FLEX LNG Ltd. (FLNG) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. And thank you for standing by. Welcome to today's Flex LNG Second Quarter 2019 Earnings Presentation. [Operator Instructions] I must advise you that this conference is being recorded today Tuesday, the 20th of August 2019. And now I would now like to hand the conference over to your speakers today, Oystein Kalleklev, CEO and the CFO, Harald Gurvin. Please go ahead.

Thank you and hi everyone. Welcome to the second quarter earnings presentation for Flex LNG. My name is Oystein Kalleklev. And I am the CEO of Flex LNG management, and I will guide you through today's presentation together with our CFO, Harald Gurvin, who will run through the numbers a bit later in the presentation. A replay of the webcast will also be available at flexlng.com. Flex LNG is a shipping company focused on the growing market for seaborne transportation of liquefied natural gas and since 17th of June, we've been listed both in Oslo and New York Stock Exchange under the ticker FLNG. So a disclaimer with regards to, among others, forward-looking statement and completeness of details. The full disclosure is available in the presentation, and we recommend that the presentation is read together with the interim financial report and our annual report which all listed on our website. So then let's move on to the highlights for the quarter. In the second quarter, we delivered revenues of $19 million in line with both first quarter 2019 as well as third quarter of 2018. TCE has docked slightly on Q1 on $43,000 per day to $46,000 per day due to less positioning cost resulting in our adjusted EBITDA of $11.5 million compared to $8.7 million in the first quarter. Due to unrealized non-cash mark-to-market loss on the revenue of $2.2 million in the second quarter, the net loss for a quarter was $3.9 million compared to $3.4 million in the first quarter. The first half of the year was negatively impacted by lower transportation demand which adversely impacted freight rate. Utilization and dollar sentiment, a very mild winter and glut of LNG hitting the market in the first half of the year resulted in plummeting spot prices for gas which have been the key drivers for lower than expected shipping demand. And I'll go into more details about these drivers in the market section a bit later in the presentation. The shipping markets have improved gradually with increasing ton-mileage and less availability of ships recently. Hence the outlook for second half of the year is considerably better than the first half. Furthermore, as we are approaching winter season, gas prices are in steep contango not only in the -- due to winter season but also into the next year with summer prices 20:20 for European gas actually at similar levels at this coming winter. With increased shipping demand and improved market conditions, we are also pleased to guide that the third quarter is now booked with expected TCE of around $60,000 per day. This subject to normal operation and uptime of all vessels. Furthermore, we've been very busy on the financing side during the summer executing both the $300 million global sales of the charterback deal Flex Endeavour Flex Enterprise as well as a new $100 million refinancing of Flex Ranger. These two effective refinancings have contributed with around $103 million in increased liquidity as well as longer funding. This gives us a high degree of financial flexibility and a healthy cash buffer in relation to all remaining seven new buildings. Lastly, it's worth mentioning that we are also listed our shares on New York Stock Exchange on 17th of June. So our stocks can always head it on the two most relevant market basis for shipping companies. Next, before turning it over to Harald for the financial numbers, I will briefly touch upon the development of the company. In a period 2017 to 2018, we increased the fleet of this company from two Samsung Ships, FLEX Ranger and Flex Rainbow to now 13 ships. Our ships are our hardware and I'm pleased to say that our hardware is the state of the art. All our ships are large LNG carriers with cargo capacity in excess of 170,000 cubic meters. And they are all fitted with the latest generation; efficient slow speed two stroke propulsion either high-pressure Maggie or low-pressure XDF. Such ships can deliver about 30% larger cargo capacity as about 50% less fuel consumption than the old steam ships, which are now rolling of contracts in the near term. This is also good news for the environment as the carbon footprint of our new ships is significantly lower. However, in order to operate these expenses and sophisticated the hardware you also need the right people, software and quite a lot of financing given the price tag of the ships. When it comes to people, we have during the last year or so actively recruited very experienced management teams. Given the fact that we have the best fleet of LNG carriers around and a vibrant environment in the sea tankers organization which operates about 200 ships, we have been able to [tell] big people for all functions. Our organization is now in the process of taking the ship management in house together with our partner Bama Schuster and this will be executed by fourth quarter. The reason for taking the ship management in-house is primarily that LNG is a complex trade with basically a live cargo which needs to be managed correctly at all times. And it's considered mission-critical by all charter. Secondly, this is force business driven. Our customers are demanding and require first class service 24/7 to ensure safe and reliable transportation. As Flex has the most modern fleet of large and advanced LNG carriers, we think of commitment in involvement will put us in a better position to also secure long-term commitments by charters through long -term employment contract when the time is right. So at least we have our long-term perspective on all assets and all assets have a very long technical and economic life. Case involvement will also ensure better control that our vessels are operated and maintained to the highest standard ensuring competitive total cost of ownership during their lifespan of our vessels. When it comes to the software side of the business, this is related to the systems and processes. During 2018, we moved our management office to Oslo, integrating our staff with older sea tanker affiliated shipping companies like front line Golden Ocean and Ship Finance which have a long experience operating sophisticated ships. Such integration do not only offers cost synergies but also ability to adapt best practices on continuous basis. Lastly, since we have invested around $2.5 billion in these ships, we also need to finance them. During the last three years. We have raised $630 million in new equity on top of the pre-existing paid in cash equity; hence a book value of equity is around $830 million considerably more than the current market cap. In addition, we have secured around $800 million of effective long-term financing for our first six ships as we do in July refinance of a $350 million term loan by two leases, as well as the new $100 million bank loan. This refinancing boosted our liquidity position by more than $100 million and we are thus well capitalized both in terms of equity finance and liquidity. As mentioned, we also recently carried out the direct listing in New York. The company does --due listed in the two most effective capital markets. So now over to you and the numbers are.

Thank you, Oystein. Revenues for the quarter came in at $19 million in line with the first quarter revenues of $19.1 million. Adjusted EBITDA for the quarter was $11.3 million, up from $8.7 million in the first quarter, mainly due to lower voyager expenses due to increase utilization of fleet in a quarter and lower administrative expenses due to costs associated with the US listing in the first quarter, partly offset by increased operating expenses costs due to delivery of Flex Constellation beginning of June. The result for the second quarter also includes a $2.2 million negative non-cash mark-to-market on derivatives relating to interest rate swaps enter into in connection with the financing of the Flex Constellation. Net loss for the quarter including the $2.2 million mark-to-market was $3.9 million compared to net loss of $3.4 million in the previous quarter. Then moving on to our balance sheet for June 30th. Following delivery of Flex Constellation in June, our assets consisted of five vessels on the water with an aggregate book value of $982 million at quarter end. In addition, we have booked vessel purchase through payments of $385 million relating today's vessels under construction which represents advance payments on these. We had a cash position of $26 million at quarter end which is excludes the $270 million available under revolving facility provided by Sterna. Total debt at quarter end was $567 million or which approximately $30 million is due over the next 12-months and as classified as current liabilities. Total equity as per June 30th was $820 million giving a very strong equity ratio of 58%. Looking at our cash flow, the operational cash flow was $9.4 million for the second quarter mainly due to improved utilization of the fleet during quarter and a positive working capital adjustment of $4.7 million. The final payments upon delivery of Flex Constellation was $146 million which was part financed by drawdown of the $125 million tranche under the $250 million bank financing entered into April. With net proceeds $123.5 million of expenses. The net cash flow for the period was negative $19 million mainly due to the delivery Flex Constellation giving a cash position of $26 million at quarter end excluding the $270 million available under Sterna RCF. Post quarter end, we closed the $300 million sales in charterback transaction with Hyundai Glovis, with net cash proceeds of approximately $103 million also prepayment of associated debt and fees giving a current strong liquidity situation. We have entered into several new and attractive long-term financing over the last quarters giving a very comfortable debt maturity profile with the first maturity due in July of 2024. The $300 million sale in charterback transaction with Hyundai Glovis for the 2018 vessels Flex Endeavour and Flex Enterprise was closed in July. Whereby the two vessels were sold for a gross amount of $210 million per vessel with a net consideration of under $50 million per vessel net of $60 million of select credit. The vessels have been charter back from Hyundai Glovis for a period of 10 years with the fixed monthly payment structure giving annuity cash flow profiles as an all-in cost of around 6%. We have several repurchase options during tenure of the charters and at the expiry of the charters in 2029 there is a fixed cost structure at $75 million per vessel, giving a repayment profile of 20 years and age adjusted profile of 21.5 years. The Flex Rainbow is also financed under a 10-year as sale and leaseback structure maturing in 2028. The $157.5 million transaction closed upon delivery of vessels in July 2018, basic interest on LIBOR plus margin of 3.5% per annum and as a repayment profile of 20 years. Flex Constellation and Flex Courageous are financed under $250 million bank facility entered into April this year. The first $125 million transfer is drawn upon delivery of Constellation in June and a second $125 million Trans is scheduled to be drawn upon delivery of Courageous in end of August. The facility has tenure of five years from delivery of the last vessel with the interest at LIBOR plus a margin of 2.35% per annum and as a 20-year repayment profile. Post quarter end, we also enter into $100 million term loan and revolving bank facility for the refinancing of the Flex Ranger, which together with Endeavour and Enterprise was under the $315 million facility. The new facility is divided into $50 million term loan and a $50 million revolving facility giving us flexibility to save interest cost by keeping the revolver undrawn. Although the existing financing within outstanding amount of around $100 million will not mature until 2023, the rationale for the refinancing was to remove certain restricted covenants including the dividend restriction including in the previous facility. In addition, the new facility has a very attractive margin of 2.25% per annum compared to margin of 2.85% under old facility. The facility has tenure of five years giving maturity in 2024 and a 17.9 year repayment profile or 19years age adjusted. None of our financings have requirement for fixed employment giving us flexibility to opportunistically employed vessels as we see fit. Based on the current interest rate levels, the average cash breakeven rate for our financing including operating expenses is also attractive at approximately $50,000 per day. When it comes to funding and capitalization, we are in a comfortable situation as we raise $300 million of fresh equity in October last year and also close the global transaction which freed up around $103 million upon closing. At the quarter end we had $26 million in cash, adjusted for a global transaction and the net cash due on delivery of the remaining newbuildings delivering in August; the pro forma cash balance excluding free cash flow is around $110 million. This excludes the $270 million freely available under the standard revolving facility. Excluding the remaining newbuildings delivering in 2019, we have investment commitments for the remaining seven newbuildings of around $1.3 billion or on an average under $184 million per vessel, which includes the full [rally kit] on three of the vessels as well as newbuildings supervision. We have prepaid a total of $349 nine million of the CapEx representing 20% on two of the vessels at 30% on the five vessels acquired in the fourth quarter of 2018. This leaves us with the $937 million of remaining CapEx for the seven newbuildings equivalent to $134 million per vessel. Adjusted for the pro forma liquidity again excluding the $270 million available on the Sterna revolving facility, the number is $180 million per newbuildings which is well below the recent analysis concluded. Giving the outlook for LNG shipping, we do think we are well capitalized with more than $800 million of equity on our balance sheet. Based on our existing financings, our average cash breakeven is around $50,000 per day. This means we have the potential to generate substantial free cash flow for our vessels going forward. Our TCE rate of $75,000 per day means each vessel can generate $9 million of free cash flow per annum, increasing to $18 million per annum with a TCE rate of $100,000 per day. Right now we have five vessels on the water with an additional vessel delivering in this month. Middle of next year we will have 11 level vessels and finally in the second quarter 2021 we will have taken delivery of the last newbuildings giving a fleet of 13 vessels in operation. This means we are uniquely positioned to generate substantial free cash flow over the next years. And with that I'll hand over back to Oystein who will give an update on the market.

Okay. Thanks Harald. I will now proceed with the update on the freight market to start with the conclusion of the first half of 2019 has been disappointed in terms of trading in sales. It is fair to say that we had higher expectation for 2019 than what have materialized so far. Following the boom in the fourth quarter, the market went through a disruption in the first quarter this year with rates and utilization levels plummeting. The chart to the left illustrate this by development for the three types-- different types of LNG carriers, older steam vessels, 160,000 cubic four-stroke diesel electric vessels and lastly the modern 2 stroke vessels. It is the latter which consists entirely of. Headline rates for low and modern 2 stroke vessels have today rebounded to around $75,000 per day. The key drivers for the softer phase market in the first half of the year were primarily due to three reasons. Firstly and seasonably mild winter not only in Asia but also in Europe due to the El Nino. Secondly, a glut of LNG entering the market pushing down the product prices and thus with harsh economics and cost based in trade. Lastly, our shifting trading pattern favoring shorter halts to Europe instead of Asia. These factors resulted in higher vessel availability and also a less-- and also less need and also a need for repositioning vessels from Pacific into Atlantic during the first half of the year. Headline rates however mark the importance of ballast bonus and utilization. Today ballast bonus conditions are generally more advantageous than in the first half of the year with full hire and full compensation for ballast leg currently. Terms of ballast conditions due to Flex type of shipping availability as illustrated in the chart to the right. Okay. Let's move to the LNG market which is the product we are transporting. After Asian LNG prices peaking at about $12 per million Btu last September, they took throughout the winter season at unprecedented low levels both absolute but more so relative to oil. As explained, the mild winters have reduced heating demand particularly in Asia; softer demand coupled with increased LNG supply means spot price for LNG has slipped. This means a lot of new LNG supply coming out of US and Russia have been picked up by European buyers, which have ancillary gasification and storage capacity, as well as incentives to switch from coal to natural gas given the high carbon prices in Europe as we will illustrate in the next slide. That said only about 15% of traded volume are linked to spot prices while around 70% of traded volumes are linked to oil price with the residual volumes being linked to gas prices like Henry Hub, National Balancing Point or TTF. Hence most of the volumes are not linked to the spot parts of LNG which have implication for cargo destination. While low LNG prices can be negatively short-term due to charters willingness to pay for transportation, low LNG prices per demand and switch from coal to natural gas. However, product prices are not expected to stay at these lowest levels. Forward prices for LNG and gas has a significant premium to spot thereby setting base Contango. Contango is the best plan in town for ship owners and all ships are the preferred types given the favorite [boiler] face cargo size and efficient to stock machinery. When forward prices are higher it also creates storage demand and sometimes this storage is done during transit to other markets by delaying discharge. Right now you can buy gas cheaply on the spot market and sell it at the considerable premium forward. Similar terms by lots of floating storage lot often with more than 30 ships being put into floating storage thereby reduce the availability of ships and sending the freight rate to all-time high. So to illustrate the shift in trading pattern we have on slide 12 a breakdown of US volumes which typically are a bit more fit loose than most other cargos. In the first half of 2018 about 3/4 of US volumes were sold to Asia, which is in line with the market share. In 2019, the volume of US LNG almost doubled while volumes to Asia were flat. As explained earlier, European buyers stepped into the market grabbing almost as much volume as Asian buyers and increasing the purchases of US LNG by our whooping 1,200%. Given the low prices of gas, we also seen buyers in Latin America more than doubling the demand. As the sailing distance from US Gulf to Europe is about half of the distance to the largest import markets in Asia, this shipping cost are less and this is favor on Atlantic centric trading pattern with negative implication for ton mileage i.e. how many ships are needed 10 million ton. With the product price differentials, we do however think demand in Asia for US LNG will pick up in the second half of the year with positive effects on ton mileage and this we have already seen in the data with more cargos being transships out of a Europe to Asia. Next slides give an overview of the various LNG projects competing for green light. This slide from Bloomberg illustrates the most realistic project competing for green light in the near term. As you can see there are plenty of projects particularly in the US, where gas is abundant and cheap due to ranges output of shale oil which has associated gas very suitable for LNG projects .The biggest project here is the $33 million ton Qatar expansion which is expected to receive FID in early 2020 once they -- more prices on EPC and also new ships for the project. The projects marked with blue color are considered likely to get the green light during 2019 and 2020. While the light blue projections, project are considered potential project for 2019 to 2023. As you can see, there is not a lack of potential projects and it's also interesting to see development where more of the projects today are initiated without locking up offtake agreements for the LNG on long-term contracts. Rather projects like Canada LNG and Rovuma LNG initiated without such offtake agreements that either were large international energy and utility companies utilize the balance sheets commit to both financing and offtake similar to how upstream oil project ultimately executed. 2019 is already a very good year when it comes to sanctioning of LNG projects with several projects being sanctioned during the last 12-months as I will illustrate on the next slide. That said the current low gas price, thermal energy markets and trade conflict between US and China are causing delays in project sanctioning compared to the projections 12 to 18 months ago. So if we look at the project which has received FID this year and the ones that are most likely to receive it. We use this slide also in our first quarter presentation in May that there have been some developments with two new projects being sanctioned, and two projects terming off. The base case installed capacity today is 392,000 million tons; another 56 million tons are under construction. These being mostly US projects like Seaport, Cameroon, Elba, Corpus Christi and Sabine Pass Ten 5, which will provide this will go during 2019, 2020 and 2021. So far this year 33 million tons of new volumes have been sanctioned, but preliminary estimates that sanction volumes could approach 100 million tons for 2019. In February, Golden Pass received the green light and there we have seen approval of both Sabine Pass T 6 and Mozambique LNG. The Calcasieu Pass modular greenfield project of 10.8 million tons has secured both financing and offtake for most of the volumes. Additionally, they have secured the environmental permits from FERC and export license from the Department of Energy. So it is expected that this project will receive formal FID shortly. With 5 billion West Canada is finalizing its EPC contracts and it's also expected to announce FID shortly. Novatech have also during the summer announced that it has received full partnership commitment for the Arctic LNG-2 project which is located in the proximity to the Russian Yamal LNG plant. This project is expected to be sanctioned in 2019 which could potentially slip into 2020. The remaining projects of Exxon Rovuma LNG project in Mozambique and Phase 1 one project. The uncertainty is probably highest with regard to these two projects given its project finance nature and lack of firm of tech agreements. Furthermore, this project is competing with a lot of other US project for buyers. Recently the both auto LNG project have made several positive announcements with heads of agreements offtake with both Saudi Aramco and Polish Oil and Gas and this increase the likelihood of this project being sanctioned also in the near term. Given the trade conflict between US and China, it is positive to see US moving forward however without this conflict there would certainly be more project getting green light as the biggest buyer are not eager to enter into financing offtake for the US project. So our link in the LNG value chain is the midstream transportation side. The older book for large LNG vessels is currently 106 ships according to [Indiscernible]. Of these 106 ships, 3 vessels are ice breaking vessels constructed for the Arctic Yamal LNG project. At the end of August when we take delivery of Flex Courageous, we will have six ships on the water. In 2020, we have five newbuildings for delivery and another two for delivery in 2021. In 2020, which we think will be verified, we have verified market there are only 12 uncommitted vessels of which we have five ships. Hence, we control around 40% of this capacity. Although, we have elected not to take long term contract so far, our strategy is not to be focused only on short-term contracts. Our strategy is to focus on the right context as the market is expecting to become tighter and older ships are holding of longer term charters as I will illustrate later, Flex LNG is in good position to secure attractive long-term business. So far we have predominantly focused on spot market, but once the market gets tighter as it's currently becoming, we are open to fix our vessels longer term. Given the high-speed, large cargo size and efficiency of our vessels, they actually fit better on longer-term contract with high level of utilization and long sailing distances easy from US to Asia. Our next slide is ordering activity of LNG carriers in a more historical perspective as the industry woken up to the fact that shipping market will become increasingly tighter, there was a flurry of ordering activity in the second half of 2018 and into 2019. We, FLEX LNG have been ahead of this curve and it's generally with better slots than older owners who also have uncommitted vessels. Ordering activities do however varies depending on new projects coming to the market. And the availability of capital market sentiments and level of attrition which is generally very low in LNG shipping as ships have our long technical and economic life as the cargo is light and non-corrosive. Despite the flurry of orders recently ordering activity is actually low compared to the period 2010 to 2014. That said, we do expect a big uptick in project order soon particularly by the Qatar which wants to secure ships for the 33 million ton expansion which is expected to come on stream by 2024. The large project orders will put pressure on the arc in terms of capacity and limits the availability of slots available to independent ship owners in the coming years. We had a slide in our Q1 report which gives a more in-depth analysis of this for those who are interested. Then we will consider the supply demand side. As mentioned, we had estimate incremental production growth of about 29 million tons in 2019. This is slightly lower than Shell's recent LNG outlook projection of 35 million tons and our last estimate of 33 million tons. The new projection will mainly come from three places namely US with 50 million tons, Australia with 10 million tons and rest of the world including Russia with 4 million tons. US and Russia has far longer sailing distance to the key Asian end-users market than traditional exporter. And the Asian markets represent normally about three quarters of LNG demand. So the million-dollar question is who will be the end user of these volumes as this will have big implications for shipping demand. As explained earlier, a lot of portion of both US and Russian volumes have ended up in Europe reducing the sailing businesses. However, the market have recently become increasingly tighter and we expect demand to outstrip supply for about five ships in 2019 in aggregate and this trend is set to continue into 2020 with only 30 ships, seven ships scheduled for delivery. In 2021, we expect more ships and more recruits to enter the market but this is a period of time when most LNG analysts think the market for LNG will become increasingly tight, which will probably affect trading pattern. And we thought between the basin and increase for relaunch which is supportive of shipping demand. Additionally, approximately 6% of the LNG fleet consists of small, inefficient steam ships with a cargo capacity of below 130,000 cubic. These ships are on average around 30 years old and a lot of them are holding of longer- term contracts as I will illustrate on the next slide. Then let's have a look at the contract structure for the different segments of LNG carriers. The fleet of commercial LNG carrier are today about 500 ships divided into about 200 steam ships, about 204 of diesel electric ships and close to 100 large fifth generation slow speeds 2 stroke LNG carrier. As mentioned, the new ships are much more efficient due to larger cargo capacity and more efficient propulsion system. At the price of $5 per million BTU, which is about the spot price currently, the new ships command the payment of around $30,000 compared to steam ships at $10 per million BTU, this payment goes to $45,000 per day. Please note that only 15% of cargo selling to spot price. So if the gas is consumed during transit during as boiler, it's less cargo to sell at discharge port and this price is more likely closer to $10 than $5. However, the expected observed premium is more likely higher than this due to the fact that newer ships have higher utilization and more of the parcel size being sold today is bigger than what the old steam ships can carry. An additional point is the carbon footprint. More of the energy companies are implementing goals for greenhouse gas reduction. And this can only be accomplished by replacing steam ships with high CO2 emissions, and poor stock diesel electric ships, which have considerably higher CH4 emissions than the new Maggie NXDF vessels. The paradox of LNG shipping is that the most inefficient ships are the ships on long -term contracts while the newest most efficient ships are the one with the lowest level of contract coverage. However, as older steam ships are rolling of 2025 year contracts in the coming year, we expect the charters to replace them by new or modern ships, so this situation will be flicked. This also makes sense when considering that the utilization of charter ships tend to be higher than spot vessel. And it just makes more sense for inefficient ships to take an increasingly higher share of spot cargos. With 94 steam ships and about 64 of these diesel electric vessels rolling off contracts by 2025. There is a big contracting window for ships. We would also expect interest capping activity of older inefficient ships, particularly of ships older than 30 years, which represent as I mentioned about 6% of the fleet. Additionally, there are around 70 ships built before 2000 which are also consider commercially challenging. Okay, I will then try to summarize today's presentation. We delivered revenues of $19 million and slightly higher this year than in first quarter according to our guidance. We're not content with the numbers, but there are reflects the softer than unexpected first half of the year due to reasons explained. Despite continued low gas prices, the shipping markets have gradually improved during the year and the market is now actually quite tight ahead of the winter season. Hence we expect trading results to be significantly better in the second half of the year with expected to see of around $60,000 per day in the third quarter. We are fairly bullish when it comes to the fourth quarter and think charter rate will continue to trend upwards. If Contango in the gas market leads to floating storage and/ or of the arbitrage freight tariffs have considerably move upside. However LNG, it's a long game and we maintain focus on long-term opportunities as well. We remain positive to the near term and long-term outlook due to the compelling drivers for LNG in relation to price, demand and environmental footprint. That gas is competitively priced will create more demand. So longer term, low gas prices will actually be supportive of demand for shipping. During the first half of the year, we have also secured in total $650 million of attractive long-term financing which have boosted our liquidity position. Okay, the financial flexibility enables us to return earnings to shareholders when the bottom line turned black. And lastly, we are well positioned with the most modern fleet of 13 state of the art LNG carrier, which are attractively positions for both improve short term market and longer-term business. So that's it folks. I will get the sound back to the operator, can check if we have any answers, or questions.

[Operator Instructions] And the first question comes from the line of Greg Lewis from BTIG. Please go ahead.

Hello, thank you.

I hope, Greg, you notice I said answer-and-question session. So this is - so I guess you have the answers and I have the questions.

Okay. Hi, guys. So I guess my first question is it seems like the market the LNG spot rates have been more kind of just like grinding higher over the last month. I think if we would look back in previous years, it was a lot more like I guess spiking higher. Just kind of curious what you're seen in the market and why were it looks like we're seeing this more of a like methodical ramp up in pricing as opposed to some of the volatility was seen in past summers when rates started moving higher?

Okay. Yes, I know I share your view. I think you know we had a very good sentiment in April, May where the market turned up very quickly and availability of ships -- so end of May I would say looked very good, however, we had this leg down in the gas prices suddenly over to summer gas prices just collapsed. We had this double whammy of not only you had a mild winter in Asia but that the summer was not as hot either. So at least not before August. And during August temperatures in Japan has been hitting a 40 degree centigrade. So it's starting at least to be become a bit more cooling demand. So you had low heating demand and the beginning of the summer low cooling demand in Asia and Europe it's been quite hot. So the collapse in product prices over to summer also resulted in the shipping demand softening and June July's been fairly flat in terms of freight. While we know see that increased cooling demand and demand from Asia is pushing cargoes into Asia which means highest on mileage JKM been jumping up from around $4 to $4.70 and is trading less ships available and pushing and basically the rates up to around $75,000 per day today. That said, we don't really have that volatility except for maybe our stock price which has been very volatile but when it comes to the trade market, I think the reason why you haven't seen this same kind of volatility is the reload market. There happen to be really been those net backs to switch cargoes to Asia so far at least in a season. And those are the kind of the super profits cargoes. However, that said we have till middle of August last year that the rates went $300,000 per day in the middle of September. So things can happen during the coming month, if you look at the positioning list of available tonnage, that's not really a lot of ships around them particularly not the big ones which are the petrol ships for the US volumes where parcel size tend to be bigger and their hole is longer and there's a lot of US volumes being ramped now with more volumes than [Indiscernible]. People, it's also [Indiscernible] demand so this is kind of creating a positive sentiment in the face market and that the trend is definitely upward in terms of pace and we are also heading into a season where people will start looking more for the Contango type buying the cargo spot and reduce the --increase the level of delayed discharge where people are waiting for this discharge and basically floating storage.

Okay, great. And then just and then just another question I had. You kind of like, it seemed like we're touching on it throughout the earnings call. I mean you mentioned the fact that you were able to get rid of the covenants around the dividend on removal of the debt that had the covenants restricting dividends; you kind of highlighted your cash breakeven, kind of talking about liquidity. As we think about Flex clearly the goal this company is to catch the odd cycle start returning cash to shareholders. But as we think about the timing of that you, this month you'll take delivery of six of your six vessels so you still have some new builds you need to address, financing looks be in place. How is the company today thinking about realizing it's still kind of early days for you guys? How are you guys thinking about dividends and/or buybacks as we sort of move forward or through this the next couple quarters which probably looks like it's going to be fairly attractive?

Yes. I think most people thought maybe 2019 should have been our highest market and we also positioning for 2019 to be fairly a good year for ship owners due to the reasons I explained the market turn out a bit different at least in all areas is heading in the right direction. Also it has been hammered price implicitly as 165 million per ship, which is what bottom I think and I always say if you assume 200 million per ship, the stock price would be almost a double. So, of course, we as you know on the other side, we raised $300 million of equity in October. So we're really not dependent on selling any more stocks and we’ve decided to do our U.S. listing without printing any shares. So we're not really dependent on raising equities. So forth it's more about actually returning equities to shareholders, which are our main focus right now as the price of the stock is, would be interesting. Looking at buying back I think it's a bit early for us, we guided 60,000 earnings in Q3 which case at least positive for shareholders. And then Q4 will be interesting to see. We're very well positioned for Q4 and if rates goes up we’ll of course make, we will aim to make considerably higher TCE in Q4 than Q3. And then we are similar to older sea tanker companies like Frontline, Ship Finance, and Golden Ocean. We have a majority shareholder with a big stake here have around 44%. So, he is also interested in receiving some of the earnings from the company and it's additionally in this system, we have been shareholder family and paid out dividends when we are taking excess cash flow. Right now for 2019, we haven't saved this excess cash flow, however, we have created the cash buffer by utilizing a lot of financing this year, which gives us more than $100 million of cash after delivery of wages, which is a very comfortable situation to be in that you don't have to buy or sell any stocks. You don't have to kind of raise any more liquidity, except of course putting in place financing for the next seven newbuildings.

Thank you so much. And the next question comes from the line of [Indiscernible]. Please go ahead.

Yes, good afternoon. I was wondering given that about 30% of LNG trade goes for the strike of almost if you have witnessed any big inflation in insurance rates?

Inflation in insurance or

In insurance, yes, insurance --

Yes, of course, the insurance premium for going into -- has ballooned, we wouldn't to sail into space of homer except if we want to pick up our cargo, and there is a lot of cargos in that area, always producing around 80 million tons a year. So every day is more or less, of course the vessels picking up cargos in that area, and we are also open to trade into that area, we have a vessel on its way into that --in Qatar these days. However, the insurance payment, every voyage in LNG shipping is a time chart. What it means that -- they take --you offer them the ship but they’ve paid for the car, the insurance, canal duties, port fees, so it's a bit like if you go to -- and you rent a car, you have to take out the insurance. You have to pay for the fuel. So the same concept that is for LNG shipping and in all the inflated insurance payments is of course a cost that the charters have to take into account.

But is it material on the OpEx?

No. I wouldn't say material. No, no. There hasn't been any incident with LNG ships and these ships are running into this in and out of this area typically is around 90 knots. So they're not the easiest target.

And the next question comes from the line of [Indiscernible] Please go ahead.

Hello. Maybe a little bit of a repeat from previous question, but I just wonder if you can elaborate a little bit more on the dynamic that happened last year compared to how the set up is for this October, November time frame. I mean so far the rates are approximately the same or slightly below last year and the ship availability is quite low currently. I mean what is required to get a similar kind of squeeze up? Is that --is it possible to expect or is it unlikely?

I think you are right we are in a fairly similar situation also this heading year has developed very similar to 2018. On balance actually the market is much tighter in 2019 than 2018 because you have much less vessels entering the market. Last year you have more than 50 ships; this year you have -- we expect 39 ships. There are a lot of new volumes in the market. So in a kind of like excel -- exercise the market is much tighter in 2019 and that's why most people also were very bullish on 2019. However, the product prices are lower this year and the kind of the spread between the different bases is a bit slightly less. So, we know --we have decided to go fairly short on the third quarter to have ships available in the fourth quarter. So we think the fourth quarter will be extremely tight on shipping. How high the rate will go is it's hard to predict. There are two factors working against each other. The one factor is that the market is tighter this year. You don't have capacity to have 35 ships in floating storage this season because there are not that many ships around. And then the other factors are the spreads and of course the forward curve is actually not a very good predictor of future prices. And I'll let you forward passes of the paper market then if you look at the forward price for this winter when we were in September you have the high spot prices throughout the season at above $10. And we ended up all the way down to $4 and actually lower in Europe. So and the product prices are you know it's just a guess but the product prices are deeper and it's unheard of that you would have this kind of low prices during winter season because of the heating demand. So we do expect product prices to go up, how far they will go, hard to say, best prediction I guess it's the forward prices but they could go much higher as well. So it will be interesting to see. I think there's a that --this can go --this is the kind of the drivers when we put them together and calculate on it, it should be up highest market but what we also like with the term structure of the gas prices is that you don't really have gas prices peaking up for the winter and then slumping down in 2020, 2020 audit prices in forward market also quite high. So and which it should be. If you look at the gas prices compared to the brand prices, you know historically gas prices have been 14% of brand, one barrel of oil is 5.8 million BTUs so that means 1 million BTUs should be 5.17% of brand. However, gas has usually been at this consequence so the historical price has been 14% in our dock on slide 11 we have this so-called JCC 13% that means the Japanese food cocktail so these are the import prices of light oil to Japan with a 13%. So usually this contact in Asia has been around 12% to 14% of --so right now gases prices are more like 7% of, so that gas prices will pick up that's we are surely comfortable --feel confident about. And we think we'll interesting shipping market going forward.

Thank you. And the next question comes from the line of [Indiscernible]. Please go ahead.

Thanks for taking my question. I had three if that's okay. How much -- can you say how much of Q4 your Q4 capacity has you already locked in pricing on? Second question, how many ships do you think or estimate is already engaged in some form of storage? And the third question was do you think the tender the Qatar is carrying out or reported to be carrying out both of shipyards and also allowing existing ship owners to offer ships into that tender, do you think that will be of interest to many existing ship owners as opposed to just the odds? And if that's something you would consider effectively kind of selling forward capacity and number of phase out.

Okay. Thanks. Okay, let's talk with a few hope and I won't think it give away too many features, heading features but what I can tell you in Q4 we had six ships on a water. We have two ships on what I would call term contract meaning one year or longer. So we have fix ranger lot of with NL, she entered that contract in June. That time operates for that is in 80s, and then we have also announced a one year time charter for our Flex Enterprise which was commenced around April. But she is on market index rate so if Q4 rates go also up or down we are exposed to the spot market for that vessel. So what I can say is we have five vessels then exposed to the spot market for Q4. And we generally decided to go fairly short on the pay rate. We didn't want to sell out all of those [Indiscernible] coverage already have in the summer. So I think we have very good position for Q4. When it comes to your second question, ship storage. We do see some reports that late discharged meaning that the definition there is that the cargo is discharged more than 15 days later than kind of normal schedule. We do see some indications of the late discharge or floating storage standard, it's very minimal. I think most people get this from September onwards. And we have received increased from traders for floating storage but we will see. I think there will be floating storage this season as well. As I mentioned, I don't think you have capacity to take out as many ships and deposit price differential don't incentivize that level of floating storage either. When it comes to the Qatar, so we had a slide on this in Q1 last May, so they have 33 million tons Qatar expansion. Then probably need around 45 ships for that. Qatar is also the 70% owner of Golden Pass and they have this company called Ocean LNG where Qatar is supposed to divide LNG carriers project, it is 15 million tons, it's longer sailing business. So it probably need around 25 ships for that project as well. So then that gets you to 65 ships. And then Qatar is also, they also have -- Qatar in --shipping they have 25 old steam ships which are rolling off contract. If you add those you get to around 95 ships and that's why this number of 60 to 100 ships are circulating in the press. They are in a tender which or they have invited people to express interest for managing the new ships. We would expect them to buy new ships for Qatar expansion and Golden Pass which is this 60-70 ships. What they do with the steam ships is still uncertain. It could be that they are open to get pump ships for those requirements. But I think most of the ships have will be built for the project that they want to have efficient ships for those projects when they are coming mostly in 2024.

Thank you. And the next question comes from the line of [Indiscernible] Please ask and go head.

Hi, good afternoon. So you said that you're implied NAV per ship based on the current market cap is $1.65 million per ship. That's a very important statement. Could you please give us just a bird eye view to as to how you reach this number especially how you treat your SLB ships? Do you consider as part of your NAV and how you reached that number?

I think if you look at most analysts also there's been a flurry of panelists sending out the research report, they said they will conclude on more less the same number, but the math here are fairly simple, it's basically you would have to take the ships you have in your portfolio and the ships and you have to take the enterprise value. So for us it would be today we have around $820 million of equity. We have debt of, if we do this-- if we do this post globe, still we have around $800 million of debt. Then you remove the $100 million of cash. Then you have net interest-bearing debt of $700 million. And then you have to add the remaining CapEx. So the remaining CapEx is $934 million. And then you kind of get what is EV with the remaining CapEx being treated then as a debt. And then of course our market cap is not the book equity. The book equities around 820, I didn't really check stock prices too much today, but it's around $500 million. So if you add $500 million, $700 million and the remaining CapEx $934 million, you get the enterprise value and you divid it by 13 ships and you arrive at around $165 million per ship.

Okay. But when you did the sale and leaseback transaction of these ships aren't they in effect sold? They're not your ships anymore so as a denominator in NAV, yes please go ahead.

Obviously, we would treat it as a financial lease so we put that debt obligation on the balance sheet as ordinary debt. And we depreciate the ships and the reason why we can also do this is the fact that we have purchase options or to say the choice, -- good options so of course for all practical purposes we do intend to buy the ships back. Usually the ships as the [Glovis ships] they have a purchase price of $75 million when they're 10 years old and 11.5 or 10 years after lease whichever or 11.5 years, so it's really likely we would utilize that option to buy them back. And I believe they also have a boost and for the book only is there is also a fixed cost structure at 50% of the $157.5 million which then should be around $78 million when the ships are ten years, so we do expect that all ships will be bought back as either the end of the lease or potentially during the lease because we also have options to buy them back during the life of lease.

All right, thank you. And perhaps one more quick question. Until recently you mostly talked about the strength of spot market and that Flex want to be chartering the ships in the spot market. I believe this is the first time you start talking about long-term contracts. So what changed in last --in your strategy that you are now looking more at long term contract?

It's not really a change in strategy. I think we've been trying to hammer around this year after year but it's not coming through. So I think I have to make a slide on this last time. So what we have decided to do is just place our ships short term while the market is improving. So when we started getting vessels in 2018, it wasn't really a good shipping market until the end of the year. Then in 2019, it's been a bit disappointing first half of the year and it's heating up now. So what you typically would try to do it is to charter your ships on a longer- term contract when the spot price is higher than the period price. So right now of course till the spot prices have rebounded to $75,000, the one year PCE is still higher than the spot price. So what we try to achieve here is to add areas to our backlog once the spot prices go above the period charter and also as we are adding more ships. And it is okay we still operate five big ships in the spot market but next year we get five ships for delivery. And it's a bit more challenging having 11 ships or 13 ships in 2021 exposed to the spot market. So we are gradually building backlog as we are building a fleet. And this is one of the reasons why we also last year decided to integrate or shift management systems. This is not a process that is very quick to do. So by Q4, we expect to have in-house ship management, which makes us better position in terms of securing the longer term employment. So it's always been our strategy to add backlog to the portfolio as we have increased and as the market is becoming tighter with spot prices at higher levels. End of Q&A

Thank you so much. And there are no further questions at the moment. So please go ahead. Speakers, please go ahead.

Okay, doesn't seem to be any more questions. So then I thank you everybody for participating. And wish you continue happy day.

Thank you so much. That does conclude our conference for today. Thank you for participating. You may all disconnect.