Flex LNG Ltd. — Form 6-K Summary
Business context and reporting period
Flex LNG Ltd. is a Bermuda-based owner and commercial operator of fuel-efficient, fifth-generation LNG carriers listed on the NYSE and Oslo Stock Exchange under “FLNG.” The filing presents unaudited U.S. GAAP interim results for the three months ended March 31, 2023, filed May 16, 2023. The Company operated 13 LNG carriers, principally under long-term charters.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Vessel operating revenues | $92.5 million | $74.6 million | +$17.9 million |
| Operating income | $55.0 million | $38.4 million | +$16.7 million |
| Net income | $16.5 million | $55.8 million | -$39.2 million |
| Basic and diluted EPS | $0.31 | $1.05 | -$0.74 |
| Net cash from operating activities | $38.3 million | $42.5 million | -$4.2 million |
| Cash, cash equivalents and restricted cash at period-end | $475.5 million | $174.5 million | +$300.9 million |
Operating margin was approximately 59.5% in Q1 2023, compared with approximately 51.4% in Q1 2022. Net margin declined to approximately 17.9% from approximately 74.8%, primarily because Q1 2022 benefited from a large derivative gain, while Q1 2023 included higher interest expense and debt extinguishment costs.
- Voyage expenses decreased to $0.3 million from $1.4 million because no vessels operated in the spot market during Q1 2023.
- Vessel operating expenses increased to $15.7 million from $14.4 million, although the prior-year amount benefited from a $2.9 million out-of-period adjustment.
- Administrative expenses increased to $3.9 million from $2.7 million, primarily due to higher stock-option compensation expense.
- Interest expense increased to $26.3 million from $14.6 million because of higher floating interest rates and increased debt.
- The Company recorded a $10.2 million debt-extinguishment expense, including an $8.8 million write-off of unamortized debt issuance costs and $1.4 million of direct exit costs.
- Derivative results changed from a $31.9 million gain in Q1 2022 to a $2.8 million loss in Q1 2023, including a $7.9 million unrealized loss partially offset by a $5.0 million realized gain.
Liquidity, debt and cash flow
Cash, cash equivalents and restricted cash increased by $143.1 million from December 31, 2022, to $475.5 million at March 31, 2023. Operating activities generated $38.3 million, investing activities used $4.5 million for drydock-related vessel expenditures, and financing activities provided $109.9 million.
Total debt was $1.905 billion at March 31, 2023, including $400.0 million drawn under revolving credit facilities. Reported net outstanding debt was $1.889 billion. The Company completed several refinancing transactions during the quarter, including a $290 million facility, sale-and-leaseback financings for Flex Amber, Flex Artemis and Flex Rainbow, and an asset swap under the $375 million facility.
The Company had $820.0 million of interest-rate swap notional outstanding, comprising $160.0 million based on LIBOR and $660.0 million based on SOFR. The weighted-average fixed rates were 0.96% for the LIBOR swaps and 1.81% for the SOFR swaps. Management stated that all financial covenants were satisfied as of March 31, 2023.
Financing agreements require, among other conditions, minimum book equity, positive working capital, minimum liquidity and collateral maintenance. Certain agreements also contain dividend restrictions and cross-default provisions. From April 1, 2023, the most stringent minimum book-equity ratio changes from 0.25 to 1.0 to 0.20 to 1.0.
Material changes, outlook and risks
- Revenue benefited from improved spot-market conditions, higher fixed charter rates, charterer option declarations and the absence of a vessel idling in the comparable quarter. These benefits were partly offset by 19 days of Flex Enterprise off-hire for drydock.
- Flex Enterprise and Flex Endeavour completed scheduled drydocks in Singapore in March and April 2023. Two additional vessels were scheduled for drydock in 2023 and two in 2024.
- The Company stated that higher interest rates increased the cost of floating-rate debt, while also producing significant, primarily unrealized, gains on interest-rate swaps over the preceding 12 to 18 months.
- The ongoing Russia-Ukraine war had not affected the Company’s charter contracts as of the filing date, but management warned of possible broader impacts from sanctions, supply-chain disruption and economic instability.
- Major risks include LNG charter-rate and vessel-value volatility, refinancing and liquidity risk, higher interest rates, charterer counterparty risk, drydock and off-hire periods, environmental and climate-transition regulation, geopolitical disruptions, port or canal congestion, operational incidents, cybersecurity and natural disasters.
- The filing cautions that the transition away from fossil fuels could reduce long-term demand for natural gas and LNG transportation.
- On May 15, 2023, the Board declared a Q1 2023 cash dividend of $0.75 per share, payable on or around June 13, 2023, to shareholders of record on May 31, 2023, subject to applicable restrictions and Board discretion.
Investor verification checklist
- Verify the composition, maturity profile and variable-rate exposure of the $1.905 billion debt balance.
- Assess refinancing, covenant and cross-default risks, including the revised minimum book-equity covenant effective April 1, 2023.
- Review the sustainability of cash generation after interest expense, scheduled debt amortization, drydock spending and dividends.
- Evaluate the effect of higher SOFR and the transition from LIBOR on debt costs and interest-rate swaps.
- Confirm charter coverage, expiration dates and renewal or re-chartering risk for vessels with charters expiring from 2024 onward.
- Monitor scheduled drydocks, related off-hire days and associated capital expenditures.
- Reconcile the reported derivative losses with the $48.6 million derivative asset balance and the Company’s swap notional exposure.