risks include LNG charter-rate and vessel-value volatility, higher interest rates, refinancing and liquidity needs, debt covenant compliance, counterparty performance, dry-docking and operating costs, environmental and energy-transition regulation, geopolitical disruption from the Russia-Ukraine war, COVID-19-related operational disruptions, crew availability, port and canal congestion, adverse weather, cyber risks and potential litigation. The company stated that its charter contracts had not been affected by the Russia-Ukraine conflict as of the filing date.
Important facts for investors to verify
- Reconcile the reported $146.6 million net income with the $74.8 million derivative gain and assess the sustainability of earnings excluding mark-to-market gains.
- Review the maturity, amortization, floating-rate exposure and covenant requirements associated with the $1.713 billion of total debt.
- Confirm completion and final terms of the proposed Flex Resolute refinancing and Flex Amber/Flex Artemis sale-and-leaseback transactions.
- Assess the effect of higher SOFR and LIBOR rates on interest expense after considering the company’s interest-rate swaps.
- Evaluate charter expirations, extension options and re-chartering exposure, particularly for vessels with charters expiring in 2024 and 2025.
- Monitor the potential dilution and capital-raising impact of the $100 million ATM offering and proposed $100 million dividend reinvestment plan.
- Consider the $2.9 million out-of-period accounting adjustment and the company’s conclusion that related prior-period errors were not material.