Flex LNG Ltd. current report, Q2 FY2021

Flex LNG Ltd. — Form 6-K Summary

Business Context and Reporting Period

Flex LNG is a Bermuda-based owner and operator of fuel-efficient, fifth-generation LNG carriers listed on the NYSE and Oslo Stock Exchange under “FLNG.” The filing, submitted in September 2021, reports unaudited U.S. GAAP results for the six months ended June 30, 2021, compared with the six months ended June 30, 2020.

As of June 30, 2021, the company operated 13 LNG carriers, compared with six during the comparable 2020 period. Three newbuildings—Flex Freedom, Flex Volunteer and Flex Vigilant—were delivered during the first half of 2021.

Financial Performance and Key Metrics

Metric	Six months ended June 30, 2021	Six months ended June 30, 2020
Vessel operating revenue	$147.1 million	$63.9 million
Operating income	$77.5 million	$28.1 million
Net income/(loss)	$60.0 million	$(21.5) million
Basic and diluted EPS	$1.12	$(0.40)
Net cash from operating activities	$91.2 million	$18.0 million
Cash, cash equivalents and restricted cash at period-end	$144.2 million	$116.0 million

Revenue increased 130% to $147.1 million, primarily reflecting fleet growth and higher achieved charter rates.
Operating expenses increased with fleet expansion: voyage expenses were $2.3 million, vessel operating expenses were $29.7 million, administrative expenses were $4.3 million and depreciation was $33.4 million.
Calculated operating margin was approximately 52.7%, compared with 44.0% in the prior-year period. Calculated net margin was approximately 40.8%, compared with a negative margin in 2020.
Interest expense increased to $27.5 million from $19.6 million as debt increased to finance vessel deliveries.
The company recorded a $10.2 million gain on derivatives, versus a $28.6 million loss in 2020, principally from changes in longer-term interest rates. The 2021 gain included a $13.5 million unrealized gain.
Total debt was $1.654 billion at June 30, 2021, compared with $1.419 billion at December 31, 2020. Long-term debt, net of current maturities and debt issuance costs, was $1.555 billion.
Total assets increased to $2.540 billion from $2.304 billion at December 31, 2020, while vessels and equipment, net, increased to $2.379 billion from $1.856 billion.

Cash Flow, Liquidity and Capital Resources

Operating cash flow was $91.2 million. Investing cash outflow was $266.2 million, primarily for final payments and capital expenditures related to the three delivered newbuildings.
Financing cash flow was $190.2 million, including $223.3 million of long-term debt proceeds, $32.5 million of debt repayments, $37.4 million of dividends and $5.6 million for treasury-share purchases.
Cash, cash equivalents and restricted cash increased from $129.0 million at December 31, 2020 to $144.2 million at June 30, 2021.
Management stated that cash on hand and borrowings under current credit facilities should be sufficient to fund requirements for at least 12 months from the interim report date.
Financing agreements require, among other conditions, a minimum 0.25-to-1 book equity ratio, positive working capital and minimum liquidity equal to the higher of $25 million or 5% of net interest-bearing debt. The company reported compliance with all financial covenants at June 30, 2021.
The company had 18 interest-rate swaps with aggregate amortized notional principal of $722.1 million. Floating-rate debt remains exposed to LIBOR and future reference-rate reform.

Material Changes and Developments

The fleet expanded from six to 13 vessels between the comparable periods, materially increasing revenue, operating costs, depreciation and debt.
In April and May 2021, the company entered into or commenced several fixed-rate time charters, including arrangements with Cheniere, an Asian-based energy company, and an international trading house. The Cheniere arrangements covered four vessels, with an option for a fifth.
Flex Freedom entered a new charter beginning in the first quarter of 2022 with a minimum firm period of five years.
Options were exercised to extend the charters of Flex Amber, Flex Aurora and Flex Resolute.
As of September 1, 2021, the company had repurchased 980,000 shares for $9.4 million under its buyback program. The maximum repurchase price was subsequently increased to $15 per share, and 3,130,584 shares remained available for repurchase.
Subsequent to June 30, 2021, the board declared a $0.40-per-share dividend for the second quarter of 2021 and issued 585,000 management share options.

Guidance, Outlook, Risks and Unusual Items

No formal financial guidance was provided. Management expects current liquidity and available borrowing capacity to fund requirements for at least 12 months.
COVID-19 continued to create uncertainty around LNG demand, charter rates, vessel utilization, crew changes, port access, operating costs and access to financing.
Results remain sensitive to LNG shipping supply and demand, spot and time-charter rates, vessel values, customer creditworthiness, off-hire periods and the ability to renew or replace charters.
Floating-rate debt creates interest-rate exposure; the discontinuation of LIBOR after 2021 may affect debt and derivative arrangements.
Debt agreements include restrictive covenants, collateral requirements and cross-default provisions. A covenant breach could restrict dividends, share repurchases and additional borrowing and could permit acceleration of debt or enforcement against vessels.
Additional risks include vessel accidents, environmental liabilities, dry-docking costs, adverse weather, geopolitical disruption, piracy, terrorism, regulatory changes and evolving environmental, social and governance requirements.
Reported earnings were materially affected by derivative fair-value movements, including the $10.2 million derivative gain in the first half of 2021.
The filing includes related-party payments for vessel purchases from entities associated with Geveran, the company’s largest shareholder, including final payments of $130.5 million, $127.0 million and $127.0 million for three vessels.

Important Facts for Investors to Verify

Charter coverage, rates, renewal options and counterparty obligations for the 13-vessel fleet, particularly vessels scheduled for charter expiration during 2022.
Debt maturities, refinancing requirements, interest-rate exposure and compliance with minimum liquidity, working-capital and equity-ratio covenants.
The sustainability of dividends and share repurchases given debt service, vessel capital needs and charter-market volatility.
The extent to which reported net income and margins depend on non-cash derivative fair-value gains.
COVID-19-related operational effects, including crew changes, off-hire periods and additional operating costs.
Related-party vessel purchases, management arrangements and technical-management fees.
Future effects of LIBOR replacement on floating-rate borrowings and interest-rate swaps.