Looking to profit from supply chain disruptions and inflation? With Europe turning away from Russian energy supplies, there has been a lot of disruption in the energy market, leading to higher prices.
Initially, this reduced the sailing times by 15% in Q1 22 for LNG ships, as US LNG exports to Europe jumped 21% between January and April 22:
Europe has more than doubled its US LNG imports so far in 2022, with 73% of US cargoes going to Europe, up from 34% in 2021:
It has long been wondered why Europe is not buying more LNG from the United States, a longtime ally, instead of buying as much from Russia, a potentially unstable supplier. Price isn’t everything, is it? What good is a cheaper price when your main supplier wants to destabilize a neighboring region via an invasion?
Flex LNG Ltd.(NYSE: FLNG), through its subsidiaries, is engaged in the maritime transport of liquefied natural gas (LNG) worldwide. As of February 16, 2022, it owned and operated nine Type M electronically controlled gas injection LNG carriers; and four vessels fitted with Gen X dual-fuel propulsion systems. It also provides charter and management services. FlexLNG Ltd. was incorporated in 2006 and is based in Hamilton, Bermuda. (FLNG website)
FLNG has one of the youngest fleets in the LNG transportation sub-industry – with build dates ranging from 2018 to 2021:
It already has 98% of its vessels fully utilized for 2022, and this week management just secured long-term charters for 3 more vessels, the Flex Rainbow, Flex Enterprise and Flex Amber, on new time charters during 7 years with a supermajor. These charters will begin in Q3 2022 and expire in Q33 2029.
In addition, Flex Rainbow’s charterer, a major global trading company, has agreed to a new 10-year fixed time charter for Flex Rainbow, which will commence as a direct extension of the existing time charter, which expires in January 2023. The new Time Charter will expire in early 2033.
These charters add ~$750m of fixed backlog to FLNG’s backlog, for a firm minimum backlog of 54 years. (FLNG website)
2021 has been a big year of growth for FLNG, with 3 new vessels added to the fleet and prices skyrocketing. Revenue more than doubled, while net income and diluted EPS recorded 4-digit gains. Adjusted EPS and EBITDA both posted triple-digit gains.
Q4 2021 delivered unprecedented revenue, net income, EBITDA and adjusted net income, driven by high TCE rates, which averaged $95,908/day, compared to $68,341/day in Q4 20.
The spot market cooled in Q1 ’22, with an average time charter equivalent “TCE” rate of $62,627/day, compared to $95,908/day in Q4 2021. However, they have started to recover end of February, with the result that the FLNG began obtaining higher and premium long-term charter rates for its vessels.
This should bode well for FLNG’s Q3-Q4 earnings.
Looking ahead, the LNG products market is expected to witness high demand in 2022-2023. There are bottlenecks in Europe, as the whole supply chain has to develop the appropriate infrastructure to manage the different supplies.
The most recent dividend was $0.75, giving FLNG a forward dividend yield of 10.49%, with a trailing yield of 9.27%.
Management appears to be committed to paying a dividend of $0.75/quarter, which may not be covered by earnings in some quarters, but should be covered on average for the year. Management said on the Q1 ’22 call that:
“We prefer to have a stable level of dividend rather than adjusting up and down every quarter. to pay out all of our profits on the cycle.
“We apply a balanced scorecard to assess the appropriate level of dividend. For the first quarter, earnings only received a yellow light, but with a large order book, strong outlook and a very healthy financial situation. , we expect all lights to turn green shortly.”
Management uses adjusted net income to assess its earnings and the sustainability of its dividends:
“Adjusted net income represents earnings before write-off and accelerated amortization of unamortized loan costs, foreign exchange gains/losses and gains/losses on derivative financial instruments held for trading.” (FLNG website)
FLNG’s dividend payout ratio is over 1X on an adjusted EPS basis – a high number.
However, the Adjusted EPS figure also includes a large amount of non-cash amortization. Adding the depreciation of $1.34/share for the last 4 quarters gives a dividend payout ratio of 68.57%:
Profitability and leverage:
FLNG’s ROA is below the shipping industry average, while its ROE is higher, as is its EBITDA margin. Its Debt/Equity leverage is much lower, Its Net Debt/EBITDA leverage
Debt & Liquidity:
In March 2022, management signed a term and revolving credit facility of $375 million, with an accordion option to increase it by $125 million, secured by an additional vessel. The facility will be secured by the Flex Ranger, Flex Rainbow and Flex Endeavor vessels, while Flex Enterprise is a candidate for the accordion option. In April 2022, the Flex Ranger and the Flex Rainbow completed their refinancing, with net cash provided to the company of $11.5 million. (FLNG website)
FLNG’s first lump sum payment will not occur until 2025, when ~$281 million will fall due. 2026 will have a lump sum payment of $257 million due:
Like other energy-related stocks, FLNG has outperformed the market over the month, quarter, year and so far in 2022, seeing mostly positive price gains, relative to price movement negative from the S&P (SPY). It has also outperformed its industry by wide margins during these periods.
With the exception of EV/EBITDA and P/E, FLNG earns above-average valuations for its industry.
Analyst price targets:
At $28.59, FLNG is about 2% above analysts’ mid-price target of $27.94 and 16.6% below the 34-high price target. $.27.
Given its large updated order book, FLNG should have stable and strong earnings in 2022 and beyond, which should support its dividend. However, the shipping industry can be quite volatile, so don’t bet the ranch. We consider FLNG to be a speculative BUY.
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