Business Context and Reporting Period
Flex LNG Ltd. filed a Form 6-K in November 2023 containing unaudited U.S. GAAP interim financial statements and management’s discussion for the nine months ended September 30, 2023. The Bermuda-based company owns and operates 13 fuel-efficient LNG carriers listed on the NYSE and Oslo Stock Exchange under “FLNG.”
The fleet is primarily employed under long-term time charters. Flex Vigilant’s charter was extended by 200 days in August 2023 and is now scheduled to expire in June 2031. Four vessels completed scheduled drydockings during the period, with no additional drydockings scheduled for the remainder of 2023.
Financial Performance and Key Metrics
| Metric | Nine months ended September 30, 2023 | Comparable 2022 period | Change |
|---|---|---|---|
| Vessel operating revenues | $273.8 million | $250.0 million | +$23.8 million, or 9.5% |
| Operating income | $159.4 million | $139.6 million | +$19.8 million, or 14.2% |
| Operating margin | 58.2% | 55.8% | +2.4 percentage points |
| Net income | $100.6 million | $146.6 million | -$46.0 million, or 31.4% |
| Net margin | 36.8% | 58.6% | -21.8 percentage points |
| Basic earnings per share | $1.87 | $2.76 | -$0.89 |
| Net cash provided by operating activities | $120.8 million | $166.5 million | -$45.8 million |
Revenue benefited from a greater proportion of the fleet operating on improved, longer-term fixed-rate contracts and stronger spot-market conditions affecting Flex Artemis. This was partly offset by off-hire time from four scheduled drydockings.
Operating expenses included $1.5 million of voyage expenses, $49.9 million of vessel operating expenses, $8.4 million of administrative expenses and $54.6 million of depreciation. Interest expense increased to $81.1 million from $52.1 million, primarily because of higher floating interest rates and increased debt. Interest income rose to $3.9 million from $0.9 million.
Gain on derivatives was $29.9 million, including a $12.0 million unrealized gain and a $17.9 million realized gain, compared with a $74.8 million gain in 2022. The 2022 result included a substantially larger unrealized gain.
Liquidity, Debt and Cash Flow
- Cash, cash equivalents and restricted cash totaled $429.5 million at September 30, 2023, up from $332.4 million at December 31, 2022.
- Operating activities generated $120.8 million of cash. Financing activities used $23.1 million, while investing activities used approximately $2 thousand.
- Long-term debt totaled $1.838 billion, including $400.0 million drawn under revolving credit facilities. Total debt before debt issuance cost deductions was $1.853 billion.
- Debt refinancing during 2023 included the $330 million sale and leaseback for Flex Amber and Flex Artemis, the $290 million facility for Flex Freedom and Flex Vigilant, and the $180 million sale and leaseback for Flex Rainbow.
- Four drydockings resulted in approximately $20.5 million of expenditure during the period.
- The Company paid $134.2 million of dividends during the first nine months of 2023.
- As of September 30, 2023, the Company was in compliance with all financial covenants. Key requirements include a minimum 0.20-to-1.0 book equity ratio, positive working capital, minimum liquidity and collateral maintenance tests.
- The Company had 24 interest-rate swaps with aggregate net notional principal of $720.0 million and a weighted-average fixed rate of 1.35%, intended to reduce exposure to floating-rate debt.
Material Changes, Outlook and Risks
Revenue and operating income improved year over year, but net income, net margin and operating cash flow declined because of sharply higher interest expense, lower derivative gains and drydocking-related cash expenditures. Administrative expenses also increased due to higher listing fees, headcount and share-based compensation.
Management did not provide explicit earnings or revenue guidance in the filing. The company’s outlook remains dependent on LNG shipping demand, charter rates, vessel availability, contract renewals and the ability to refinance or service substantial secured debt. Most of the fleet is covered by long-term charters, but exposure remains to spot and short-term charter rates, including for Flex Artemis.
Principal risks include higher interest rates, refinancing and liquidity risk, covenant breaches or cross-defaults, volatile LNG charter rates, charterer counterparty performance, drydock and operational disruptions, vessel damage or loss, environmental and regulatory requirements, adverse weather, port or canal congestion, geopolitical conflicts, sanctions, supply-chain disruption, cybersecurity events and the potential longer-term impact of the energy transition on natural-gas demand.
The ongoing Russia-Ukraine war and the Israel-Gaza conflict had not affected the Company’s charter contracts as of the filing date, but management warned that escalation could adversely affect operations, counterparties, financial condition and cash flows.
On November 7, 2023, the Board declared a regular third-quarter dividend of $0.75 per share and a special dividend of $0.125 per share, both payable on or around December 5, 2023, subject to the stated record-date and ex-dividend-date conditions. Future dividends remain subject to Board discretion, financial performance, debt restrictions, liquidity and applicable law.
Important Facts for Investors to Verify
- Verify the sustainability of long-term charter coverage and the renewal or replacement prospects for vessels with nearer-term expirations, particularly Flex Constellation in 2024 and several vessels in 2025.
- Assess the effect of higher SOFR-based borrowing costs on cash flow, debt service and dividend capacity after considering the $720.0 million interest-rate swap notional.
- Reconcile total debt, scheduled amortization, balloon payments and revolving-facility drawings against projected liquidity and covenant requirements.
- Distinguish recurring operating performance from volatile derivative gains, including the $29.9 million derivative gain reported for the period.
- Review drydock schedules and expected off-hire periods, including two vessels scheduled for drydock in 2024 and four in 2025.
- Confirm the regular and special dividends declared after the reporting date and evaluate whether future dividends could be restricted by debt covenants or capital needs.
- Monitor LNG charter rates, vessel values, geopolitical developments, environmental regulation and energy-transition risks that could affect fleet demand and collateral values.