FLNG - FLEX LNG: A High Yield Floating Pipeline

Summary

• Solid charter coverage provides cash flow visibility in the long term.
• Resilient free cash flow to firm due to secured revenue backlog and nil newbuild capital expenditure.
• Anticipated $3.00/share dividend distribution in the next 12 months resulting to a ~10% yield.

Key Takeaway

Flex LNG ( FLNG ) presents an attractive risk/reward profile for a shipping focused dividend income investor on the back of the following arguments:

1. Company’s chartering strategy provides cash flow visibility and is aligned with the dividend-based shareholder return strategy.

2. No major capital expenditure in the short-term adds resilience to Free Cash Flows to Firm ((FCFF)).

3. Clear debt runaway leaves excess cash generation, post debt service payments, earmarked for enhanced shareholder returns.

Anticipated 12-month Free Cash Flow to Equity ((FCFE)), excluding any fresh cash raised due to debt refinancings and/or sale of new shares, provides good coverage for a minimum $0.50/share dividend distribution. Still, I expect Flex to continue distributing a minimum $0.75/share dividend per quarter or $3.00/share annualized due to (1) hefty liquidity position ($271 million available cash as of September 30, 2022), (2) fresh cash raised from debt refinancings on the back of company’s balance sheet optimization process and (3) additional proceeds from selling new shares.

FLNG Dashboard covers the company’s financial summary, financial statements projection and the assumptions underpinning the analysis.

Strong FCFF generation set the base for enhanced shareholder returns

The company’s fleet has zero open days in 2022 and 2023 with the first two open vessels coming out of their fixed charter periods in the second quarter of 2024. All the vessels are employed under a fixed charter rate, excluding Flex Artemis, which is somewhat exposed to the spot market via her variable long-term charter. The table below reflects FLNG’s charter coverage as of November 15, 2022.

¹ The expiration of the charters is subject to re-delivery windows ranging from 15 to 45 days before or after the expiration date. ² The expiration provided assumes all options have been declared.

Analysis assumes the lower point of company’s revenue guidance for Q4 2022 at $95 million or $380 million annualized. However, in the next 12-month period, four 2018-build vessels will need to undergo its regulatory 5-year class renewal. As a result, the estimated revenue generation is slightly lower at $367 million to account for the drydock off-hire.

Assuming no substantial changes in Q3 2022 reported operating and G&A expenses but accounting for $12.8 million in drydock payments regarding the four 2018-built vessels ($3.2 million each), I anticipate strong FCFF generation of $276 million in the next 12-month period.

FCFE and strong balance sheet further strengthen the case for enhanced shareholder returns

Flex has no imminent debt maturities in the near future, with the first refinancing coming in 2026. Still, in Q4 2022, the company took advantage of the strong asset values and received credit approved term sheets for Flex Resolute, Flex Amber and Flex Artemis. Post those refinancings, I expect Flex to push further back part of the 2026 balloon repayment. As a result, with no imminent debt maturities in the short term, the company can focus on the shareholder return strategy. Based on my calculations, post servicing $167 million in debt amortization and interest payments, Flex will generate FCFE of $109 million in the next 12-month period.

Note: Debt payments include (1) loan amortization attributed to traditional loan financing and (2) sale & leaseback loan amortization and the final repurchase obligations at the end of the respective charters.

Flex follows a variable dividend policy determined by several factors such as cash flow generation and visibility, liquidity position, covenant compliance and other. Since the third quarter of 2021, $0.75/share dividends have been declared except for the second quarter of 2022 when Flex further enhanced the quarterly distribution with a $0.50/share special dividend. Year-to-date, the company has paid dividends of $2.75/share.

Finally, Flex strengthens its balance sheet by raising fresh cash under the at-the-market ((ATM)) program. During December 2022, Flex raised $14.8 million by issuing 409,741 ordinary shares at an average gross price of $36.09/share.

Excluding any fresh cash from re-leveraging and sale of shares, a minimum $0.50/share dividend distribution (~1.00x dividend coverage) is guaranteed from the FCFE generation of $109 million in the next 12-month period. However, I expect Flex to continue distributing $0.75/share dividend per quarter as minimum distribution on the back of (1) healthy cash position ($271 million available cash as of September 30, 2022), (2) vessel refinancings and (3) proceeds from the sale of new shares.

Conclusion

For a dividend income investor, Flex is a solid investment alternative in the shipping universe on the back of the following arguments:

1. The company’s chartering strategy offers visibility and insulates the revenue generation from the volatile LNG spot market.

2. With no newbuild program in place and clear debt runaway, Flex can focus on the shareholder return strategy, allocating any excess cash generated, post debt service payments, to dividends.

3. FCFE, excluding any fresh cash raised due to debt refinancings and/or sale of new shares, supports a minimum $0.50/share dividend distribution. Still, I expect Flex to continue distributing a minimum of $0.75/share per quarter on the back of solid company fundamentals.

Assuming a minimum $3.00/share annualized dividend distribution, FLNG trades at a solid ~10% yield.

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