FLEX LNG Ltd. (FLNG) Q3 2019 Earnings Report, Transcript and Summary

Thank you. And welcome to the Third Quarter Earnings Presentation for Flex LNG. My name is Oystein Kalleklev, and I’m the CEO of Flex LNG management. Together with our CFO, Harald Gurvin, I will guide you through today’s presentation. And a replay of the webcast will also be available on our web page, flexlng.com. Flex LNG is a shipping company focused on the growing market for seaborne transportation of liquefied natural gas and we are relisted both at Oslo and New York Stock Exchange under the ticker FLNG. First, our disclaimer with regards to, among others, forward-looking statements and completeness of detail. 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 are all available on our webpage. So first of all, I’m pleased to say today’s presentation is packed with highlights. And we have put up a top 10 list of bullet points on this slide. To start with the financials, in the third quarter, we delivered revenues of $29.8 million, which was $10.8 million higher than in the second quarter. Adjusted EBITDA was also up by $10.5 million compared to the previous quarter. TCE increased from $46,300 per day to $48,200 in the third quarter in line with the guidance of approximately $60,000. Please bear in mind that we took delivery of Flex Constellation and Flex Courageous in June and August, respectively. So we just had two ships doing the maiden voyage in this quarter, which is 1/3 of the fleet on the water in the quarter. Maiden voyage for ships not tied to long-term charter are typically done at a discount to market due to the ship lacking certificates and having to positioning from yard. When it comes to financing, we executed $525 million of new loans for the quarter. The financing executed was the newbuilding financing of $125 million for Flex Courageous, which was delivered end of August. As well as the $300 million sale charterback transaction with Hyundai Glovis for Flex Endeavor and Flex Enterprise. And lastly, the $100 million refinancing of Flex Ranger. We are also very pleased to announce that we have secured a very attractive new $629 million debt facility for five of our remaining seven new buildings. This facility is supported by $300 million of commitment from Korea Eximbank through loans and guarantees as well as a syndicate of 11 banks and interest for participation in this facility in the banking market have been very high. Harald will provide more details about the financing later in the presentation. When it comes to the freight market, we have seen a big improvement in the second half of the year, which are [indiscernible] approaching the record levels seen last season. Thus, we are not only able to deliver better third quarter results, but also expect to deliver significantly better results in the fourth quarter. Subject to normal uptime we expect revenues in fourth quarter of approximately $50 million to $55 million. I will go into more details about the market also a bit later in the presentation. When it comes to in-house ship management, Flex LNG Fleet Management received the Document of Compliance, which is basically the license to operate in mid-October, according to our plan. We are all ready to transfer the technical management of the ships to this new management company. Charters have responded positively to our new ship management setup. So we are confident that this will also result in more long-term employment opportunities for our ships. As we are also seeing increased awareness by investors to take a bolder approach in simply financial measures, but also taking into account factors relating to the environment, social and governance. We have also implemented ESG reporting based on the Sustainability Accounting Standard Board’s framework, which I also will come back to. Last point is dividends. With positive financial results, improved outlook and earnings visibility, healthy liquidity situation and financing in place for the 2020 newbuildings, the board has decided to declare a dividend for the third quarter of $0.10, which is in line with the clean earnings per share for the quarter. So the ship management. Getting approval for in-house ship management company is a big milestone. We have put in considerable effort and time and resources to get this in place. And we think this will put the company in a better position to attract longer-term employment. As we have communicated, it is our ambition to gradually build more backlog as the fleet of ships on the water is growing. We have during the last year or so, recruited a very experienced technical team, which has taken off key positions in Flex LNG Fleet Management. The reason for taking ship management in-house are primarily three-fold. First of all, LNG is complex trade, with basically a live cargo, which needs to be managed correctly at all times. And this is considered mission-critical by all charters. Secondly, this is, for us, very much business driven. Our customers are demanding and require first-class service around the clock to ensure safe and reliable transportation. As Flex LNG has the most modern fleet of large and advanced LNG carriers, we think our commitment and involvement will push ourselves in a better position to also secure longer-term commitments by charters to longer-term employment contracts. Thirdly, we have a long-term perspective on our assets, and our assets have a very long technical and economic life. Greater involvement will also ensure better control that our vessels are operated and maintained at all times to the highest standard and showing competitive total cost of ownership during the rather long lifespan of these ships. And lastly, with the fleet of [indiscernible] ships and our ability to take synergies from the sea tankers organization, we have the right scale and organization to do – to take on this endeavor. Lastly, before turning it over to Harald Gurvin for financing and financials. This is related to the all-new ESG reporting. As mentioned in the highlights, more and more investors are today focused on measures not only related to financials. We are very positive to increase awareness about non-financial measures. And these are matter, we as management also keep a very close eye on. More focus on environment. We also think it’s positive, given the fact that our company is focused on transportation of LNG. LNG or natural gas is the cleanest hydrocarbon and offer significant reduction in pollution compared particularly to coal, but also oil products. The CO2 emissions compared to coal are reduced by about 50%, while a 22% to 25% reduction vis-a-vis oil products are also achievable. However, in terms of local pollutants, like SOx, NOx and particulate matter, the reduction in emissions are much higher than this. Additionally, our fleet consists of the newest and most fuel-efficient LNG carriers, which consume about half the fuel as the old steamships, while the cargo capacity is also around 30% bigger than these ships. After reviewing different reporting standards, we have decided to implement the well-recognized Sustainability Accounting Standards Board’s reporting guidelines. The SASB offers the benefit of having reporting guidelines for – in total, 79 different industry, enabling us to support industry relevant measures, which can be benchmarked towards industry players. Furthermore, it identifies material sustainability factors that are likely to improve or impact financial performance. Our ESG report is today available on our website, flexlng.com/esg, and this contains key non-financial numbers related to environment, social issues as well as governance issues. So Harald, with that, we can go to the financials.

Thank you, Oystein. We are pleased to announce that we have secured financing for the five newbuildings delivering in 2020. The facility was substantially subscribed with commitments from KEXIM, and 11 leading international shipping banks, demonstrating our ability to raise financing at very attractive terms. The total facility is $629 million or $125.8 million per vessel. KEXIM will provide a total of $379 million in direct loans and guarantees. And in addition, there is a commercial bank tranche of $250 million. The facility also includes an up-size option of up to $60 million in case of long-term employment, acceptable to the banks. The KEXIM commitment is for up to 12 years. And the commercial bank loan has a term of five years from the delivery of the final vessel scheduled for November 2020. The average repayment profile is 20 years, and the average margin approximately 2.2% per annum over the life of the facility, giving an attractive all-in cost of approximately 5% based on current interest rate levels. The projected breakeven – breakeven rates, including OpEx is also comfortable at $43,000 per day per vessel. As for other financing, there is no requirement for firm employment and the financial covenants are linked to balance sheet. The financing remains subject to final documentation and customary closing conditions and is expected to be drawn on delivery of the relevant vessel. During 2019, we have secured close to $1.3 billion in new financings, of which $525 million was executed in the third quarter. The 10-year $300 million sale and charterback transaction with Hyundai Glovis for Endeavour and Enterprise closed in July. The transaction has six monthly payment structure, giving annuity style cash flow profile at an all-in cost of around 6% and a 20-year repayment profile or 21.5 years age-adjusted. The Flex Rainbow is also financed under a 10-year Asian sale and leaseback structure, maturing in 2028. The $157.5 million transaction closed upon delivery of the vessel in July 2019, base interest of LIBOR plus margin of 3.5% per annum and has a repayment profile of 20 years. Flex Constellation and Flex Courageous are financed under $250 million bank facility entered into in April this year. With a final $125 million tranche was drawn upon delivery of Courageous in end August. The facility has a tenure of five years from delivery of the last vessel, base interest at LIBOR plus margin of 2.35% per annum, and has 20-year repayment profile. In July, we also entered into a $100 million term loan and revolving bank facility for the refinancing of the Flex Ranger, which, together with Endeavor and Enterprise was financed under $315 million facility. The new facility is divided into a $60 million term loan and a $50 million revolving facility, giving us flexibility to save interest cost by keeping the revolver undrawn. The facility has a tenure of five years, and base interest at LIBOR plus margin of 2.25% per annum. The repayment profile is 17.9 years or 19 years age-adjusted. The $60 million revolving part of this facility was undrawn at quarter end. Following these transactions, we have a very comfortable debt maturity profile with the first maturity due in July 2024. With financing secured for the five newbuilding delivering in 2020, we have limited remaining unfunded CapEx for our seven new buildings. The net remaining payment on the five newbuildings in 2020, it’s an average $11 million per vessel, which will be funded from our availability liquidity. The remaining CapEx on the two newbuildings delivering in 2021 is $126 million per vessel which is in line with the recent bank financings we have done and well below the Hyundai Glovis sale and charterback leverage of $150 million per vessel. As mentioned, the $629 million facility also includes an accordion option of up to $10 million per vessel, subject to long-term employment acceptable to the banks. And we may also request to replace two of the 2020 newbuildings with the two newbuildings delivery in 2021 if we enter into [indiscernible] and financing for 2020 vessels. We have previously guided a cash breakeven level for our vessels on the water of around $50,000 per day per vessel, including OpEx. Based on the recent improved financing terms and also lower interest rate levels, the cash breakeven level for the whole fourth quarter 2019 is estimated at just about $48,000 per day. The new $629 million facility has a projected cash breakeven level of approximately $43,000 per day, which is expected to reduce the overall breakeven level once the vessels are delivered in 2020, giving substantial free cash flow potential over the next years. Moving on to the income statement. Revenues for the quarter came in at $29.8 million versus $19 million in the previous quarter. Adjusted EBITDA for the quarter was 28 – $1.8 million an increase of $10.5 million compared to the previous quarter. Administrative expenses in the quarter were impacted by an NYSE listing fee [indiscernible] cost in connection with the U.S. listing and also costs associated with establishing the in-house technical ship management services. The increase in interest expense is due to a full quarter of interest on $125 million tranche drawn upon delivery of Flex Constellation in June and drawdown of the remaining $125 million tranche relating to Courageous in August and also increased leverage due to the refinancing of the vessels, Flex Endeavour and Flex Enterprise with the $300 million sale and charterback transaction with Hyundai Glovis in end July, whereby existing mortgage debt totaling $194 million was repaid. The result for the third quarter also includes $900,000 in negative non-cash mark-to-market on derivatives relating to interest rate swaps compared to $2.2 million negative mark-to-market in the second quarter. We also recorded a non-cash write-off of deferred debt issuance cost of $3.4 million due to the refinancing of the $350 million term loan facility entered into December 2017. The facility was fully repaid in July upon closing of the Hyundai Glovis sale and charterback and drawdown of the new $100 million facility for Flex Ranger. Net income for the quarter including the non-cash write-off of $3.4 million and $900,000 negative mark-to-market was $500,000 compared to a net loss of $3.9 million in the previous quarter. Then moving on to our balance sheet for September 30. Following delivery of Flex Courageous in August, our assets consisted of six vessels on the water with an aggregate book value of $1.16 billion at quarter end. In addition, we have booked vessel purchase prepayments of $349 million relating to the seven newbuildings under construction which represents advanced payment on these. Total debt at quarter end was $737 million, of which approximately $34 million is due over the next 12 months, and thus classified as current liabilities. We had a solid liquidity position at quarter end, including free cash of $56.5 million, $50 million freely available under the new $100 million bank facility and also $270 million available under revolving facility provided by Sterna. Total equity as per quarter end was $821 million, giving a strong equity ratio of 52%. Looking at our cash flow, the operational cash flow was $8.4 million for the second quarter. The final payment upon delivery of Flex Courageous was $145 million which was part financed by drawdown of the final $125 million tranche under the $250 million facility. In addition, we executed the $300 million sale and charterback transaction with Hyundai Glovis and the $100 million refinancing of Flex Ranger bringing total new debt in the quarter to $525 million. At the same time, we have prepaid a full outstanding of $294 million under the $350 million facility. And also repaid the $60 million revolver under $100 million facility. This gave enough cash flow for the quarter of $70 million and cash position of $56.6 million at quarter end. And with that, I hand the word back to Oystein who will give an update on the market.

Thanks, Harald. So let’s move on to talk a bit about the LNG market. And first, we start with the freight market. Freight market generally tends to improve from the autumn due to higher gas demand. Gas demand is again driven by consumers buying increased volume of LNG following cooling season for inventory injection, but also due to increased demand caused by colder weather, as we are getting into the winter months, and thus, creating more heating demand. 2019 has been no different with freight rates evolving according to previous seasonal pattern despite a backdrop of very low gas prices and generally softer demand from Asia than envisioned earlier in the year. Demand in the three large import nations, Japan, China and South Korea have been on the soft side this year. In Japan and South Korea, mostly due to increased nuclear production. China, we expect to deliver around 15% growth in 2019 versus 2018. This is down from the 40% growth in 2018, but still pretty robust despite lower economic growth as well as significantly reduced import in October due to severe weather. It is, however, important to bear in mind that while low LNG prices can be negatively short-term due to charters' willingness to pay for transportation, low LNG prices spur demand and switch from coal to natural gas. We are these days seeing increased demand from price-sensitive markets. This includes Europe, which also has seen both high regas – which also has a high regas and storage capacity as well as increased incentive to switch from coal to gas, given the fairly high carbon prices in Europe. So when it comes to ship availability, our main market thesis this year have been that increased volume, more cargoes flowing into Asia in the second half of the year as well as contango in gas prices will result in gradual buildup of floating storage of LNG. We could add to this mix congestion, which has also played a part so far this season. I will shed some more light on some of these drivers on the following slide. All this means fewer ships available to chase cargoes resulting thus in higher rates, as illustrated on the previous slide. As illustrated by this part, the number of home ships available today is only four ships. And this is for all the three basins being Atlantic, Indian Ocean and Pacific. Four ships is less than 1% of the entire LNG fleet. So we are experiencing a similar tightness seen last year which is supportive of Apex. To illustrate the shift in trading pattern, we have on Slide 15 – Slide 14 provided our breakdown of U.S. volumes from cargo tracker KPLER as these volumes tend to be a bit more footloose than most other cargoes. In first half of 2019, volumes from U.S. to Asia were flat compared to 2018. As explained in last quarterly presentation, European buyers stepped into the market, grabbing the new volumes and buying on aggregate almost as much volume as Asian buyer in the first six months of 2019 from the U.S. As the sailing distances from U.S. Gulf to Europe is about half the distance to the largest import markets in Asia. The shipping costs are less and this has favored this trading pattern with negative implications for tonne mileage multiplier in the first half of year. However, as expected, more cargoes have been heading for Asia in the third quarter given the netback and per tonne [indiscernible] structure in gas prices. This is positive for shipping demand, with trading multiplier bouncing back, although still at lower levels historically. Volumes from U.S. to Asia are now up 15% for 2019. Europe is still absorbing increased number of U.S. cargo, but the growth in European imports from U.S. have tapered off. Given the low prices of gas, we’re also seeing buyers in Latin America and the Middle East, increasing the purchases of U.S. LNG. So during the early part of the year, we have seen a steep contango in the forward gas prices as the spot prices for gas have increased, while – which they normally do when we’re heading into the heating season. This spread have not hold. Furthermore, the realized spot price for winter contracts are now on considerably lower levels than the forward prices implied earlier in the season due to the gluts of LNG now coming online and somewhat softer fuel from Asia to the reasons described earlier. However, with a rapid increase in hedging through derivatives, this means several of cargoes which have been floating or are still floating have probably been already hedged at higher prices than the current spot prices. Keep also in mind that only about 15% of traded volumes are linked to spot prices with another 15% being linked to gas prices like Henry Hub, TTF, which is the Dutch gas hub. The vast majority of volumes, about 70% are linked to the oil price, as it’s being sold on a long-term take agreement with take-or-pay obligations. Hence, these volumes are less sensitive to spot price fluctuations for LNG. That said, the low gas prices have been the primary headwind we have faced in 2019, and we do expect fairly low gas prices also in 2020 due to the amount of new volumes that need to be absorbed by the market. The graph to the right shows a number of ships in floating storage reported by cargo tracker KPLER, and the number and shape are very much in line with last year. However, the peak was reached at a slightly earlier period than last year, and the storage have generally been for shorter period of time compared to last year. It’s also interesting to see that most of the floating storage this year have been in Atlantic, while last season, this was predominantly occurring in the Pacific. Despite fewer ships in floating storage over the last couple of weeks, we have not seen a corresponding number of ships becoming available in the market, which have kept spot rates remarkably stable during the last couple of weeks. With dispute regarding Ukraine pipeline transit for Russian gas still not resolved and deadline 31st of December, we think European buyers might take precaution in securing sufficient gas availability. So we wouldn’t rule out that European floating storage could bounce back in case progress is not made in these negotiations. So when it comes to the order book, we and Flex LNG has been ahead of the curve and already have six ships on the water. Five ships for delivery in 2020 and the remaining for delivery early 2021. Hence, we generally have better slots than other owners with uncommitted vessels. There are 36 ships for delivery in 2020 and with about 25 million tonnes of increased production, we think the shipping market will remain very tight, where the level of tightness will depend on trading pattern, which is, again, influenced by gas prices. It’s also important to keep in mind that while new volumes are supportive of shipping demand, the market for replacing older ships is actually the biggest market. The fleet of conventional LNG carriers, including the 45 large Qatari Q-Flex and Q-Max ships, well exceeds 500 ships. About half of the 200 steamships will come off long-term charters within the next five years, while the number for dual fuel, high fuel ships are about 60. This means that around 160 ships that can be redelivered over this time frame, giving ample opportunity to replace these older ships with more modern ships. The new two-stroke MEGI and X-DF ships are much more efficient due to larger cargo capacity and more efficient propulsion systems. Hence, we do expect that charters to replace these older ships with newer modern ships. So more of the older types will eventually end up in the spot market. This also makes sense when considering that the utilization of charter ships tends to be higher than spot vessels. And it does make more sense for the inefficient ships to take an increasingly larger share of the spot cargoes. Given the high speed, large cargo size and efficacy of our ships – vessels they actually fit better on longer-term contracts, with high level of utilization and long sailing businesses. We would also expect increased capping of all inefficient ships, particularly of the ships older than 12 years, which represents about 6% of the existing fleet. So next cost is illustrating the steady rapid increase of volumes, with cumulative average growth rate, last four years also, in excess of 10% on an annual basis. There are very few shipping segment with this healthy growth rate. Being in a growing market is generally good for shipowners as excess supply typically is a temporary issue. Due to the demand growth resulting in rebalancing of the shipping market quicker than a stagnant market. And typically, without having to go through a long and painful accretion phase. We also expect continued near-term growth with the sanctioned projects coming on stream as illustrated on the right-hand side. We’ll now look – have a look at upstream projects, which create new LNG volumes. 2019 is the best year ever when it comes to project sanctioning. This year, we have seen five large new projects being sanctioned as well as one expansion project related to Sabine Pass. This means about 63 million tonnes of new volumes, and we do also expect Woodfibre LNG to get the green light this year, pushing the number to 65 million tonnes for 2019. Next year, we foresee a similar busy year for project sanctioning, with several projects very likely to go ahead and volumes at par or possibly exceeding the FID numbers for 2019. This, despite low gas prices, as most industry experts expect public markets to become increasingly tighter, given the strong demand growth. In addition to the projects listed here as likely to receive FIDs in 2020 according to Bloomberg New Energy Finance, we will also mention project at Port Arthur in the U.S., which has made several positive announcements with head of agreement and for offtake with both Saudi Aramco and Polish Oil & Gas, which typically increase the likelihood of this project being sanctioned in the near term. So all we have considered historically in near-term growth of the market as well as the abundance of projects being sanctioned and projects under evaluation on their term sanctioning, which replaces the map. The graph to the left illustrate the different growth projections for natural gas from different sources. Most industry expects in this growth rate until 2035 at about 1.5%. McKinsey is one on the low side, with a growth rate of 0.9% on natural gas, while the Sustainable Development Scenario of IEA, with the overall rate of 0.6%, hence even in a case with rapid growth of renewable, you would have more gas as gas is very suitable to balance the intermittency of renewables, dependent on the wind and sun. However, LNG will grow much quicker than natural gas. And more natural gas is expected to cross international borders in the form of LNG rather than natural gas by 2025, also according to Bloomberg. McKinsey, which has one of the lowest projected growth estimates for natural gas, estimates LNG will go on average 8.6% from now until 2035. Compound growth is very strong across, so this means the market should roughly double in size over the next 15 years. This makes us a bit about the outlook for LNG shipping industry longer term. So to summarize, today’s presentation before turning it over for questions. We are very pleased with the progress made in the third quarter. We significantly improved our financial performance and the level of TCE of above $58,000 per day in line with our guidance. Furthermore, we kept growing throughout the year and positioned the company for substantially higher freight rates in the second half of the year as we did expect floating storage would result in a very tight market. Hence, we expect substantially better trading results in the fourth quarter as we are benefiting from higher freight rates in the second half of the year as we did expect floating storage would result in a very tight market. Hence, we expect substantially better trading results in the fourth quarter as we are benefiting from higher freight rates on our spotted as well as the two ships we put on index-linked contracts earlier in the year. During the quarter, we were also very successful in executing and securing large amounts of long-term debt. During this year, we have executed $650 million of debt on our ships on the water, and now secured almost a similar amount for our five next newbuildings. The terms and conditions for these financings are, in our view, very attractive and have become incrementally better as financiers have confidence in our business strategy and tactical execution ability. We are also pleased to have a top-class, in-house ship management in place with license to operate over the next – and over the next couple of months, all our ships will be moved to Flex LNG Fleet Management. With a first-class onshore organization, we are confident we are able to also deliver incremental backlog as our fleet of ships on the water is growing. With the financial flexibility and improved outlook, we are also pleased to announce the first dividend for this company with $0.10 payable for the third quarter, in line with the clean earnings per share. So that’s it, folks. I’ll pass the word back to the operator who will check if we have any questions from the listeners. Also for those people who have question in the chat function of – in the webcast, we would very much prefer those questions to be pretty short. So operator, take it away.

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

So as I think about opportunities for chartering vessels. You kind of made some comments in your prepared remarks about roughly 70% of the fleet being on term charter. As the global fleet, not Flex’s fleet, how should we think about Flex potentially ramping up contract coverage and just some of your comments around having more modern tonnage, which is more probably in demand for time charters with some older vessels going to spot market? I’m just kind of curious if you could kind of talk a little bit more about that in terms of timing? And then just a little follow-up. We’ve seen a lot of operators, not a lot, but enough operators that have newbuilds go out and fix those well before delivery next year, I believe you have five ships getting delivered. Should we think about the potential for those ships to actually be fixed on contracts in advance of their deliveries, just kind of any kind of color you could give around those comments?

Thanks, Greg. It’s questions we receive a lot. So I don’t really have to prepare anything for those questions. What I would say is that, first of all, we have to think where we are and what we have done with this company. It’s basically we have seen that the market will grow very rapidly. We have seen under investments in ship, especially in the period 2016, 2017, early part of 2018. I wouldn’t say 2018 in total, but first half of 2018. That was certainly the case. And then, of course, the reason was a poor freight market, 2014, 2015, 2016, and ordering is typically very pro-cyclical. So we saw that we could get good slots, good, very good prices on the ships, and then there would be demand for those ships when they were coming out now in 2018, 2019, 2020. So we have been kind of in a bit different situation than most shipowners, where we actually just bought the most advanced shift and then having the ability to kind of wait and see a bit and try to kind of find the right contracts for us and also being willing to trade the ships in the spot market. And as long as the company was pretty small, we started off with two ships in the beginning of 2017 and added four ships then, and we added remaining seven in 2018. So as we have been growing, of course, it’s become a much bigger venture. So we do feel that we also need to build incremental backlog. So of course, one way of achieving this is also to build a big organization. So we have been out now, we started this process last year. Actually, how to in-source the ship management process started last summer when we saw that we were paying on all these new ships. We have recruited some very good people. And of course, it’s pretty, I would say, easy to recruit. We have the newest ships. We have a very attractive place to walk in the Seatankers' office – office in Oslo, where we are operating more than 250 ships and 35 newbuildings today. The different shipping companies in this house being Frontline, Golden Ocean, Ship Finance, us and Seatankers. So that means we can attract good people. And then we have invested in people, processes which seems to build our first-class ship management company. So that’s the first step. We have to build some kind of what I see as ability in what you are doing. I think we certainly have a lot of credibility in the financial markets and banks and charters in general, but to kind of build the first class organization to run ships on long-term contracts. Right now, shipping a cargo from U. S. to Asia 50% of the cargo goes to freight. So the kind of the shipping side is a much more bigger factor of the value change in LNG shipping. So that we don’t – step-by-step, we have entered some shorter-term time charters. We announced one with ML which Flex Ranger is serving now. We have announced also index-linked this year where market or oil market was pretty dire in the early part of the year, and we fixed two ships on index in order to get utilization, and also having the opportunity to benefit from a much stronger freight market now. With the kind of the ship management in place with five ships for delivery next year, we do hope that we are able to build more long-term contracts. And I would say of course, somewhere contacts with eight-to seven-year time charter periods of what we are typically looking for. Three of the ships for next year, I would say, we expect those for long-term contracts. They have full relay systems. So we spent another $6 million on each of those three 2020 ships next year to have some features, which is basically very relevant for ships on long-term charters, maybe not so much in the spot market. So our goal and ambition is to build more long-term contract, if there are – if we are able to charter out all the 2020 ships on long-term contract, certainly, we are willing to do that. But we need to see the right structure and the right charter, the right rate. But we do see a fair amount of charters looking for pretty humps requirements. Also in 2020, and people who have the ability to redeliver our old steam ship and replace it with a new ship. So it’s definitely our ambition not to have 11 ships at this time next year in the spot market.

Okay, great. And then just one more follow-up for me, more broad forward thinking. I mean I guess, Arctic to LNG was FID and is moving forward. Now realizing the first gas is not even targeted until 2023, I think, early 2024. Has there been any talk in the markets? Because I’m thinking those vessels might need to be. I guess first question, would those vessels have to be ice class? And just in thinking about that, is that a tender, is that going to be – should we expect that to be a newbuild tender process that sort of surfaces in the market sometime next year? Or is that maybe still a little bit farther out?

Okay. For the Yamal – so Arctic LNG-2 is very close to the existing Yamal. The three Yamal [indiscernible] and fourth will be coming on stream as well, probably next year. It’s a bit smaller thing. And this is in Sabetta. And I think Arctic LNG is just close by. So it’s Yamal 17 million tonnes and then 20 million on Arctic LNG-2. Now here you have a situation where you need to have ice-breaking LNG carriers. So this is the ARC 7. Given the time it takes to build those, you have to get started pretty early. I think the ambition is to build more of these ships in Russia for the Arctic LNG-2 project. So Sabetta yards have made certain agreements with technology transfer with Korean yards to build those there and will certainly be placed tender for those ships. They are not – they are very unique ships, the kind of the first series of Arctic ARC 7 ships, typically, again, cost you see $300 million, $350 million. So those ships are like almost Like a shuttle tanker, you don’t take the cargo in Sabetta, you have the ability to break through ice. And then you can go to Europe, usually. So you go to Europe in the winter period. And during the first half of 2019, a lot of the volumes just stayed in Europe because it was better economic to sell them to European consumers. But the intention has been more to ship those cargoes to Asia. Well, a lot of the [indiscernible] off. And then in, I believe, four months of the summer, you are able to break through Northern sea route, and the intention there is to build a terminal in Kamchatka or also a ship to ship transfer. So the leg from Kamchatka and the lag from Europe will then typically be done on conventional LNG carriers, while these ARC 2 will do the kind of the heavy-duty work shuttling the cargoes out of Sabetta into more hospitable areas for ordinary LNG carriers. And last year, they had a bit lack of this ARC 7 LNG carriers due to volumes coming on quicker than expected and at higher volumes than nameplate. So a lot of the Yamal volumes were transhipped in [indiscernible] north of Norway through conventional LNG carriers and Novatek executed 122 of those last season, and we did 12 of those, which is 10% with our ship Flex Endeavor. So for us, it’s more the focused conventional LNG carrier, but Arctic LNG-2 is positive for LNG carriers, the ordinary type because it create demand for LNG carriers in Europe and then also Kamchatka.

Okay. Perfect, thank you gentlemen very much, for the time.

Thank you. Your next question comes from Peter from [indiscernible] Capital. Please go ahead.

Thank you for taking my question. I just got a minor question in terms of your OpEx. Can you perhaps provide some more color on that, to explain the delta between the quarters? And – because I’m just wondering how you see this developing going forward. I see on Page 6 of the presentation, you used $13K in order to calculate the new breakeven with the new financing. Is this an internal figure you use, a sustainable OpEx levels, like once the fleet is fully delivered? Or how do you think about Flex OpEx going forward? Thank you.

Clearly, you have done your math. I would say that what we have guided there is around $13,000 on OpEx. We’ve achieved a bit better number than this. The kind of the OpEx for Q3 looks very low. But usually, when you get new ships, you can kind of sometimes have a bit lower OpEx in the early months because of what I would call accruals. So that’s one factor why OpEx is slightly low in Q3. And then we also have fuel claim, from time to time, you could have a situation where you have a fuel claim or something like that, and you might have to do a provision. And when you talk to auditor, they usually would like to have a high position as possible. And then when you do, the end result that settlement might be much less. And then you have to reverse the settlement. So that’s also a driver of the OpEx. Then we also see our composition change that we put in our ship management in the quarter, expensed a lot of this kind of costs through the admin. You see admin cost is jumping up within Q3 and maybe some of that cost, which probably better be kind of in the OpEx line. So I think we’ve been given a pretty good estimate of $13,000 on average for our ships. And that’s really the number we would expect to see over time, and there might be quarter-by-quarter differences, especially when you have ships delivering because some of kind of the OpEx out. And it could be on the high side or the low side because the OpEx are not really that kind of gone through when – before you have a shipment kind of ordinary transportation – in ordinary kind of journeys.

That’s very clear. Thank you.

Thank you. There are no further questions at this time. [Operator Instructions]

Okay. I think we have some questions from the audience as on the – on web chat, I have to find my glasses, but we have a question from Santos Gupta. Can you please suggest if a lack of clarity on propulsion system with reference to IMO emission reduction target by 2050 will lead to lower LNG new orders going forward, especially from next year? So – okay. So in relation to emissions. And our one of, I think the big benefits, I’m not sure if everybody noticed it, but there is, this called Poseidon Principle, which is a lot of the big banks have made a club and want to kind of flow them onto kind of the more sustainable shipping companies. And we are one of the benefits for [indiscernible] because we are in a situation now that our ships are burning LNG rather than heavy fuel oil or diesel. And we do this in a very efficient way. We take it basically from the cargo, and we heat a bit of the cargo every day. And of course, that’s good for the environment, not only the CO2, the CO2 is actually 20%, 25% reduction compared to oil. But the local pollution, as I mentioned, the significant higher numbers of reduction. And then you also have the propulsion system itself. So a kind of two-stroke propulsion system gives us thermal efficiency of 50-plus percentage, while a steam propulsion system gives typically a thermal efficiency of 30%, 35%. It could be higher for the new hybrid systems. But that kind of improvement in the thermal efficiency means that kind of all ships are in the front when it comes to fuel economy and also what kind of fuel you utilize. So kind of – if you have the whole merchant fleet shifting to this kind of propulsion system and LNG as fuel, you have done a great [Technical Difficulty] of emissions. And keep in mind that when it comes to transportation, there is no other kind of motorized transportation that comes close to the carbon footprint at shipping when it comes to moving a large parcel of goods from one place to another. So in our sustainability report, which is available on flexlng.com/esg. We have put out some examples on this. And maybe that can give some more light on this question. But these are ships that are much more efficient than in terms of carbon emissions. And this is actually one of the driver where we are optimistic about charting opportunities. A lot of oil companies, energy companies today also are measured on the ability to reduce carbon footprint, and it’s becoming our key kind of incentive part of the package for top management. And in order to achieve reduction in carbon intensity for oil and energy major, they need to switch out the 200 steamship they have on charter with newer ships, because then you can get the ships with 30% larger [indiscernible] which burn about half as much fuel. That means that for every cargo unit you are transporting, you have a kind of fuel reduction of close to 60%. And so if you want to have a 50% reduction of carbon intensity of shipping according to the IMO, you should call us and [indiscernible]. So I think we have one more question asked from Jack. Complements to the great job for the quarter. I have two questions. Why has the company not fixed TCE faster when Bloomberg is already reporting the yearly TCEs ATK, I believe that ATK , the company owns 30K per day, per share. Now the season is at high rates. I think we have discussed our charting strategy already. We are gradually building our backlog. And – but we wanted to be in position for what we have believed would be a very strong and the second half of the year. And then second question is, how is the company positioned to battle in the market in the period from 2020 to 2021, which is expected to be weak? That’s right. We have kind of a tapering off of the liquefaction volumes, I think first half of 2021, you still have pretty good production growth. I would say, we also do expect a tighter product market. So what’s been kind of one of the negative driver this year is the shear amount of new gas coming to the market, and more supply all means lower price unless there is a corresponding high demand. So Europe has been gobbling up a lot of LNG. Since it’s become relative. So what we do expect is that we should be around peak [indiscernible] in terms of LNG. And that’s kind of the product market would start to become tighter somewhere into 2020 probably and then into 2021, 2022, 2023. And there is kind of analysis as well, we get into a very tight product market in this period before, new volumes are being ramped up, I would say, around 2023, and then a new wave of newly extraction capacity coming 2023, 2024, 2025. And these are the 65 million tonnes FIDs this year, it is the FID volumes, especially LNG [indiscernible]. And then it’s all the FIDs that coming next year, where we have a offshowing 90 million tonnes. And just to give you an idea how many ships this is. So 65 million tonnes FIDs in 2019 should mean around 100 ships. So if the nine ships – 90 million tonnes are coming somewhere close to that in 2020 – of FIDs, 90 million tonnes depending on where it comes from. It should be, let’s say, 130 ships. So then you get 230 ships. And then you also have the FID volumes for 2018. So it’s a lot of newer ships that will have to be added to the fleet. We also think that [Technical Difficulty] you would expect that trend 2021 with pretty tight. 2022 could be maybe a bit looser. 2023, you start getting new volumes. But no, it’s something, of course, we are also concerned about them. I think investors are generally concerned about it, and that’s why we – also prices not been performing very well this year, together with the whole sector. So we try to mitigate it by having a kind of a reasonable kind of approach to our charting strategy, being a bit ahead of the curve, which I think has been very much the case this year with regards to positioning ourselves for a stronger future market. So let’s see when we come back with our quarterly numbers for Q4, in February, how we have progressed since then. Okay.

We have one more question by the phone, would you like to take it?

Yes, sure.

Yes. And it comes from the line of Jack Titan from [indiscernible]. Please go ahead.

I think actually, we just went through Jeff’s questions. But Jack, go ahead.

Thank you, for taking one more question. So this final question is about CapEx. So what is the estimated dry dock cost per vessel every five years? And secondly, when you say that your breakeven is $45,000 per day, does it include the maintenance CapEx? And is the maintenance CapEx part of the operating cost? Or it’s separate?

So yes. It’s a good question. Dry docking every five years. We actually have whole thing on some of the ships where you could theoretically do the dry docking often 7.5 years. I – probably not something we would like. So kind of when we are doing our accounting, we are assuming a docking at a five-year, usual kind of CapEx related to our dry docking is around $2.5 million to $3 million for a five-year survey. And then you would have to do a 10-year, 15 years and so on. So the number is around that $2.5 million, $3 million. So – and that would then also ship to dock would be affected and as well as [indiscernible] 2023. When it comes to maintenance CapEx, the OpEx of $13,000 we don’t really have maintenance in the sense you are – if you have like a factory, you shot – shut it down for a month and do maintenance. We have what we would call it, continuous and conditional maintenance. So we are doing this every single day, making sure that the ship is in top performance and operational, to make sure that we can run smoothly. So the whole kind of maintenance CapEx is included in the OpEx number, which we have guided at $13,000 on it.

Thanks a lot, and I wish you best for the future.

Thank you. There are no further questions. Sir, please go ahead.

Yes. I think we just have one more question. We have some on the web. That’s one question, which I will see look today. So I might as well do that before hanging up. And it’s related to dividends. How should we be thinking about dividends? Should have a similar dividend and cetera. So luckily, it’s not for me to decide. It’s the Board that decides the dividends. But what I can tell you is when we are making assessment or recommendation, at least to the Board or management side in relation to dividends, we don’t really look at the charter in installation. We deliver fantastic results end of 2018, but decided not to pay dividends. And the reason for not paying dividends. I would say it was twofold. It was kind of a low visibility. And we also saw that the market softening quite a lot end of 2018. We were then a bit concerned about first half of 2019. And then the second point being the fact that we had a lot of unfunded CapEx and starting to pay a dividend before you have kind of secured financing. It’s a bit not really prudent. So what – the difference this around is the fact that we basically financed all the 2020 newbuildings, and we have some option in the 2020 financing to either also increase the $629 million facility and also swaps. So meaning we could take out a ship and move – the financing and move it to 2021 ship. So we’re really kind of comfortable with the remaining CapEx. We also have done a lot of financing this year, which have increased our cash balance. So ending the quarter with $56 million of free cash and €50 million of our loan range of credit facility plus the turnout. So we have plenty of cash. We have a very good quarter, fantastic quarter next year, and we have more visibility into Q1 than last year because we had one vessel on a good time charter and two on an index. So we are – and then some of the ships we have on spot. We have kind of longer duration into Q1. So it means we have kind of confidence about our kind of visibility into Q1. And with the combination of good numbers, good visibility, a lot of cash funding is basically taken away, we feel it’s comfortable to reward the shareholders with the dividend. I can be frank and say we have talked about buybacks as well because of stockpile is at a level, which makes it much cheaper to buy ships on the stock exchange than from the yard. So – but we think it’s more democratic to pay out dividend, and then shareholders can spend them on Christmas gifts. So new Flex LNG shares. And you can decide yourself. So with that happiest note. I think we call it today, and thank you all lot for listening in. And I wish you a further good day.