Is FLEX LNG A Different-Style Shipping Company?

Summary

• FLEX LNG is an interesting LNG shipping company with modern vessels.
• They have four existing tankers.
• Further nine tankers are under construction, delivery due between 2019 and 2021.
• All vessels are 5th generation with ME-GI/XDF propulsion and 173 400 m3 capacity.
• At the moment, Flex LNG is coming to the NYSE listing.

Data by YCharts

About Flex LNG

Flex LNG (OTCPK:FLXNF) is a growing company with nine new vessels that are to be delivered between 2019 and 2021. The company is controlled by the billionaire John Fredriksen via the Geveran Trading Co. Ltd. and has been listed at the Oslo Stock Exchange since July 2017.

(source: Kepler Cheuvreux)

In total, Flex LNG issued 54,104,390 public-traded shares at the nominal value $0.1 (source: Oslo Stock Exchange). The free float is 47,180,000 shares (source: Financial Times). On the 7th March 2019 the company made a reverse split with ratio 10:1 (10 old shares give 1 new share).

On 7th May Flex LNG has filed a registration statement on Form 20-F with the U.S. Securities and Exchange Commission (the “SEC”) relating to the proposed listing of its ordinary shares on the New York Stock Exchange (the “NYSE”).

Flex LNG started with just two vessels in 2018. In the same year it gained two more vessels, with further two planned to be delivered in 2019. All four newbuilds were ordered in 2017.

(source: VesselsValue)

The first two vessels, Flex Endeavour and Flex Enterprise (Hull 8010 and Hull 8011) are financed via sale-charterback transaction with Hyundai Glovis Co. Ltd. Flex Constellation and Flex Courageous are funded with a bank loan. Cash break-even for all vessels is less than $50,000 on average.

A TCE of $100,000 per day means that each vessel can generate $18 million of free cash flow. This is free cash flow after OpEx, finance expenses and installments as well as general and admin expenses, i.e. money in the bank. Harald Gurvin, CFO (Q4 18 earnings conference call)

Last year they acquired seven vessels. Three with ME-GI and Full Reliquification System and four with XDF propulsion. Five of those vessels will be delivered in 2020 and the last two in 2021. Flex LNG pays 30% of the acquisition price before delivery.

All these vessels are modern LNG carriers with a large parcel size; they are propelled by efficient dual fuel using slow-speed, 2-stroke engines, which results in very compelling fuel economy when compared to older steam and tri-fuel vessels. The purchase price for the vessels was $180 million each with an additional CapEx of $6 million for a full re-liquefaction system for each of the 3 new MEGI vessels.

Øystein M. Kalleklev, CEO (Q4 18 earnings conference call)

The timing is very fortunate as the second phase of the US LNG revolution will probably culminate when these ships are delivered.

(source: EIA)

The differences

There are several reasons why Flex LNG is different from other US-traded companies and partnerships. Some of them are due to the fact that the company was introduced to the market only a few years ago, while others are more of a structural nature.

Flex LNG is a real company, not just a Master Limited Partnership ((MLP)). It is similar to Golar LNG (GLNG) or GasLog (GLOG). This fact is important for two main reasons:

• dividend size
• safety of investment

Dividend paid by a company is smaller than in the case of MLP distribution. Golar LNG pays 2,9% and GasLog pays 3,6%. Currently Flex LNG pays no dividend and it will remain so in the near future. I suppose the dividend can eventually be around 3-8%. This amount would provide a fair passive income and still keeps the price available for possible market gains.

A real company is also a bit safer than a financial vehicle. Both Golar and GasLog have their vehicles – MLPs. Flex LNG has no external entities and the majority investor is on the same boat as all the other investors.

I have nothing against MLPs, I have also invested in two LNG shipping MLPs. As usual, there are positive examples of LNG shipping MLPs like Höegh LP (HMLP) or GasLog LP (GLOP), as well as negative examples like Dynagas LP (DLNG).

Flex LNG CEO said that the MLP financing of the LNG shipping sector is typical for the 2nd generation o vessels, while ROCE (Return on Capital Employed) is typical from the 3rd generation onwards. Moreover, lower leverage - just 50-75% - is used at the moment. That is a very important detail regarding the concept behind the company.

Total debt at year-end was $455 million. (...) Following the $300 million equity raise in October, our total equity as per December 31 was $827 million, giving a very strong equity ratio of 64%.

Harald Gurvin, CFO (Q4 18 earnings conference call)

LNG 3.0 - back to roots

More relevant than the company’s structure, however, is its attitude, which reflects the transformation that the maritime LNG shipping market is currently undergoing. Flex LNG describes itself as 3rd generation maritime LNG shipping company (LNG 3.0). The first generation was characterized by long-term, 20-25 years long contracts financed by banks. The banks funded ship construction and the initial 10 years of the charter. External capital coverage was very high, between 80% and 100%. (source: Flex LNG)

The 2nd generation’s advantages and disadvantages are well known today. It is funded via MLP and preferred stocks. Market growth and the influx of new players lead to the commoditization of LNG, which lead to an increase in short-term and spot contracts and confusion among investors who until that point had been used to a relatively stable environment. Just remember last October when investors first reproached these companies, claiming that long-term contracts deprive them of opportunities to participate in the rising spot prices. Then, however, after the drop of spot prices in the following months, they longed for any contracts longer than a couple of months.

The usual MLP financing has also revealed its weaknesses. Let’ take the example of Dyngas LNG LP (DLNG) – there was gossip about the possibility of a General Partner taking over the partnership and taking it off the stock exchange.

In comparison, LNG 3.0 returns to the roots of stock investment and he price of stock becomes once again an important source of income.

Spot market player

Thanks to the different funding model, Flex LNG can benefit from market changes and favour short-term contracts and the spot market. Management deliberately decided not to take long-term contracts, as they believe there will be better opportunities later.

Portfolio of LNG 3.0 vs. LNG 2.0 (Flex LNG and GasLog LP) (source: Kepler Cheuvreux and GLOP)

In my opinion , this concept presents an interesting alternative to the existing companies.

Financing, shares and insiders

Flex LNG issued new stocks after placing each order for new vessels:

• $329m in 2017, mixed public and private offer (72,434,782 First Private Placement Shares, up to 7,200,000 Offer Shares in the Subsequent Offering to Eligible Shareholders, 78,000,000 Consideration Shares, issued in connection with the First Transaction and 89,479,166 Second Private Placement Shares)
• $300m in 2018in private placement to institutional investors (172,938,947 Shares, issued in a Private Placement)

Data by YCharts

Insiders

Two out of four top managers and all directors from the Board own Flex LNG shares.

Name	Position	Number of Shares	Options
Øystein M. Kalleklev	CEO	10,000	for 60,000 stocks @ $14.3
Harald Gurvin	CFO	5,000	for 30,000 stocks @ $17.6
Halfdan Marius Foss	Head of Commerical and Operations	no data	for 45,000 stocks
David McManus	Chairman of the Board	89,984	no data
Marius Hermansen	Director	6,169	no data
Ola Lorentzon	Director	2,159	no data
Nikolai Grigoriev	Director	5,994	no data

Click to enlarge

(source: Oslo Stock Exchange, table author)

Conclusion

Is Flex LNG a different-style shipping company? The answer to this question is "Yes". Flex LNG is an interesting company with a fresh perspective of the LNG shipping industry. It uses most modern vessels, behave opportunistically on changing market needs lower leverage and regard price of stock as important worth for its investors. I hope the listing will happen and I can add the company to my UP LNG Shipping Index.

Disclosure: I am/we are long GMLP, DLNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.