Flex LNG Ltd. — Form 6-K Summary
Reporting period: Unaudited U.S. GAAP interim financial statements for the six months ended June 30, 2020, filed September 16, 2020. Flex LNG owns and operates fifth-generation LNG carriers and is expanding its fleet through newbuildings. The filing reported six operating vessels and seven vessels under construction as of June 30, 2020; three additional vessels were delivered between July and September 2020.
Financial performance and key metrics
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|
| Vessel operating revenues | $63.9 million | $38.2 million |
| Operating income | $28.1 million | $8.0 million |
| Operating margin | Approximately 44.0% | Approximately 20.9% |
| Net income/(loss) | $(21.5) million | $(7.4) million |
| Net margin | Approximately (33.7)% | Approximately (19.3)% |
| Basic and diluted EPS | $(0.40) | $(0.14) |
| Net cash provided by operating activities | $18.0 million | $5.8 million |
| Cash, cash equivalents and restricted cash at period end | $116.0 million | $26.4 million at June 30, 2019 |
Revenue increased $25.8 million, primarily because of the larger operating fleet following deliveries of Flex Constellation and Flex Courageous in 2019 and higher achieved charter rates. Voyage expenses declined to $1.5 million from $4.9 million, while vessel operating expenses increased to $14.0 million from $9.7 million. Depreciation rose to $17.2 million from $12.2 million.
Interest expense increased to $19.6 million from $13.4 million because of higher debt, partially offset by lower LIBOR. The company recorded a $28.6 million derivative loss, compared with a $2.2 million loss in the prior-year period; most of the 2020 loss was unrealized and resulted from lower long-term interest rates and a substantially larger interest-rate swap portfolio.
Balance sheet, debt and liquidity
- Total assets were $1.616 billion at June 30, 2020, versus $1.641 billion at December 31, 2019.
- Total debt was $768.4 million, including $37.5 million classified as current; long-term debt, net of issuance costs, was $726.3 million.
- Total equity was $812.5 million, compared with $839.3 million at December 31, 2019.
- Cash, cash equivalents and restricted cash declined by $13.1 million from December 31, 2019, primarily due to debt repayments, dividends and financing costs, partly offset by operating cash flow.
- Variable-rate borrowings totaled $478.8 million at June 30, 2020. The company’s interest-rate swaps had a total notional value of $610 million and a reported liability of $29.8 million.
- Cash flow from investing activities was positive $0.1 million, compared with $(146.2) million in 2019, when the company made a vessel delivery payment.
- Financing cash flow was $(29.5) million, including $16.9 million of debt repayments, $6.5 million of financing costs and $5.4 million of dividends.
- Management stated that cash on hand and available borrowings should be sufficient to fund requirements for at least the twelve months following the interim report.
Material changes and fleet development
- Flex Aurora was delivered in July 2020, Flex Artemis in August 2020 and Flex Resolute in September 2020. Final payments were approximately $130.3 million, $130.6 million and $130.5 million, respectively.
- The three deliveries were primarily financed through drawdowns under the $629 million Term Loan Facility of $125.8 million, $135.8 million and $125.8 million, respectively.
- The company entered into or expanded employment arrangements for Flex Ranger, Flex Aurora, Flex Amber, Flex Resolute and Flex Artemis. Flex Artemis commenced a five-year charter with Clearlake Shipping, with an option for an additional five years.
- The company entered into a sale-and-leaseback transaction for Flex Amber with a gross sale consideration of $206.5 million and a net consideration of $156.4 million after advance hire. The transaction remained subject to customary closing conditions as of the filing.
- The company entered into a $125 million term loan and revolving credit facility for Flex Volunteer, expected to be delivered in the first quarter of 2021.
- Flex Amber was replaced under the $629 million Term Loan Facility by Flex Vigilant, scheduled for delivery in the second quarter of 2021.
- Remaining vessel purchase commitments were $937.0 million as of June 30, 2020. Total stated debt obligations, including principal and related commitments, were $768.4 million.
Outlook, risks and unusual items
COVID-19 reduced energy and LNG demand, contributed to cargo cancellations, and pressured LNG carrier utilization and charter rates. The company reported greater difficulty securing employment, crew-change restrictions, potential additional crewing costs and uncertainty regarding future operating results. Management could not reasonably predict the duration or severity of the pandemic.
Financing costs increased on new facilities arranged during the pandemic. The company also faces exposure to LIBOR discontinuation after 2021, floating interest rates, charter-rate volatility, vessel values, refinancing risk, liquidity requirements and restrictive debt covenants. As of June 30, 2020, management stated that the company complied with all financial covenants.
Debt agreements generally require a minimum book equity ratio of 0.25 to 1.0, positive working capital and minimum liquidity equal to the greater of $25 million or 5% of net interest-bearing debt, subject to facility-specific terms. Breaches may trigger acceleration, cross-defaults and enforcement against secured vessels and other assets.
Other material risks include vessel construction and delivery delays, employment risk for newbuildings, operational accidents, dry-docking costs, environmental regulation, geopolitical disruptions, piracy, public health events, counterparty credit risk and dependence on related-party entities for vessel management and newbuilding transactions.
Investor verification priorities
- Verify the timing, financing and charter coverage of the July–September 2020 vessel deliveries and remaining 2020–2021 newbuildings.
- Review debt maturities, covenant headroom, minimum liquidity requirements and the company’s ability to refinance or fund approximately $937 million of remaining vessel commitments.
- Assess the cash-flow impact and accounting treatment of the Flex Amber sale-and-leaseback transaction.
- Evaluate exposure to COVID-19-related charter-rate weakness, utilization declines, crew restrictions and customer performance.
- Reconcile the $28.6 million derivative loss, $29.8 million swap liability and $610 million swap notional against the company’s floating-rate debt and future interest expense.
- Review related-party arrangements with Geveran and Flex LNG Fleet Management AS, including newbuilding purchases, prepayments, guarantees and technical-management fees.
- Confirm that the reported liquidity outlook remains adequate after subsequent vessel-delivery payments, debt drawdowns, dividends and operating needs.