FLNG - Flex LNG: 8.5% Yield $.50 Special Dividend Strong Q2 Earnings Tailwinds

Summary

• Management declared another $.75 quarterly dividend, plus a $.50 special dividend.
• Q2 2022 revenues grew 28% vs. Q2 '21. Adjusted net income rose more than 36%.
• Its backlog is a minimum of 54 years.
• FLNG has long-term tailwinds in the LNG market, with Europe switching to US supplies.

Looking for a good high-yield energy play? With Europe's shift from Russian energy supplies, there has been a lot of disruption in the energy market in 2022, leading to higher prices for LNG vessels.

Pipeline flows from Russia to the EU have declined 75% vs. 2021.

This has created a global gas crunch - there's a high spread between US pipeline gas prices and LNG prices in Europe due to import bottlenecks:

Subsequently, one- and three-year term charter prices have been rising in the first half of 2022. Additionally, spot market prices are rising ahead of the winter, when Europe could experience shortages.

Performance:

Although we've covered other LNG carriers for many years, we began covering FLNG only recently, ~2 months ago, in late June 2022. As it happens, FLNG has risen over 18% during that period. To be sure, shipping stocks can be very volatile - this just happened to be a big price gain period for FLNG.

Looking back a bit further shows FLNG outperforming the shipping industry and the S&P 500 by wide margins over the past quarter, year, and so far in 2022. More recently, it's up 15.8% over the past month, once again outperforming:

Profile:

Flex LNG Ltd. ( FLNG ), through its subsidiaries, engages in the seaborne transportation of liquefied natural gas ((LNG)) worldwide. As of 6/30/2022, it owned and operated 9 M-type electronically controlled gas injection LNG carriers, and 4 vessels with generation X dual fuel propulsion systems.

It also provides chartering and management services. Flex LNG Ltd. was incorporated in 2006 and is based in Hamilton, Bermuda. (FLNG site)

FLNG has one of the youngest fleets in the LNG shipping sub-industry - ranging in newbuild dates from 2018 to 2021.

Fleet:

The shift in LNG demand has helped FLNG's fleet have chartering coverage into mid 2024. Also, the Charterer of Flex Rainbow, a large global trading company, agreed to a new 10-year fixed rate Time Charter for Flex Rainbow, which will start in direct continuation of the existing Time Charter, which expires in January 2023. The new Time Charter will expire in early 2033. These charters add ~$750M of fixed backlog to FLNG's backlog, for a firm minimum backlog of 54 years. (FLNG site)

The world's LNG fleet inventory will increase in 2023-2025, but most of these newbuild vessels are already committed to contracts, leaving only 30 uncommitted new vessels.

Earnings:

Q2 2022 Revenues grew 28% vs. Q2 '21, and ~13% sequentially. Net income rose 2.5X vs. Q2 '21, while adjusted net income, which strips out derivatives, rose over 1X vs. Q2 '21, and ~37% sequentially, resulting in adjusted EPS of $.61, vs. $.45 in Q1 '22, and $.29 in Q2 '21:

For the first half of 2022, revenues were up ~8%, with net income and diluted EPS both jumping 67%. Adjusted EPS rose 14%, while adjusted EBITDA was up 10.5%. Interest expense rose 10.8%, and the share count was flat.

This continued FLNG's growth from full-year 2021, albeit at a lower pace, when it had 3- and 4-digit growth in several categories, after bouncing back from the pandemic in 2020.

Dividends:

Management declared its fourth straight $.75 quarterly dividend, and also declared a special $.50 dividend, both of which will go ex-dividend on 9/7/22, and pay on 9/13/22:

Management uses adjusted net income to assess its earnings and dividend sustainability: "Adjusted net income represents earnings before write-off and accelerated amortization of unamortized loan fees, foreign exchange gains/loss and gain/loss on derivatives financial instruments held for trading." (FLNG site)

FLNG's trailing dividend payout ratio is over 1X on an adjusted EPS basis- a high figure. However , the adjusted EPS figure also includes a large amount of non-cash depreciation. Adding back the $1.35/share in depreciation for the last four quarters brings a dividend payout ratio of 83.61%. This is higher than in Q1 '22, when the trailing EBDA dividend payout ratio was 68.57%:

Profitability and Leverage:

ROE improved markedly in Q2 '22, and ROA also improved, with ROE above the industry average. Net debt/EBITDA leverage improved to 5.05X, but remains much higher than the 1.23X industry average, while debt/equity rose slightly, but was well below the industry average.

An interesting note on the marine shipping industry is that some major players have very low debt, with very high Interest coverage, which is why the average interest coverage for the industry is 31.87X.

Debt and Liquidity:

Management has been pursuing a Balance Sheet improvement program and completed phase 1 in Q2 '22, a $320M Sale/Leaseback and a $375M Term Loan and Revolving Credit Facility:

In phase 2, they'll focus on refinancing, or amending and extending their remaining seven debt facilities for the fleet:

FLNG has ~4.5% of its debt load maturing each year, in 2023 through 2025, with a $340M balloon due in 2026, and $1B in six years or more:

As of 6/30/22, FLNG had cash, cash equivalents and restricted cash of $283.7M, including the fully drawn revolving tranche of $250M under its $375M Credit Facility.

Valuations:

With its big price gains, FLNG has reached a point of receiving premium valuations vs. its industry averages on a P/E, P/Sales, P/Book, and EV/EBITDA basis.

Its base 8.57% dividend yield is ~200 basis points lower than the industry average, which illustrates how much yield the market requites for this traditionally volatile industry.

Analysts' Price Targets:

At $35.00, FLNG is 9.6% above analysts' $31.93 average price target, and just ~5% below the $36.81 highest target.

Parting Thoughts:

Industry tailwinds, an attractive dividend yield, but a higher dividend payout ratio, with management committed to paying out attractive dividends, based upon several factors, including its significant backlog.

At present, FLNG's valuations are high. We suggest waiting for the doldrums of September-early October, a traditionally weak time for the market, in order to get a better entry price.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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