FLEX LNG Ltd. (FLNG) Q1 2024 Earnings Report, Transcript and Summary

[Call Starts Abruptly] Management and I will be joined by my colleague, Knut Traaholt, our CFO, who will run you through the numbers a bit later in the presentation. We are doing this presentation live from Nydalen, Oslo, and following the presentation we will do our Q&A session, where you can ask questions with the chat function or send the email to ir@flexlng.com. And as usual, we have some nice gifts for you, for the best question. The best question wins the Flex LNG Summer kit, consisting of, of course, our caps, the Flex and the city sunglasses, both in pink and black. We have a water bottle, so you can hydrate. This nice Flex, Just Flex It T-shirt, running shirt, I was using it yesterday and with sunny Oslo now 26 degrees, it's also nice to have some sunscreen, Flex on the Beach sunscreen, and we also have a big Flex on the Beach bathing towel here. So hope you can provide some good questions. That's the most fun part of this presentation. So before beginning, I just going to remind you about our disclaimer. We will be providing some forward-looking statements, some non-GAAP measures and they are limit to completeness of detail. So we also recommend you to read our earnings report published today as well. Okay. Let's kick off the highlights numbers very much in line with what we have guided. Revenues came in at $90.2 million, which was, as mentioned in line with guidance of approximately $90 million. Our net income and adjusted net income came in at $33.2 million and $37.9 million, respectively, giving our earnings per share and adjusted earnings per share of $0.62 or $0.70, respectively here. Knut will give you some more details on these numbers. It's basically in our adjusted numbers. We only take in the realized gains and losses on interest rate derivatives, while in the net income and earnings per share, we take in both. Recent events, we have added quite a lot of backlog so far this year. First, we announced extension of two ships with a super major. This is Flex Resolute, Flex Courageous. They have been now doing about two years of the three-year period they were fixed for. This contract is three, plus two, plus two years. And the charters have now in February and March, announced that they will extend those contracts from end of Q1 '25 to end of Q1 '27. And there is a further option here until Q1 2029, which we do expect will be utilized. Additionally, Cheniere, which have charter, Flex Endeavour for getting close to three years, actually slightly more than three years. They extended this contract, which has been extended also in the past, extending this contract now by 500 days, from Q3 2030 to Q1 2032. So this is now the second longest contract we have in our portfolio. And lastly, we also have secured a contract for Flex Constellation, a new contract. This is the ship you saw the picture of the funnel on the front page. We had this ship on close to three-year contract starting in '21. She was redelivered in March from that charter. We took her into a drydock and traded her spot, and we were able to find 10 months firm charter beginning in May, and which takes this ship until end of Q1 2025, where also the charter has the option to take that ship until 2026. As we have said in the past, which we also said in our Q4 presentation back in February, we were a bit cautious in terms of the market. There's a lot of ships for delivery this year, while the number of molecules coming to the market is on the low side. So the balance looks a bit in favor of charters rather than owners. And we therefore are very happy to find a good contract for Flex Constellation, taking her out of the spot market for this year. This year, we have two drydockings, the sister ships Constellation and Courageous, as I mentioned, we took Constellation into dock end of March, finalized that according to plan and budget, and now we have her sister ship, Flex Courageous doing a similar exercise. She is out of dock and we are doing the final modification and expect to have the ship back in operation and back on TC end of May. Q2 is the softest quarter due to the seasonality, so we do expect our Time Charter equivalent earnings to be reduced slightly in Q2, which has been the norm since we started this company. We expect these average rates to be around $72,000 to $74,000, as we do have one ship on variable higher charter, and we also had Constellation exposed to the spot market for a short period of time in Q2. Thus, revenues with two ships out of drydocking and the spot market as mentioned, we expect revenues to be close to $85 million for Q2. Once again, the Board is pleased to announce $0.75 per share dividend for the quarter. We have changed a bit how we are paying out the dividend. We are paying it out from contributed surplus, which might have an effect from some of our shareholders in terms of dividend taxation, this depends on where you are investing from. It means that now the last four quarters we paid out a dividend of $3.125 per share, implying a yield of around 11%. The stock was up a bit here in Oslo this morning. It's now up about 1%. However, liquidity in the Norwegian market is fairly limited, as most people investing in this company is doing that in US, and US is yet to open up, it opens up now in 25 minutes and we will see how the market reacts. In any case, we are in a very strong financial position. We have added more contract backlog than we have consumed this year, and these factors all support our dividend capacity, and I will come back to the dividend in more detail shortly. Just to touch upon the guiding. As mentioned, we delivered $90.2 million. We guided the revenues of around $90 million. Adjusted EBITDA came in slightly higher than the guiding. We guided approximately $70 million, delivered $70.6 million, and also the TC in line with guidance. As mentioned, Q2 is the softest quarter. We also have two ships in drydock for this quarter, so we expect slightly lower revenues and adjusted EBITDA for that quarter. And then typically in Q3, we will have all ships back in operation. That tend to be a better quarter impacting the ship we have on a variable higher, and usually Q4 is the strongest quarter as we are heading into the winter season, where demand is peaking. Two ships in drydock and both of these are according to schedule and budgets. We expect the CapEx related to this drydocking to be around $5 million and that $5 million will then be depreciated over the five-year docking cycle, about $1 million a year in depreciation from this drydocking. Having a look at the ships, Constellation here on the left-hand side and then Courageous, when she was in dock. She is now berthed alongside Kai, on the yard, where we are doing the final preparation to take her out to sea and back on TC end of May. Looking at our fleet portfolio today, we are still at 50 years of minimum charter backlog. There is a couple of options attached here. We do expect most of the options to be declared, which will then bring the charter backlog closer probably to 69 years than the 50 years minimum. As you can see, we have ships coming off in 2033 and they were recently extended to 2032. Vigilant last year was extended to 2031. We have two ships with a supermajor maturing 2029. We have Freedom, also with a supermajor maturing in '27. But where the charter has the option to extend that ship to '29. Resolute and Courageous, recently, as I mentioned, extended from Q1 '25 to Q1 '27, and there they also have one option which we expect to be declared, taking those ships to 2029. Cheniere also have two ships more. They have Endeavour and Vigilant. They have Volunteer and Aurora, where firm period is to Q1 '26, where they have an option to take those ships to '28. And then Cheniere also have a fifth ships, Flex Ranger, which was extended in November 2022 until end of Q1 2027. So that's, except for Constellation, that's the first fully open ship we have. Flex Constellation as mentioned, she had a docking stay. She was in a short period of time in the spot market. She's now on a 10-month charter, where the charter has the option to extend that contract until end of Q1 2026. So a lot of coverage, 100% covered for this year. And then we have one ship on a variable higher charter, where that higher is linked to the spot market that is firm until Q3 2025. But here the charter has five single options until Q3 2030, and given the fact they are paying market rate for the freight and they lose the remaining options if they are not declaring the first option. We would expect at least a couple of these options to be declared. So that backlog. Of course, together with our sound financial position, creates a good environment for paying good dividends. Once again, we are paying the regular $0.75 per share, approximately $40 million. The last 12 quarters, now or three years, we have paid out $510 million in dividends and counting, as we have illustrated here on the slide. So just before handing over to Knut and the financials, just the kind of key decision criteria for the dividend as we have covered also in the past. We have become a bit color-blind on green lights. Last presentation back in February, I believe it was the 7th February, we warned that we had a bit cautious outlook on the spot market, but having such a number of green lights, we forgot to take down the market outlook to yellow. We have taken it down to yellow now, given that the fact that there are numerous ships in the spot market and a bit soft spot market is dragging down the front end of the term rate curve, except for that our earnings and cash flow are strong. We have been growing the backlog, increasing the earnings visibility by these new contracts. This year we have a lot of cash, $383 million that Knut will cover. Flying colors on all the covenants, no debt maturities before '28. CapEx liabilities are zero. We don't have ships under construction, so CapEx liabilities are only related to the ships that we are drydocking, and we have done more or less the drydockings for this year. So with that, I give it to you, Knut.

Thank you, Oystein. So let's have a look at the financial highlights for the quarter. Revenues in the first quarter came in at $90.2 million or that calculates to a Time Charter per day of $76,500. So the lower numbers for the first quarter versus the fourth quarter, that's explained by the seasonal softer spot market impacting the revenues from Flex Artemis as well as some off-hire days for Flex Constellations, while she entered drydocking. Operating expenses in the first quarter is lower, at $16.7 million, and the reduction is explained by timing effects of when we expense certain operating expenses. As you may recall, in the fourth quarter we had a number of swing sets expensed on our fleet, while we had zero in the first quarter. So operating expenses will be a bit lumpy in between quarters, but we stick to our guidance of OpEx per day of $14,900 for the full year. Interest expenses during the quarter is fairly flat quarter-on-quarter. But as you see on the gain on derivatives, in the first quarter, we booked a net gain of $7.3 million. That includes $700,000 in unrealized gains and $6.6 million in realized gains. During the quarter, we have also amended one of our interest rate swap. We have reduced the duration of a $50 million interest rate swap and thereby we have received a cash proceed of $5 million. Now we'll come back to that later. That results in net income for the quarter of $33.2 million or $0.62 per share. If we look at the adjusted numbers, here we adjust out unrealized gains of both interest rate derivatives and from foreign currencies. So we strip out $700,000 for the interest rate derivatives, and also the FX loss of $400,000. And then we add back the $5 million we received from the amendment of the interest rate derivative, where we reduced the tenure of that swap to July 2025. And that gives us an adjusted net income of $37 million -- $37.9 million or $0.70 per share. If we look at the cash flow for the quarter, we received $49 million from operations. Now, we have slightly higher net working capital as we have prepayments in relation to the two drydockings that we have. $26 million in amortizations of our debt, and as we note here, if we compare the depreciation of our fleet versus the amortizations, we pay $7.5 million more to reduce our debt. And here again the $5 million from the termination of the swap and we paid out $40 million in dividends, giving us an end-of-quarter cash balance of $383 million. If we look at our funding portfolio, there are no changes to our debt position except for scheduled amortizations. And as we highlight here, the split of financing between leases and term loans and also the geographically diversified providers of this both from the US, Europe, and Asia. And in this structure, we have the $400 million revolving credit facility, which we then use for cash management optimization during this high interest rate environment. And when we have $383 million in available cash, we repay our RCF during the quarters to save interest rate cost. A reminder that our first maturity on a loan portfolio is in 2028. And if we then revert to our interest rate hedging portfolio, which comprised of the interest rate derivatives, which has a book value today of $45 million and in addition we have fixed rate leases, elements of that of nearly $200 million. That gives us a sound hedge ratio in this high-interest rate environment. As I mentioned that during the first quarter, we reduced the duration of a $50 million swap giving us $5 million in cash proceeds and post quarter in the second quarter we did a similar one for another $50 million, which will -- which gave us a $5.4 million cash proceeds that you will see in the next quarter. Today, we also released our Sixth Annual ESG Report for 2023, which -- where we explained more about our initiatives for reducing emissions and how we deal with our environmental footprint, business ethics, and code of conduct, and also self-health and safety for our seafarers and offshore -- onshore personnel. One of the key highlights here is our 7% reduced emissions compared to 2022. And also this report should be read in conjunction with our CDP reporting, which we announced last quarter where we had a -- received a B rating improved from B- in 2022. So that concludes the financial sections and back to you, Oystein.

Okay, great. Thanks. Yeah, let's look at the market. Best way to start looking at the market is to look at export and imports. As you can see here on the left-hand side of the graph, there are three major exporters of LNG, with US now becoming the largest one, 29 million tons in the first four months of the year. Australia and Qatar neck on neck, both of them 28. So those three countries are the major exporters. Despite Russia and sanctions on Russia, there's really not any widespread sanctions on Russian LNG, although there are Russian, sanctions on the new project from Russia Arctic LNG 2, which I will cover more. But despite this, Russia is still growing and maintaining the fourth largest exporter of LNG. Malaysia the fifth and then there's a lot of other countries in the other bracket, including Norway. On the import side, we have seen a mark shift this year in where the cargos are flowing. Europe entered storage levels at a very high level, and have been lucky two winters in a row in terms of the winter temperatures and thus the gas requirements. And with ample storage levels in Europe. Europe has been pulling back from the market, and which has also sent prices down to very competitive levels. And this has opened up a lot of demand in Asia and especially emerging Asia. China, despite somewhat disappointing growth in China after scrapping off the COVID policies a bit more than a year ago, they're growing very healthy, 15% up and have become once again the biggest importer. Japan flat together with South Korea and also Taiwan, which are the more mature Asian economies. India, a lot of economic growth in India and optimism about India lately growing at the same pace as China at 15%. And then as you can see, the highest growth actually is in the other package, which includes a lot of emerging Asian economies, up 28% there. The biggest outlier I would say is Thailand, growing this year, 1 million tons, up 25%. And Thailand actually also grew 25%, the full year last year. So we do see that the prices are spurring demand in Asia, which I will cover on the next slide here. You do see the graph of the price of LNG come down a lot. August 2022 was the peak, when the European gas prices hit $100 per million BTU, on par with $600 per barrel of oil. Today, we are stabilizing around $11, $12 for both the LNG in Europe or the gas price in Europe TTF and then the JKM, which is the Asian spot prices, where we actually now see a situation where spot LNG is cheaper than contracted LNG. So about approximately one-third of this market is spot market, where people are contracting the LNG on a spot basis, while the other part of the market is contracted, the LNG, which is typically priced towards oil prices at discount to oil of around 20%. Henry Hub is flatlined at around $2, which makes it very profitable for US exporter to export natural gas out of US to international markets. And I would say as Stephen in Bloomberg had covered in our article recently in Bloomberg, these prices are spurring demand in Asia. And, of course, it has a huge impact on this price drop, especially as I will cover in Europe, which is very dependent on spot prices. When they fall, the importers basically get a lot more LNG for their money and it's almost like a tax relief. So just to give some more details, European LNG imports lagging as I mentioned, 20% behind last year because of the ample storage levels, demand subversion, although we do see some green shoots in terms of demand coming back in Europe with these prices and then also some more contribution from renewables. While in Asia, we see much higher demand than last year and in the high range of the last couple of years. I mentioned Europe, the region the most dependent on spot cargoes. Natural gas storage levels came out very high into this winter. Out of the season, we are around 67% full storage level now when we have started the injection season. And the target for you is that you want to get to 90% fully storage level by end of November. And I do think we will be on track to meet that target. But as I said, Europe is very dependent on spot cargoes. And for some -- the last couple of years now been the buyer of first and last resort, now they are pulling a bit back from the market. They're leaving room for emerging markets. And as we have said in the past, Europe's energy policy is a bit like Jon Bon Jovi song. It's living on a prayer, hoping that the weather will be good. And if not, they have to be paying off in order to entice those cargoes to go to Europe rather than Asia, which also means that when you see on contracting of new LNG, it's not, it's some of the rather the European superpowers signing up for flexible portfolio contracts. This being ENI, Shell, Total, Equinor, buying flexible LNG from especially US, where they can trade that worldwide as there is so much political uncertainty about the regulatory framework for natural gas in Europe, when you have a 20-year horizon. Looking at bottlenecks, it's been a lot in the media lately, most recently with the Suez Canal. So traffic through Suez has been very limited, more or less non-existing this year after the Houthi rebellions started targeting marine traffic. And we do see Qatar have started to divert cargoes through Cape of Good Hope, 3 million tonnes this winter season, which is up basically infinity. We've also had congestion issues in Panama, especially end of last year, but we also see it now with auction prices in Panama being very high. We've seen close to $2 million in auction fees for Panama. So we see a huge drop in US LNG going through Panama, and they are rather being sent a long way from US to Asia via Cape of Good Hope, as Suez is not really a very viable alternative, which both of these two trends are dragging out sailing distances and thus requiring more ships than if the canals were working properly, which is in general good for shipping market as ships have to stay longer, and that you require more ships for each cargo in order to move the cargos. We have had a couple of questions lately about two topics, so we will just cover them briefly. What we see a lot is questions about, what about closure of Strait of Hormuz, what will the impact be for the LNG market? So, of course, there are two big LNG exporters in that region. So while in oil, it's a lot about Saudi Arabia, about 20% of the oil is flowing through the Strait of Hormuz, which is rather a narrow strait. It's a bit similar for LNG. Here the bigger producers are Qatar and United Arab Emirates. So while on oil, it's about 20% of the market, it's quite similar for LNG. About 20% of all LNG is traveling through this narrow strait. And of course, a closure of this would be devastating, not only for the exporter, but also for the world economy, as energy prices would soar. We think that is a very, very low probability, but it's a high impact. And on the right-hand side here, you can see the two major exporters, Qatar and United Arab Emirates, where those cargoes have gone in the last 16 months, from January 2023 until end of April. You do see a lot of these cargoes going to Asia, which makes sense. It's the shortest route, and especially India, which is very closely situated to these two countries. So we don't think this will happen. The effects for the world economy of closing this strait is too big, both in terms of oil and LNG. And actually Iran is also very dependent on getting their oil cargoes, especially sold, which are typically being sold to China. So China also have an interest in keeping the traffic through this strait open. Then the second question we get quite a lot is Russia, and what will happen with Russia? As I mentioned, Russia being the fourth biggest exporter and they're planning to ramp up Arctic LNG 2 should be up and running. This project have been hit by sanction, which is postponing the startup of this. The Russians state that the first train should be operational, but they are planning also to add further trains to this project, two more trains, which could bring up the capacity for the project from 7 million to 20 million tons and then they do also have some other projects. So this is a big uncertainty. However, what we have seen in the past is, the Russians have been able to get surprisingly many hydrocarbons on ships. If we look at the oil and the petroleum market, we do see now for EU this week have not been able to sanction Russian LNG. It's really just the US and the UK, which is not importing Russian LNG. But now the EU has let the member states decide themselves, whether they want to ban Russian LNG. In general, we do think that all the cargoes here will be produced and we will have a bit of a similar trading picture that we have seen in the product and the oil side, where the BRICS are supporting each other. So we do think that if Europe are not taking the Russian cargoes, the other countries in the BRICS being Brazil, India, China, South Africa, are willing buyers of the Russian LNG, which will result in longer sailing distances. The limiting factor for Russia being, of course, the number of icebreaking vessels they have. So they will have to do more ship-to-ship transfers. Also, getting this Arctic LNG 2 project up and running is more challenging with all the sanctions. But we do not expect any shutting of Russian LNG. That has not been the case. On the oil side, we don't expect it to be happening on the LNG side either. And this could potentially be the start of LNG Dark fleet and TradeWinds have a good article, Lucy Hine in TradeWinds today about a lot of activity on the steam side, where there's a lot of unknown buyers. So if you don't have subscription to that, I think at least we can cover this a bit here in our project, in our presentation. We do think that the Russians are planning to do something similar. We have seen on the oil and petroleum side, and that these cargoes will flow and they will be maybe soaking up some of the steam tonnage that would otherwise be scrapped. Looking at another driver here is of course, coal. With the high LNG prices, coal has been coming back a lot. We have seen that in EU during the energy crisis, coal really grew quite a lot, despite this not being the intended policy of EU, with gas prices now coming down to earth, EU has been able to reduce their imports. But China, India, the big coal consumer, keep growing their coal consumptions. There's been a lot of talk about LNG and emissions. There came out a good report recently from BRG Energy in April, measuring the GHG emissions from various sources of both LNG, pipeline gas, coal, et cetera, to measure the greenhouse gas emission intensity of these various sources. What they actually find is US LNG is quite good in terms of the GHG emission and thus reducing coal by around half in terms of emission. And EIA also came out with a report recently, this year where actually the methane emission from coal is slightly higher than the methane emission for the natural gas value chain. So we do think that LNG is a good way of reducing emission, not only the greenhouse gas emissions, but also the pollution emissions, this being the SOx, the NOx, the particle matter which is really detrimental to people's health. So we find the LNG as a good solution, but that doesn't mean we have to be complacent. We still have to bring down emissions from the LNG value chain. And I do think that our ships being the most modern ships, with a lot of these ships in our fleet, 9 out of 13 being mega ships, hardly without any methane emissions, are a good solution in order to bring down emissions in the value chain. Okay. And then before concluding, just have a bit look at the LNG shipping market. Newbuilding prices have been on our uphill way the last couple of years, gone up about 40% from the bottom, have stabilized now at around $260 million. And this together with a long lead time, lead time now typically four years, high interest rates have pushed up the long-term rates you need in order to invest in new ships to around $100,000. With the softer spot market, we have now shorter term rates, the five-year term rates actually being lower than the 10-year charter rate. Typically shorter duration Time Charter rates tend to be higher than the long-term, but right now the whole rate curve is in Contango, given the near-term weakness in the spot market. And this is of course, driven by what we see here on the next slide. A lot of ships coming for delivery '24 and '25, while the new volumes to the markets are typically coming end of '25, into '26 and onwards, which I will give some more details on shortly. We, however, do see that with these high prices, contracting activity has been a bit more subdued lately. It's mostly been Qatar active, buying more of the ships they have reserved, as they are rapidly expanding their capacity and need ships. And we do actually now have a situation where we have our order book stretching all the way out to 2031. That said, even though there's a lot of ships for delivery, more or less, all of these ships are contracted. They are not contracted on speculation and there are two reasons for this, it's because of the high growth, which I will cover shortly in the market, you need more ships to take that growth. And then it's the fact that we have a lot of older steam ships, which are economically and competitively, and where we do see our need to renew the fleet and scrap these older ships. So we need new ships to replace those older ships. And looking at rates today, with spot rates for modern tonnage at around $50,000, that means the steam ships are making rates in the low $20,000, which means that when you take in the cost of docking these ships, these are very expensive ships to dock because they are old. It means that these ships are running at OpEx level. So if you add installment and interest cost on top of that, these ships are not making any money at all. So that together with a lot of these ships coming off long-term contracts, we think, as also described in TradeWinds today, will result in more steam ships being scrapped in the coming years. And that together with more growth, will rebalance the market sometime from end of '25, '26, '27 onwards, when we have ships available again in the market. So before concluding, just showing the different projects, Qatar almost doubling the capacity, export going from 77 million tons, expected to be 142 million tons by end of this decade. US despite the moratorium from Biden, they are set to almost double their exports. We do expect after the election the moratorium will be lifted, then US, a lot of these US projects, which are ready to go will be sanctioned and we will see more growth from US. As mentioned, and '25 onwards, when we have ships open and we can recontract them, as I mentioned, the long-term rates are at around $100,000. Last year we made 80,000 on average on all ships. So we do think that will give us an opportunity to recontract ships at better rates later this decade. So, to conclude, as mentioned, revenues in line with guidance, net income and adjusted income, $33 million and $38 million, respectively, giving us $0.62 or $0.70 of EPS, depending on the measure. We have done a lot of contracts this year for three extensions and one new contract as mentioned, drydockings are going according to plan. We do expect Q2, as usual to be the softest quarter for the year. But once we get both ships back in operation in Q3 and spot market typically get tighter in Q3 and even more so in Q4, we expect revenues and earnings to bounce back in Q3 and Q4. And with that, and the strong contract position, we are declaring a dividend $0.75, 11% yield. And as Knut has mentioned, we have a very good financial position to keep on paying this dividend, which has been $510 million in the last three years. So with that, let's see who are winning the Flex Summer gift in the Q&A session. Knut? I think I have to move all this stuff. Let's see. Do you want some sunglasses?

Okay. Thank you for the questions you have sent in. You mentioned, maybe you should kick off with one of the comments you mentioned at the end here. There's been a number of comments regarding the dividend and sustainability of the dividend.

Yeah.

Do you have any more to elaborate? And there's also comments -- questions about what the decision factors are for the Board? We have listed a number of them.

Nine, I believe it is.

Yeah. So maybe you can elaborate around the decision process and your view on the sustainability of the dividend level?

Yeah. I think, there's a couple of items. Of course, we look at earnings. So, I think you know, the best measure and that's why we have the adjusted numbers is the adjusted earnings per share of $0.70. Because there we only include the realized gains and not the unrealized gains. So we are paying out slightly more in our earnings today, but it's not much. It's slightly more in terms of how we look at it. Of course, we have a contract portfolio. And as I mentioned we do have ships coming off charters later in this decade from '26, '27, '28 onwards, where we do see the ability to possibly recontract those ships at higher rate levels. Another factor is the fact that we have $383 million of cash and every quarter, we are paying down our debt. So the kind of amount -- once your debt gets lower, also your interest cost gets lower. So that means that when you have $383 million of cash, we could do either two things. We could do what you would call a dividend recap. We don't need to have $383 million on a balance sheet. We could probably pay a huge one-off dividend of $250 million or so and then rather stay on a lower cash balance level. However, we have structured a lot of this cash as a $400 million revolver. So we don't really pay the cost of having it, the cost of carrying it. We reduce the revolver during the interim of quarters, where we are paying around 70 basis points to have it on standby until '28. So it's more about those kind of factors. We do think options will be declared. A lot of these options have higher rates. So we do think that eventually, over time our earnings will grow and then over time our interest expenses will fall once we are deleveraging. As Knut showed in his graph, we are deleveraging $7.5 million more per quarter than our depreciation. So we are quite comfortable with that. We can run this company with less than $100 million of cash. We don't have a lot of working capital. We saw this quarter, we had a bit of build-up on working capital, mostly due to prepayment of drydockings, but we are on a Time Charter business, which means that all charters are paying us higher the first day of the month at the latest. And then typically, we are paying our expenses later in the month and then debt in areas. So that means it's where we have a negative working capital to run the business. So I think that makes it quite easy to also model the cash flow. Right now, we're paying out a bit more because we have the money to do it, and then eventually down the road, we think this will kind of stabilize at the level where earnings will be up and interest expenses will be down. Because kind of, if you look at it, our OpEx $14,900, most of our cost is finance cost, is installments and interests. I also do believe my personal view is that at one time here, Fed will pivot. It's only one-time that we have had Fed hiking interest rates at this kind of level without having any effect on the real economy, and that's been in 1994. So, I do eventually think that we will see a pivot where rates will be coming down as well. And we have kind of anticipated that in terms of cutting a bit on our duration of our hedges, in order to be able to benefit from that as well. And then, of course, we have the decision criteria, which we shown in the slide deck.

And Sherif Elmaghrabi from BTIG asked, with no maturities until 2028, have you given the thought of prepaying some of the debt to increase the financial flexibility? And I guess, as we discussed in the presentation, we have the $400 million RCF. And in between quarters we use that -- we prepay it down to reduce the interest rate cost, and in essence, it is a reduction of that in between quarters. But we maintained the commitment, which, in fact, in our view increases our financial flexibility, if there are investments that can be made, but also to support the business case in general.

Hey, it's like having a checkbook ready with very limited cost, and we can jump on any opportunity. You know, we have in the past provided bids on several ships, a lot of ships to be honest. Where we can then put a bid in on those ships without having to go to an investment bank or some bankers to underwrite the financing for us. We can bid because we have the revolver there and gives us a lot of flexibility. If we pay it back, we don't get it back. So it reduces the flexibility.

And that segues exactly into the next topic of how to spend it and investments. Certain questions are more specific. We've been sort of muted on newbuildings on the speculative side, but the question more on the opportunities to order newbuildings backed by a long-term contract.

Lately, it's been mostly Qatar being active in the tender market, ordering more than 100 ships based on these tenders and contracts. We have not participated in that for reasons we have explained in the past. So there's been very few tenders for new buildings. Also being a reflection of the fact that new building prices are high. Lead time is high, once you have risk free rate at 5.3% and you have to wait for four years to get the ship, that also drags up the -- the cost of that ship. So that $260 million might easily become $280 million and $285 million when you're also adding in supervision costs. So that means if you do a calculation on it, that's why you get to these rates of $100,000. Today, there's a lot of modern ships on the water MEGI/XDF, which means that instead of doing tenders for new builds, more people are looking at existing tonnage. We find it more favorable to rather bid in on all ships. We have Constellation coming up in '25 or '26. We have Ranger coming up in '27. We have Aurora, Volunteer coming up in '28, which means that we can rather bid on the basis of those existing ships, and probably be more competitive than building a new ship. That said, of course, we are looking at it from time-to-time, but we find it more interesting to market our existing ships. We are looking sometimes for buying second-hand tonnage. So far not been successful. Being successful bidding and buying ships is really about having the highest bid. So that doesn't mean necessarily make it successful if you win. So we try to always measure kind of if we are buying other ships, we don't want to impact our dividend capacity negatively. So if buying ships and getting a lower return on that, then paying our dividends is what we have to do, we rather pay out the dividend.

And then there's a specific question on ship technology and size. And would you consider 180,000 cubic for any advantages by that size?

Yeah, our advantage is it's 6,000 cubic bigger. So that's the main upside. There is downside, however, it makes it less -- slightly less tradable possibly. You have to do Ship Shore Compatibility Studies. It's a bit easier when most people are doing the 174,000 size, which is the kind of the market standard. But for sure we're open to look at 180,000. There are pros and cons. What we are most focused is on price. So we will measure that towards the price. If buying 180,000 is a lot more expensive, then well maybe not. If it's basically the same price, well, maybe we do it.

And there we have a question from Scott Leong in SSY Global. It was a general perception that newer is better, but commercially there's not too much of a difference between a newbuilding today versus our vessels. Can you say something about the commercial attractiveness of our vessels versus a newbuilding?

Yes. You're right, Scott. There are like three or four different technologies. You have the steam and then you, of course, have new steam and old steam, and then you have the tri fuel and in that tri fuel segment you also have a bit, the first generation tri fuels and then the second generation, and some size difference. And then once you get into the two-stroke, you have a modern diesel engine for our ship, which can burn LNG. And the thermal efficiency of that engine is basically the same as all ships as the new builds, it's around 50% to 52% thermal efficiency. So on the ships they're building today, it's more about adding more equipment. So maybe they're adding a full relic. We have full relic on three out of four ships. We have partial relic on four or four ships. So that is a factor. Maybe you add this air lubrication, which is kind of compressor pushing bubbles under the hull to reduce drag or friction through the water, which optimize speed a bit. Some energy-saving devices, but a lot of energy-saving devices, we are, you know, retrofitting to our ships. So there's very few differences in terms of our new build today and the newbuildings we have today. And efficiency is more the same. I think there's one benefit of having a ship that's been trading for some while. It's been to a lot of ports. It has already checked all the boxes in terms of the Ship Shore Compatibility Studies. So it's not like you have to do that work all over again. When you have a new ship, it's been proven. Sometimes you have some new hiccups, when you take delivery of the ships. We have found out of those hiccups, and we have corrected those hiccups, which means you have a ship which has a proven track record in terms of operational performance. So, I think people always like new, but all ships are as good as new. And if you look at the pictures from some of our drydockings, these ships look brand new once they're getting out of the dock after a five-year special survey.

I think that concludes the Q&A session for this time.

Yeah. Okay. The gift. Yeah. Let's give it to Scott then, because it's a good question. So, Scott, you will be the lucky winner of all the stuff I showed earlier, as well as this bathing towel, Flex on the Beach. So I wish you a very good summer. I hope you enjoy it. Remember to use the sunscreen. And we will be back in August, hopefully, when it's still summer, with our Q2 numbers, which we have guided today. And as I mentioned, we do think Q3 will be stronger, because then we have all ships in operation. And typically, rates will be higher in August than they are in May, usually, historically, we are starting to be sniffing on six-digit numbers once you're getting into end August-September. So for us it doesn't matter that much. 12 out -- we're fully covered for the year. 12 of the 13 ships are on fixed higher, but we have one ship linked to the spot market, so we like the spot market to be good. And typically a good spot market also drags up the term rates. So with that, thank you for joining and have a good summer. End of Q&A: