Flex LNG Ltd. — Form 6-K Summary
Reporting period: Unaudited U.S. GAAP results for the nine months ended September 30, 2021, filed November 19, 2021. Flex LNG owns and operates fuel-efficient LNG carriers listed on the NYSE and Oslo Stock Exchange. The fleet expanded from six vessels in the comparable 2020 period to 13 vessels as of September 30, 2021.
Financial performance and position
| Metric | Nine months 2021 | Nine months 2020 | Change |
|---|---|---|---|
| Vessel operating revenue | $228.9 million | $97.1 million | +$131.8 million |
| Operating income | $123.9 million | $39.3 million | +$84.6 million |
| Operating margin | 54.1% | 40.5% | Improved |
| Net income/(loss) | $92.8 million | $(17.7) million | +$110.5 million |
| Net margin | 40.5% | (18.2)% | Improved |
| Basic and diluted EPS | $1.74 | $(0.33) | +$2.07 |
| Net cash from operating activities | $135.5 million | $37.7 million | +$97.8 million |
| Capital expenditures | $265.9 million | $432.3 million | $(166.4) million |
- Revenue growth reflected the increase to 13 vessels, improved utilization and higher achieved market rates.
- Vessel operating expenses rose to $45.2 million from $22.5 million, primarily because of fleet growth and additional COVID-19-related crew costs. Depreciation increased to $51.6 million from $27.9 million, and interest expense increased to $41.9 million from $29.5 million.
- The company recorded an $11.0 million gain on derivatives, compared with a $26.4 million loss in 2020, primarily from changes in the fair value of interest-rate swaps.
- Cash, cash equivalents and restricted cash totaled $138.2 million at September 30, 2021, compared with $129.0 million at December 31, 2020. Net cash increased by $9.2 million during the period.
- Total debt was $1.627 billion, including $85.3 million classified as current debt and $1.527 billion of long-term debt net of debt issuance costs. Total equity was $861.5 million, and the book equity ratio was approximately 34.2%.
- Operating cash flow funded part of the $265.9 million vessel investment program. Financing cash flow was $139.6 million and included $59.0 million of debt repayments, $58.7 million of dividends and $7.8 million for treasury-share purchases.
- The company had 18 interest-rate swaps with aggregate amortized notional principal of $720.0 million and a weighted-average fixed rate of 1.13%. Net variable-rate debt after swaps was $632.0 million; a one-percentage-point increase in LIBOR was estimated to increase annual interest expense by approximately $5.9 million.
Material changes and business developments
- Flex Freedom was delivered in January 2021, Flex Volunteer in January 2021 and Flex Vigilant in May 2021, completing the expansion to 13 operating LNG carriers.
- New fixed-rate charters were entered into with Cheniere for three delivered vessels and a fourth vessel expected to be delivered in the third quarter of 2022, with an option for a fifth vessel. Additional fixed-rate charters were secured for Flex Freedom and Flex Constellation.
- In November 2021, Flex Resolute and Flex Courageous were contracted to an international energy major for minimum firm periods of three years, commencing in direct continuation of their existing charters during the first quarter of 2022.
- The company signed a 10-year sale and charterback agreement for Flex Volunteer. Gross consideration is $215 million, net consideration is $160 million after a $55 million charter-period down payment, and the company has a purchase option at $80 million at the end of the term. The transaction was expected to close in the fourth quarter of 2021 and was expected to generate approximately $37.7 million of net proceeds after fees and expenses after repayment of the $125 Million Facility.
- The board declared a third-quarter 2021 cash dividend of $0.75 per share, payable around December 15, 2021.
- The company repurchased 980,000 ordinary shares for approximately $9.4 million under its buyback program. Shares outstanding at September 30, 2021 were 53.13 million, compared with 53.91 million at the beginning of the period.
Outlook, risks and unusual items
- Management did not provide a specific earnings or revenue forecast in the filing. Results remain exposed to LNG shipping demand, charter-rate volatility, vessel values, charter renewals, utilization and spot-market conditions.
- COVID-19 continued to create crew-change constraints, potential additional operating costs and uncertainty regarding energy demand, LNG prices and access to financing. The company stated that it could not reasonably predict the pandemic’s duration or severity.
- Financing agreements require, among other conditions, a minimum 0.25-to-1.0 book equity ratio, positive working capital and minimum liquidity equal to the higher of $25 million or 5% of net interest-bearing debt, subject to the applicable facility terms. The company reported compliance with all financial covenants at September 30, 2021.
- Debt agreements include security over vessels and related earnings, restrictive covenants affecting dividends, share repurchases and additional indebtedness, and cross-default provisions. A covenant breach could permit acceleration of debt and enforcement against collateral.
- LIBOR discontinuation after 2021 may affect floating-rate debt and interest-rate derivatives. The company also faces currency, counterparty, operational, weather, piracy, geopolitical, environmental, dry-docking and litigation risks.
- The $11.0 million derivative gain included a $16.2 million unrealized gain; derivative fair values can materially affect reported earnings without corresponding operating cash flow.
- Related-party transactions included $384.5 million of final vessel payments to an entity related to Geveran Trading Co. Ltd., the company’s largest shareholder, for the three vessels delivered during 2021.
Investor verification points
- Verify the closing, accounting treatment and debt repayment effects of the Flex Volunteer sale and charterback transaction.
- Review charter commencement, firm periods, options and closing conditions for the 2022 and later vessel contracts.
- Assess debt maturities, amortization, liquidity headroom and compliance with minimum-value and financial covenants.
- Separate recurring operating performance from derivative fair-value gains and other non-cash items.
- Monitor exposure to LIBOR replacement, floating-rate debt, charter-rate volatility and vessel employment after current charters expire.
- Confirm the effect of dividends, treasury-share purchases and stock-option activity on future share count and capital allocation.