FLEX LNG Ltd. (NYSE:FLNG) Q1 2022 Earnings Conference Call May 11, 2022 9:00 AM ET
Oystein Kalleklev - Chief Executive Officer
Knut Traaholt - Chief Financial Officer
Conference Call Participants
Climent Molins - Value Investor's Edge
Thank you and welcome everybody to today's Flex LNG webcast. I'm Oystein Kalleklev CEO of Flex LNG Management. And I will once again be joined by our CFO, Knut Traaholt who will talk you through the numbers a bit later in the presentation. As always we will conclude with a Q&A session.
Before we start the presentation, I will remind you of the disclaimer as we will provide some forward-looking statements, use some non-GAAP measures and there are limitations to the completeness of detail we can provide in this webcast. So we recommend that you also review our earnings report.
So okay let's kick off with the highlights and a short summary of them. It's fair to say that while the first quarter has been a fantastic period for cargo owners given the global energy shortage with elevated LNG prices worldwide. It has not been as good for shipowners with ships in the spot market. The spot freight market has been challenging due to the rather rapid shift in trade pattern. The shift in trade pattern started in late 2021, well-ahead of the wall in Ukraine and occurred as European buyers started to mop up the spot cargoes to ensure how they got supply given the low gas inventory levels.
The pull to Europe instead of Asia resulted in a sharp up in sailing distances and thus freeing up more ships in the market. With significant lower activity in the spot market, this adversely affected the earnings on the three index ships as well as approximately 1.5 ship, which we have traded in the spot or short-term TC market during the first quarter.
In any case despite a challenging spot market, we were able to deliver revenues of $74.6 million in line with our guidance presented in February. Revenues were just about $40 million lower than in Q4 last year but it's fair to say that Q4 was exceptionally good given the all-time high spot rates. About half of the decrease in revenues were due to lower earnings on the three ships on variable higher contracts, while the remaining half was due to spot exposure in Q1 for the 1.5 ships mentioned.
Despite softer market, net income came in at a cool $55.8 million or $1.05 per share. A big chunk of the earnings was admittedly related to our portfolio of interest rate derivatives prior to the interest rates going on a bull run due to Fed tightening, we secured the majority of our debt against higher interest rates through interest rate swaps and Knut will give some more details about our hedging strategy a bit later in the presentation.
Adjusted for the big gains on interest rate swaps, earnings per share came in at $0.45 per share. As we guided in our February presentation, I -- and our repeating today we do expect to deliver sequential quarterly improvements in our revenues, which will beef up our cash flow. We have a strong backlog with 98% contract coverage for the next three quarters. So our earnings variability is related to the three ships with variable higher rates. Being exposed to the spot market is, however, affected now given the recovery in spot rates. Dividend for the quarter is $0.75 per share, which gives our shareholders an attractive yield of about 12%.
Lastly as I will explain we are also well-positioned with three ships coming fully open over the next 22 months. And with strong term market interest, we are upbeat about the prospects of recontracting these ships.
Turning to page 4 and our fleet status. As you can see from the slide we are more or less fully covered for the year. The only possible open position is Flex Amber, which could possibly redeliver end of October unless the charter utilized their last one-year extension option. Term charter coverage for Q2 to Q4 is just 98% as explained.
During Q1 we had a couple of ships coming off shorter term time charters and commencing longer time charters. In January and February, Flex Courageous and Flex Resolute was delivered from shorter term contracts and following redelivery, the two ships commenced time charters with a super major. The period for the new time charters are minimum three years with two plus two optional years bringing the period to seven years in total for each ships.
Due to the structure of the time charter for these ships and contracts, we do expect that the charter will eventually declare the full seven-year period.
In February, Flex Freedom was redelivered from a short-term 10 months time charter. After redelivery she was delivered in direct continuation to a super major for a period of five years where the charter has the option to extend the period to also seven years in total.
In February, we also got Flex Aurora redelivered from a 17 months time charter and we fixed her on a short-term flexible time charter of five to seven months, also with a super major and this duration matched exactly with the delivery window for the Cheniere contract commencing in Q3.
Flex Volunteer, which made a killing in the spot market last year, especially in the fourth quarter had a very weak first quarter, as there were very few spot requirements at the start of the year which resulted in significant waiting time for the ship, during this quarter.
We were however able to eventually fix the ship for our short spot voyage and thereafter agree with Cheniere for early delivery of the ship to them about two months ahead of the original schedule in Q3.
Hence, Flex Volunteer thus became the fourth ship to Cheniere with a duration of about 3.7 years, rather than the original 3.5 years. As Cheniere has also utilized the option to add our fifth chip, Flex Aurora will thus be the fifth ship going to Cheniere during Q3 with a minimum period of 3.5 years.
Flex Rainbow is the first ship that will be fully open, in January 2023. In our view, this is a fantastic position, as there are very few modern large ships available prior to 2025. As I will also touch upon later, the term market is very strong, as charters are willing to pay off to secure fuel-efficient tonnage given the elevated LNG prices and the introduction of EEXI and the European emission trading scheme for shipping next year.
Lastly, we have three ships on variable higher contracts, as mentioned this being Flex Artemis on a minimum five-year variable high contract with Cheniere as well as Flex Amber and Flex Enterprise.
The charter of Flex Amber and Flex Enterprise has one additional extension option for each of these two ships. So if the charter utilized these extension options which we think is very likely the ships will come open during Q4 2023 and Q1 2024. As mentioned with regards to Flex Rainbow, we think this provides us with very attractive marketing windows for these ships. As I've already covered our contract portfolio extensively on the previous slide I just want to highlight the development in the charter coverage over the next couple of years.
Most of the backlog is now fixed higher but we also maintain very higher backlog on the three ships which gives us exposure to the spot market which is usually reducing the earnings when we are approaching the winter season. We also do have some ships coming open in this period as mentioned and we look at this more often as an opportunity than a challenge given the very strong term market.
Slide six is our revenue guidance for the year and the numbers are here the same as we presented in February with only difference being that the Q1 numbers are now actual rather than our guidance.
As you can see, we delivered according to the guidance provided. And we are now also guiding about $80 million of revenues in Q2 right in the middle of previous guidance of between 75 and $85 million. As mentioned, Q1 revenues are on the weak side due to our soft spot market.
However, the spot market has bounced back. So we expect to generate higher revenues going forward. We have also covered the gap periods for both Flex Volunteer and Flex Aurora and we are therefore expecting gradual improved revenues in the next couple of quarters. In aggregate this means we still expect revenues for the year to be broadly in line with what we delivered in 2021, despite a bit slow start.
Turning to slide 7 dividends, given our previous communication it should not come as a big surprise that we are sticking to our dividend of $0.75 per share. As we have highlighted in the past, we prefer having a stable dividend level rather than adjusting up and down every quarter.
This means that we sometimes pay out more and sometimes less than earnings, but over the longer term this nets out and we aim to pay out our full earnings over the cycle, as we have also been doing in the past as you can see from this slide. Additionally, we -- given our forward backlog, we also do expect less volatility in earnings than what we have seen in the past.
As we covered in detail in previous webcast, we apply a balanced scorecard to assess the appropriate dividend level. For Q1 the earnings only received a yellow light, but with a large backlog strong outlook and very sound financial position, we expect all the lights to turn green again shortly.
So with that, Knut will now go through the financials, before I return with our market update.
Thank you, Oystein, and let's turn to slide eight and the financial highlights. We delivered revenues just shy of $75 million and within the revenue guidance of $72.5 million to $80 million. This translates into a time charter equivalent of $63,000 per day.
The quarter-on-quarter lower revenues is due to the weaker spot market in the first quarter, impacting our three vessels on variable hire contracts and the performance of Flex Volunteer and Flex Aurora as explained by Oystein. The background for the softer market will be covered more in detail later in the presentation.
The operating expenses was $14.4 million or $12,300 per day in OpEx. For Q1, we have made a one-off accounting adjustment relating to previous periods and this is explained more in detail in the earnings report.
The adjustment had a positive effect of $2.9 million on the operating expenses. Except for this adjustment the operating expenses were higher quarter-on-quarter due to higher number of crew rotations and handovers in Q1 versus Q4.
Crew rotations for the vessels traded in the Pacific are more costly due to the continued severe COVID restrictions and quarantine requirements. In addition, ordering of spares supplies associated services for the full year were expensed in the first quarter, thus this should result in lower operating expenses for the rest of the year.
Our main change this quarter is the gain on derivatives of $31.9 million, which relates to our interest rate derivative portfolio. As a result of increased long-term interest rates, this portfolio has continued to develop positively for us. I will come back and cover more on our interest hedging and derivative portfolio later in the presentation.
In conclusion, net income for the quarter was $56 million and adjusting for the gain on derivatives the adjusted net income was $24 million. This results in earnings per share of $1.05 or adjusted earnings per share of $0.45.
On the next slide for the balance sheet, for the quarter there are no material changes on the balance sheet. The total assets is about $2.6 billion, consisting of our fleet of 13 state-of-the-art LNG vessels with an average age of 2.5 years and with a book value of $2.3 billion, in addition to a cash balance of solid $175 million.
As covered on the next slide, the cash balance will further grow with the completions of the balance sheet optimization program scheduled for Q2. On the liability side the vessels are financed by a diversified mix of leases, ECA financing and traditional bank debt, with the first maturity due in 2025.
We updated our balance sheet optimization program in the fourth-quarter earnings presentation in February. And today we announced that six years $375 million bank facility was signed in April and utilized to refinance the Flex Ranger and the Flex Rainbow in April.
The aggregate $320 million financing for the two 10-year leases for Flex Constellation and Flex Courageous were also signed in April and is scheduled to be concluded tomorrow. This leaves us with a $905 million in book equity and a robust equity ratio of 36%.
On the next slide, we see the cash flow for the quarter and our cash balance at the end of the quarter ended up at $175 million. This is $27 million lower, than last quarter primarily driven by lower cash flow from operations, as explained earlier. Also note, that we pay higher amortizations in Q1 compared to Q4 due to the semiannual repayments under the $629 million ECA facility. This quarter, we did not have any proceeds from the financing. Thus the net of $40 million in dividends the cash balance came in at solid $175 million.
As shown in the graph, the cash balance will grow substantially in Q2, as we finalized the last phase of the balance sheet optimization program. $111 million will be freed up following the conclusion of the Ranger, Rainbow, Constellation and Courageous financing. And in Q3 we will refinance the existing lease for the Flex Endeavor, with her being the third vessel under the $375 million bank facility. As the bank tap amount for this vessel is slightly lower than the existing lease, the net effect is negative $12 million resulting in net cash of $100 million, being released under the balance sheet optimization program, which should be concluded materially tomorrow. The growing cash balance further adds to our already clean and robust balance sheet.
So turning to the next slide, and more on our inset hedging. With the increase in interest rates, we thought it would be good to also provide some insight in our interest rate hedging portfolio. Over the last couple of years, we have built up a derivative portfolio with an aggregate notional amount of $876 million, of plain vanilla interest rate swap. This hedges the floating interest rate risk under our debt financing. With assuring long-term interest rates and the new financing added to our debt funding, we utilized a big drop in the long-term interest rates during the first week of March and secured interest rate swaps of $200 million, with tenders up to 10 years at an average rate of about 1.7%.
In Q1, the derivative portfolio gained about $32 million and we also informed that during April, it gained an additional $16 million due to the rising interest rates. In addition, to the interest rate swap portfolio, the interest rate risk is further hedged through our fixed-rate leases in particular for Flex Endeavour, Flex Enterprise and Flex Volunteer. Despite that the lease of Endeavor, is scheduled to be refinanced in Q3, the two remaining leases provide us with about $290 million of balance sheet hedge due to fixed rate lease.
There is no mark-to-market of the interest on the P&L for these leases. However, the 10-year $160 million for Flex Volunteer, which was done in December last year carrying all-in interest of 4% and provide a very good hedge against rising interest rates. Our hedge ratio, including the fixed-rate leases thus gives us a hedge ratio of 70% over the next years, with an average duration of 4.6 years and an average fixed interest of 1.25% compared to about 3%, for a similar period today our hedge portfolio gives us a good coverage for expected high-interest environment, in the period ahead. So in conclusion, we are quite pleased to see that our conservative interest rate hedging policy and helps pays us off and contributes to maintain the cash flow visibility from our time charter backlog.
And with that I hand it back to you Oystein.
Thank you, Knut. I mentioned that fight against inflation with a higher interest rate. And as Knut has explained, we are well protected against higher interest rates through our derivatives and fixed-rate leases. When it comes to inflation, keep in mind, our asset base consists of Turin Ultra Modern LNG carriers, with higher raw material prices like steel, aluminum, nickel and energy, scarce yard capacity and increasing wage cost -- it should not come at a big surprise that the cost of building a modern LNG carrier, has increased a lot. We bought 11 LNG carriers at the bottom of the new building cycle in 2017 and 2018, which we have now taken delivery of. Similar vessels today are quoted at $225 million by [indiscernible] and they have also been reported newbuilding at closer to $230 million.
In addition, you would have to cover newbuilding supervision costs and bulk costs. Keep in mind these prices are for ships delivery in 2026 as most of the 2025 slots have now been filled. So if you are making this investment, you will have zero income for the next four years and to replicate our fleet you will have to spend about $3 billion. If you then deduct our net debt of around $1.4 billion, you end up with an equity requirement of close to $1.6 billion and this equity will be yielding zero [ph] for the next four years or so. So not only are we well hedged against higher interest rates but our assets also provide our investors with good inflation inspection.
So okay. Then finally turning to the market. In our market section in our February presentation we illustrated the high growth of US LNG exports, with US exports growing $23 million tonnes in 2021, representing 120% of the global market growth that year. The US LNG export growth continued unabated in the first quarter with 4.4 million tons increase or slightly above 20% growth.
Despite the war in Ukraine, Russia has not had any problem finding buyers for the LNG cargoes and managed to grow their exports by 1 million tonnes. LNG exports from Russia is not sanctioned by US and EU, Russian pipeline gas as Europe is heavily reliant on Russian gas. But as I will explain shortly several European countries are now rapidly expanding LNG import capacity to make them less dependent on Russian pipeline gas and this replaces additional long-term LNG demand. This is positive for the LNG shipping market even if more cargoes are going to Europe, as LNG export capacity will also have to be expanded to meet this incremental unexpected growth of the LNG market.
Speaking of LNG demand, on the demand side, as I have touched upon in the highlights, we saw a big pool of cargoes to Europe in the first quarter and this was the main reason for the soft spot market as ton mileage plummeted. While the market grew about 5 million tons of 5% in Q1, the LNG import in Europe grew by a staggering 13 million tonnes in the first quarter compared to last year. The strong demand from European buyers drove European prices above Asian prices and resulted in less LNG available for other markets. Consequently, Asia decreased their import by 6 million tonnes in the first quarter.
Given the high cost of LNG or spot LNG, Asian utilities swapped out spot LNG cargoes by importing more coal as the carbon emission – the cost of carbon emissions are substantially less in Asia than in Europe, if any cost at all. This is certainly not good news for the environment, as the Asian we're not alone in firing up more coal plants. We have also seen a rapid increase in coal consumption in Europe with detrimental effects on the local air quality as well as global warming.
Slide 14 and let's drill down into the U.S. LNG exports. The US LNG exports continue to grow and by end of April, exports were up 21% compared to last year. It's fair to say that almost half of this growth was due to the big freeze in US in February 2021, where exports were curtailed at several liquefaction trends for a short period. This was a freak of nature incident which happily did not occur this year because then LNG prices would have gone even more ballistic.
Hence February exports this year were about two million tonnes higher than last year. The high export growth in US is set to continue during 2022 as two new liquefaction plants with a combined capacity of 15 million tonnes started exports in the first quarter and will thus contribute with further growth.
In our February presentation, we argue that high LNG prices would incentivize exporters to squeeze out every single methane molecule through the liquefaction plants and this was very much the message communicated by Cheniere in the recent earnings call. In our February presentation, we estimated that US would increase the LNG exports by 12 million tonnes this year or 17%. Given the price picture this estimate is probably a bit too conservative as the US Energy Information Administration forecast 25% growth in US exports this year in the recent short-term energy outlook. This means US is set to become the world's largest LNG exporter in 2022.
Turning to slide 15, where we break down where the US cargoes are heading. We've also shown the development cargos destination in our February presentation, where we illustrated that the European market share for US cargoes increased from 15% in July to 75% by January. This trend has continued and Europe so far this year maintained 73% market share of US LNG export, which is very high compared to the past. Such European pool is however not entirely unprecedented.
In 2019, after warmer winter, coupled with the outtake of trade war between US and China, resulting in a cool down of the Chinese economy, we also saw European LNG imports spiking with the European market acting like [indiscernible]. During the first four months of 2019 European LNG import almost doubled. However, the European LNG pool was then due to LNG glut, while we are now experiencing scarcity of LNG with high pricing.
Back in 2019, European imports were also from a broader set of suppliers with the share of US cargoes going to Europe, only at 40%, significantly less than today. In the summer of 2020, following the COVID-19 outtake, European buyer also gobbled up a lot of cheap LNG. But again, this was due to low demand and not high demand, as we see today.
Slide 16 and a closer look at the impact, the shift in trade pattern has had on the freight market. In general, the longer the ships sail, the better for the freight market as the market will then require more ships to ship the cargoes. As Atlantic cargoes have been predominantly shipped to Europe rather than Asia, at least so far this year, the average sailing distance of the LNG fleet has dropped considerably.
From Q4 to Q1, the average distance is down by 15%, which is a really big drop in such a short period. Last year, we saw a big pull to Asia throughout the year with sailing distances improving during the year, starting off at about 4,550 nautical miles and closing in close to 5,000 nautical miles on average by the end of the year. And this goes a long way to explain why the spot market was tight last year, despite all the new buildings being delivered.
With the pull to Europe, average sailing distance dropped to 4,200 nautical miles in the first quarter of this year. This is exactly the same as in first quarter of 2019, when we also experienced a big pull to Europe as I just explained. With cargo pricing still favoring Europe, we do expect sailing businesses to stay lower than last year. But we would expect the trajectory of the average selling business to follow the path from 2019, with gradual increase of sailing business during the year. There is one difference between 2022 and 2019.
In 2019, LNG exports grew by about 35 million tonnes, while we expect around 25 million tonnes this year. Energy aspects are more bullish on growth and forecast LNG export growth of around 30 million tonnes in 2022. In 2022, there are however significantly fewer ships for delivery than in 2019. In 2019, 41 ships were delivered, while the number this year is only 27 ships. So the ratio of LNG cargoes to newbuilding deliveries, are more favorable this year. Hence we do expect LNG freight market to become gradually tighter which is also evident from the term market, which I will cover a bit later in the presentation.
Another factor is that in 2019, as I mentioned, LNG was cheap due to the [indiscernible] of LNG. Today, LNG is very costly. So, this significantly increased the premium which charters can pay for modern ships compared to older ships, i.e. the market has become much more bifurcated than back in 2019. And keep in mind, this is prior to decarbonization rules like EXXI and CIA taking effect next year together with the European emission trading scheme for shipping.
Slide 17 and returning to Europe. European LNG and pass grew a whopping 52% from January to end of April this year. As Europe is trying to cope with its energy crisis, we do see both increase in imports, in all major markets as you can see on the right-hand side here with the key import nation increasing its LNG imports by 43% to 85%.
Italy is the outlier with a growth of only 20% but this is due to Italy now importing very close to their import capacity of around 11 million tonnes higher. This is also why we do see the Italians planning to ramp up their import capacity quickly by adding two FSRUs in addition to expanding the capacity of our onshore regas terminal. Italy is very dependent on Russian pipeline gas imports and have in the past been hesitant to criticize Gremlin, but the Italian Prime Minister, Mario Draghi is now signaling a sharp shift in Italian energy policies something he shares with the German Chancellor, Olaf Scholz.
And the Italian are not alone in expanding import capacity, most European countries are now planning to swiftly add LNG import capacity to wean themselves of reliance on Russian pipeline gas as I will cover on next slide.
Slide 18. With the war in Ukraine and the global energy crunch energy security has staged an comeback. Most European countries are now planning for a future where they will be significantly -- where they will significantly reduce the pipeline gas imports from Russia. Some are even talking about banning it altogether. Hence European countries are therefore planning to substitute these energy imports with increased LNG, as well as expansion of renewable capacity.
In our February presentation we also touched upon this point highlighting that the biggest gas consumer in Europe, Germany does not have a single LNG import terminal. Well not for long. Germany has now woken up to a new energy landscape and are rapidly moving forward with plans to add two or possibly three large LNG import terminal and they have already chartered in four, FRUs with the first import capacity planned to be in operation by early next year.
If Germany wants to replace the gas import from Nord Stream 2 which now seems to be dead in the water with LNG, they will need to import about 40 million tons of LNG. 40 million tonnes are about half of the total European LNG import last year so we are talking big numbers. If EU is to replace all Russian pipeline gas with LNG, this would equate to around 110 million tonnes. This number does not include Turkey which was also a big natural gas importer.
Replacing such a large volume is however not realistic in the short run, but could be achievable by the end of this decade if sufficient new LNG is bought to the market. According to our recent research study, replacing 72 million tonnes of LNG equivalent volume should be feasible by 2030.
Needless to say, there are several LNG projects today competing to fill this gap. In any case the expected growth in European LNG imports require a lot of new regasification capacity i.e. import terminals to be constructed and this is now happening on an unprecedented scale for European utilities and energy companies are soaking up more or less all available FSRUs in order to fast track import projects.
The FSRU market has been extremely challenging in the last five years or so which has resulted in a lot of FSRU instead trading as LNG carriers in order to find employment. By shifting the FSRUs to good use as import terminals these units are taken out of the shipping market and thus adding to shipping demand rather than competing for cargoes.
Slide 19 gives an overview of the contractual obligation that Europe has towards Russia in terms of pipeline gas contracts. These contracts are usually structured as long-term offtake agreements with minimum volumes. In the past, Russia has also sold natural gas to European buyers in the spot market through the electronic sales platform, although spot volume last year were very muted.
In any case Europe including Turkey have contractual obligation to take around 180 Bcm of Russian gas, of this Turkey’s import from Russia was last year close to 30 Bcm. If we leave out Turkey this means 150 Bcm or around 110 million tonnes of LNG equivalent as I mentioned. Some of the existing contracts will expire naturally through roll-offs and chances today are slim for renewal of these contracts, unless the political landscape change dramatically.
There is also a risk that Russians insistence on ruble payment can cause disruption to the Russian imports. This we have already seen happening in Poland and Bulgaria where flows have been halted by Russia as they have not been able to agree on ruble payments for the gas. We have also today seen disruption of Russian pipeline gas to Ukraine and the risk of sanctions could potentially lead to swifter replacement of Russian gas than what is being illustrated in this graph. In any case, this is good for the LNG market.
So where will all this LNG come from? In our February webcast, we illustrated all the export plants now being built and there is a lot of them, but more will be needed now. And since February, two projects have suddenly popped up and been sanctioned with start-up already next year.
We have already seen projects being brought to the market at record time like Altius Pass, which started to export cargoes 29 months after the receiving FID, which is less time than it typically takes to build LNG carrier. The fast LNG project in US and the Congo LNG project run by E&I is however bringing the lead time of export projects down to our unprecedented new level with time to market of around a year or so.
There are currently several projects in North America where we expect final investment decision to be imminent. These are bownfield expansion of Freeport and Corpus Christi as well as the greenfield project Driftwood and wood fiber. Driftwood is a mega project of 27 million tones, but we have included Phase one of 10.4 million tonnes as highly likely.
There are also projects in Middle East and Africa where the front-end engineering and design or feed has already been completed. So these projects are ready to be sanctioned quickly. There are also several more projects doing marketing of offtake agreements or where the equity partners are discussing whether to go ahead with the investment. And this selection of projects could add close to 200 million tonnes of new capacity. Please note that it's not a complete list of all the projects but just a list of the most likely contenders in our view.
So then let's head into a snapshot of the LNG product market. As already covered, European spot prices have been trading at a premium duration spot prices and this is still the case today. Despite Henry Hub being on a bull run this year arbitrage spread to Europe and Asia are still massive.
Most of the Asian buyers are however well covered with contracted LNG. For the most part these volumes are linked to oil, but also some linked to Henry Hub. Hence, Asian buyers in the big import nations like China, Japan and South Korea are not feeling the pinch to a similar extent as European buyers, which are more exposed to spot LNG prices.
The big pull of LNG cargoes to Europe has however started to create logistical issues. In the past the [indiscernible] price which means the delivered price ex-ship in Northwest Europe for LNG has been trading very close to the natural gas price in Netherlands the TTF.
Typically they have been trading within $0.20 to $0.50 spread representing the cost of regasification of the LNG cargo at import terminal. However with armada of LNG ships heading to Europe this year import terminals have been clogging up and these prices have started to deviate substantially and are now at an all-time high level of around $8 per million Btu spread with these quotations ranging from $6 to $11 per million Btu.
Hence, if the pull to Europe continues this spread might very well endure for some time and thus incentivizing either floating storage of cargoes outside of Europe and/or that more cargoes will be heading to other regions like Asia where regas capacity is ample.
We see a somewhat similar picture in UK where prices are much lower than in Continental Europe. UKs problem is not really regas capacity but a lack of storage capacity after the politicians had a great idea of closing down the road underground gas storage site in 2017, which was the biggest storage site in the country.
UK does have a lot less storage capacity than other European peers and also lacks gas and power activities to Continental Europe. While Asian spot prices are lower than in Europe there is still a substantial arbitrage to be made on shipping cargo to this market and with prices coming down from the top level at the end of 2021 and early 2022, we expect to see increased demand from this region.
A quick glance on the forward prices for LNG, given the tight market prices -- given the tight market, prices have stayed elevated and prices have also been volatile, responding quickly to news flow relating to Russian pipeline flows as evident with the news about shutdowns of pipelines in UK in the last day or so.
With European prices at par or premium to Asian prices, cargo owners have been incentivized to ship Atlantic cargoes the shortest route to Europe. The market expects the European premium to endure for some time. But as mentioned on previous slide, the congestion in Europe is creating some bottlenecks.
For illustrative purpose, we have therefore added a red dotted line to the chart where we have put in a $8 spread between TTF and the delivered price for LNG into Europe and assume that this spread lasts for the next 12 months as ramping up import capacity in Europe will take time even for the Germans.
Whether the spread will be $4, $8, $4, or $10 is hard to predict, but at least it illustrates that cargoes might be moving to other places like Asia. If the $8 bottleneck spread stays in place, JKM might very well be priced at premium to deliver price of LNG in Europe and this is also one of the reasons we think sailing distances will gradually increase throughout the year.
We also see increase -- we could also see increased floating storage of ships in Europe. This will not affect upon mileage, but will positively effect on time and thus have a similar effect for the shipping market higher freight demand.
The market expects LNG prices to stay elevated for the foreseeable future. Even in December 24 and December 25, TTF is at $19 and $16 respectively, while JKM is trading at a $1 premium at $20 and $17 for same period. These are levels way above the contracted LNG price, which is converging towards $10. So, about 65% of the market will still receive LNG at a discount to oil and you find these buyers mostly in Asia.
So, with that background on the market, we have in a roundabout way arrive to the cut of the shipping business, freight rates. Let's start reviewing the spot rates. We came from a red hot market in Q4, but with the pool to Europe, the freight market started to soften in early December and then plummeted at the start of the year.
These charter rates are headline rates and as mentioned in the past, it masked the development in ballast bonus condition, which vary with the market sentiment. Right now it's not -- this is not an issue as ballast bonus condition started to improve in late February and were back to full round trip economics by April, where headline rates are then is at a similar level as the time charter equivalent earnings.
Since end of February, we have seen gradual improvement in the spot market. Vessel availability also peaked during end of February and spot rates are now well above the seasonal average as we bottom out about a month earlier than in the past.
One thing worth noting is that most of the ships which have been available in the spot market have been reelect [ph] available only for shorter periods rather than fully open for longer duration. This means it's harder to find a ship for longer periods and this is also one of the reason for the firmness of the term market.
As of today spot rates are hovering at around $80,000 per day, which is pretty decent for this time of the year. The spread between modern two-stroke ships and older four-stroke diesel-electric ships of high fuels, which they often called is today at around $30,000 per day, reflecting that the new ship can carry more cargo, while at the same time consuming considerable less fuel.
Not surprisingly, this spread is a lot wider to inefficient steamships. If we apply this $30,000 spread between tri-fuels and modern tonnage and plot in the forward face rates for tri-fuels, we do see that the freight market is expected to continue to firm up and follow its seasonal pattern.
For us this means higher earnings for our three ships on variable high contract. You could argue this may be XDF spread should be higher than $30000 as LNG prices are in contango with higher future prices at the end of the year than today which should increase the spread.
Then let's jump to slide 24, covering the spot market liquidity. The spot market liquidity in 2019 and 2020 and until summer of 2021 was pretty good with an increasing number of spot fixtures being done. However, with the rush by charters to secure ships on term deals last year the big charters i.e. the traders and portfolio players, have been controlling a greater share of the fleet and this has impacted the spot market with fewer fixtures recently.
And very few fixtures concluded by independent owners like ourselves as the vast majority of fixtures has involved relet i.e. ships that charters control and are reletting out to other charters. This was also one of the reasons for the soft spot market in the first quarter of the year a general lack of liquidity in the market. With the spot market now firming up liquidity has also improved.
Then the final market slide for today with the improvement in the market and expectation for the rest of the year the term market has continued to firm up after a small dip at the start of the year. One year time charter rates for modern tonnage is, now assessed by tonnage to be $138,000 per day while Clarkson is quoting as high as $150,000. The three-year time charter rate is quoted at $118,250 by Affinity while Clarksons is quoting $110,000. This is pretty solid levels which is also why we are a bit about fixing of two ships coming open next year and the one ship coming fully open in 2024.
So with this message I think we can conclude the market section and I'll just have one more slide before concluding today's presentation. Yeah. I'm pleased that we today have also published our fourth annual ESG report. ESG is an integrated part of our business. Our business is to replace dirty coal by clean-burning natural gas, which is not only good for global warming but even more so for the local air quality. We have made our substantial investment in Turin state-of-the-art LNG carriers, which is consuming about half the fuel of our older steamships but which also have a larger cargo capacity thus reducing the carbon footprint for each cargo by close to 60% and we will continue to develop our business with the aim to further bring down emissions.
Like in the past, LNG report is presented according to the Sustainability Accounting Standards Board's guideline where we are applying the marine transportation standard as industry framework. In the report, you will find useful data about the most relevant ESG factors affecting our business. Last year, we also included data for global reporting initiative and we are this year also providing a separate GRI Index. In addition, we will also add the CDP framework to report on climate-related risks to benchmark our effort and performance against relevant peers.
When talking about ESG and the focus is very often mostly on the E environment but we also have on S energy. The social aspect I think we cover well in our report and is related to how we act towards our employees and our business practices. What is often ignored is the G the governance aspect. Shipping is a fiercely competitive industry. We compete globally for freight financing and striking the best new building contracts.
Shipping is one of the most international business where free enterprise and entrepreneurship take center stage. However, there are still, listed shipping companies that are eager to participate in the shipping competition, but who wants to opt-out of the competition for corporate control. Typically you see inside which have captured corporate control to lawyers and bylaws rather than skin in the game. It is not uncommon to see a friendly boss pay generously and where appointment is for a long period with staggered election in order to limit shareholder democracy. Additionally, this company might use unfair business practices like poison pills and other procedural tactics in order to insulate management from shareholder influence.
In Flex LNG, we have none of this. Every shareholder is treated fair and equal. Everyone matters, there is no staggered boss, no voting limitation, no poison pills and every shareholder can raise an issue at AGM or EGM as we care deeply about shareholder rights. Yes we do have a large shareholder in our company with about 46% ownership. But Mr. Frederickson has the best track record in the industry not only in relation to shareholder returns but also when it comes to fair and equal treatment of all shareholders.
Additionally, rest assure our major shareholder also keep us on our edge and has an excellent track record in changing out management teams, which are not delivering satisfactory results for its shareholders.
So with that let's summarize the key takeaways from today's presentation. Revenues as mentioned $74.6 million in line with guidance. Spot market has bounced back and term market remains very firm. We have active ships which we are marketing for 2023 and 2024, where we outpaced about their earnings potential. We are 98% covered for the year.
So we expect incremental better revenue numbers in the next couple of quarters. Dividend $0.75, which gives our shareholders an attractive yield and we have a big cash position 175 million, which we will grow by another $99 million from our balance sheet optimization program. So with that, I think we conclude the presentation and open up for some questions. Nadia maybe you can check if we have some questions on the teleconference before we check whether there are some chat questions.
Thank you. Dear participants, we will now begin the question-and-answer session. [Operator Instructions] We have the first question comes from the phone from Climent Molins from Value Investor's Edge. Please ask your question.
Gentlemen and thank you for this comprehensive presentation. Strength in gas pricing has exacerbated the difference in realized rates between modern XDF or MEGI engines relative to TFDEs and especially to steamers. Could you provide some commentary on where do you see the current spread in performance given prevailing market conditions?
Yes. Thank you for the question. And I guess you are working with J Mintzmyer, who is also in Value Investor's Edged.
I think we touched upon it. We have a graph here on the spot market, where we are showing the rate for modern tonnage quoted slightly above 80,000 in the spot market around 30,000 spread to titers and the spread is due to you are consuming less fuel. And under a time charter fuel is a cost for the charters account as you are consuming part of the cargo as fuel.
And with the high prices today of course the fuel spread is higher. And then additionally, you can carry more cargo and the cargo is pretty valuable today. So we do see this $30,000 spread and on to steam it's even more. It's more than $50000. And if you were to calculate on this theoretically on like a desktop exercise – would probably be even higher. So this a bit dependent on the price of fuel more efficient ships. You have a lower unit freight costs for those ships when you're taking into account the cargo size and the fuel cost. I hope maybe that will explain.
Indeed, that's helpful. Turning to your balance sheet. You have now completed the balance sheet optimization program which further solidifies your already strong balance sheet position. In past conference calls you reverted some commentary regarding where you could potentially allocate these funds? Could you provide an update? And if you were to acquire vessels, which vintage would you offer what kind of vessel would you expect to generate the highest returns?
Yeah. It's a good question. We get a lot of question about why are we piling up such a big chunk of cash. And to be frank it's about also we're getting – as we have de-risked our portfolio through a lot of these longer time charters the terms we are getting from financers have improved. So then it makes financial sense to lock in new financing at better terms for longer durations. But what we are incorporating in one of the bank financing here is to have some more added financial flexibility, by adding a $250 million bullet revolver. So this enabled us to not having to lend all the money at all time, we can repay the loan and draw it back. And this saves us for a lot of financial costs. When we are utilizing the revolver, we're only paying a 0.75% commitment fee per annum to having that liquidity available. So we can kind of improve our cash management profile.
We certainly do have more cash than we need to have. I think this is also to evidence that people can sleep good at night that our dividend is stable given our backlog and our financial resources available. We also like to not necessarily have a lot of cash available, because I do think if we find transactions that could be accretive, we don't mind using the market to kind of vet those transactions by raising capital if needed. So yes, we are a bit long cash right now given how the financial markets are today quite broadly and volatile. I feel that's a good position to have. And our aim is to return all the cash to shareholders. As we have done in the past, we paid as I show on the dividend graph, we have been returning all the earnings as dividend and actually a bit more than that because we have also had some CapEx last year.
In terms of acquisitions, yes we are looking all the time to find accretive deals. I think it's hard to run to the at these days ordering up to 25 to 30, waiting for four years, having debt capital on the balance sheet. So I think you need to find some good deals in order for it to make sense. It also a bit dependent on where our stock is being priced. Recently, we are trading above $30. I think we are below 25% today. So the share price also matter in relation to the accretiveness of acquisitions. When it comes to asset type, we prefer the new ships because we do think a lot of the older ships will not be efficient and they will not be able to meet the future regulation in terms of carbon emissions. So we certainly are not looking for older ships when we are looking at potential acquisitions.
That's very helpful. And certainly having additional flexibility is definitely a positive as you mentioned in the present. Sorry..
Yeah, our corporate name is Flex LNG.
As you mentioned in the presentation, you have a very little number of vessels coming open through the end of 2023, assuming extension options are exercised. Given current market strength, is it a fair assumption to assume these options will effectively be exercised? And if so would that be at a higher rate?
I think we have the two ships coming up in the near term, is two ships where there are valuable higher time charters. So that variable higher time charter is linked to the spot rates. So that's why we're also saying that we think it's likely there will be a big exercise, because the charters is basically going to pay what they will pay in the spot market. So the rates are for such extension would be that you are taking another year with market exposure which we are happy with given the state of the spot market and the outlook.
All right. Thank you for taking my questions. That’s all for me.
Thank you. Dear speakers, there are no further questions over the phone.
Unidentified Company Representative
Okay. I think we have some -- maybe you can say you have your glasses on...
We have two questions from the web. Can you comment on the decreasing OpEx before COVID-19 they used to be around 15,000 per day and now they are much lower?
Yeah. It's -- actually, we have guided in the past OpEx level $13,000 per day. We have delivered on that. Actually, we have been delivering OpEx slightly below that prior to COVID. Last year when we have these COVID challenges and also in 2020 they have been slightly higher. Correct me if I'm wrong, Knut, I believe the OpEx last year was 13,300. So it's -- we are delivering OpEx at the level which we have guided, 13,000. They are slightly higher in Q1 because we have quite a lot of Russian and Ukraine crew. It has been difficult to do crew rotations zero tolerance policies for COVID in China is causing a lot more testing and requirements and longer quarantine of crew rotations. So kind of the COVID challenges two years now, more than two years since we had this problem are still something we have to deal with every day. But in general, we are guiding our OpEx to be at the 13,000 level.
Then we have a question on China and reopening and how that might increase current income expectation for Flex. I assume that would be rate levels and revenues.
Yes. China, of course -- China don't need to buy any spot cargoes this year. China has signed up a lot of new LNG offtake agreements and they did so last year and most of these are linked to oil price. They're also signing up quite a few agreements now in U.S. linked to more Henry Hub basis. So China will be able to source LNG rather cheaply and also to cover all their needs.
So that's why we've also seen some Chinese buyers trying to sell cargoes in the market to the Europeans or people in Latin America. So we're not really dependent of course if China comes back rolling back, I wouldn't rule out that after some COVID quarantines that China will follow the path of U.S. and Europe stimulating their economy with a lot of fiscal stimuli and then also maybe monetary stimuli. And that usually result in demand picking up. And when demand picking up, you need more energy to fuel that demand. So once China comes back, I would expect that to be on steroids and then probably they will be sourcing spot cargoes again and might drive ton mileage and spot rates.
But again, three of our ships are now linked to the spot market the rest are to the -- on fixed rate higher. So it doesn't have a huge impact. But of course, China is the biggest LNG importer. So we hope that China will be able to solve their issues with COVID, go back a bit more to normality like we have done in Europe and U.S. and return to normality also means growing their LNG demand, which they have grown quite a lot in the last 10 years or so.
So that concludes the questions on the web.
I think there's one question here, it's the same question. It's what are we going to do with all the cash? And I think that was the headline of the Pareto research note this morning. I can tell you one thing. We're not going to do stupid things with the cash. Right now we're just going to finish the balance sheet optimization program, get this other $99 million on the account.
We're going to use the revolver to optimize our cash management not paying too much interest to the banks. And then we will just continue returning reduce the dividends to our shareholders. And we might -- we are still looking for opportunities to grow the company, but we won't do stupid acquisition just because we have too much money. We'd rather pay dividends than buying assets at too high prices.
So, I think, that's it. Okay. Thank you everybody for joining today and we will be back in August then with the second quarter presentation. Have a good day.