Do you want to invest alongside the Norwegian billionaire
John Fredrisken? He is betting big on a revival in shipping and he has been in
the industry for 5 decades now and made a lot of money in the process.
Prefer watching? Enjoy the video, article continues below.
The owner of Flex LNG (FLNG) is Geveran trading – indirectly controlled by trusts established by billionaire John Fredriksen for the benefit of his family. He also owns Golar LNG (GLNG), Seadrill (NYSE: SDRL) – offshore drilling, Marine Harwest ASA (OSE: MOWI) – salmon, Golden Ocean Group (GOGL) – dry bulk and Frontline (FRO) – tankers .
To quote him, this is what investing in tankers really
is: “Fredriksen pockets $1 million a day in dividends from his 23
percent stake in the company. He says he finds oil drilling dull compared with
tankers, where you can earn back a year’s losses in the space of a week. “I’ve
been in tankers for 50 years, and I like it,” he says. “For me, it’s still
So, we have to keep in mind volatility before investing and
also diversification. As you have seen above, he is always diversified. Let’s
look at the LNG sector and then at the company.
We all know the story; natural gas is the fossil fuel of the
future as more environmental and cheaper. The best way to distribute it across
the world is by LNG. LNG production is consequently ramping up and this should
lead to higher demand for ships.
Expectations are that there will be more and more LNG coming
into the market creating a positive tailwind for the shipping sector. I always
prefer to invest into sectors that offer positive tailwinds. If things don’t go
as planned, you don’t lose much as there will always be positive periods that
can save you. If things go as planned, you do very well.
The following video gives a good overview of what is going
on in the LNG sector and about the company, I urge you to watch it, it is just
3 minutes long.
Flex LNG is LNG shipping company with a fleet of next
generation LNG carriers with large cargo capacity. The fleet consists of
thirteen modern LNG ships, five existing and eight under construction for
delivery throughout 2019-2021. All LNG carriers are equipped with slow speed,
two-stroke engines MEGI or X-DF propulsion which will provide Charterers with state-of-the-art
tonnage offering significant advantages in form of reduced fuel consumption and
lowered boil off rates.
Newer ships mean less fuel costs and give an advantage over
In Q2 2019, FLNG achieved rates of just $46,266 per day,
that is not great, but not bad even. It is a break-even level for the company.
However, the above shows how rates are always volatile and we have to go for
the average to make financial calculations.
They still have $670 million to pay for their new boats,
they have already paid $349 million, which is not little money. They recently
did a sale and
charter-back transaction with Hyundai Glovis where two vessels have been
sold for $420 million with a net consideration of $300m to the company adjusted
for a non-amortizing and non-interest bearing seller’s credit of $120m in
total. This confirms the value of the ships and perhaps there will be more
possibilities to do the same financing deals in the future, to improve the
Equity is high, it is in the form of money used to finance
the ships that are being build, also created with equity financing where the owners
added $300 million for 31% of the company in October 2018 at a valuation of
$900 million. The current valuation is $520 million so you are getting the
ships at a nice discount.
They recently listed on the NYSE under the ticker FLNG but
this is not a new company, it has been listed in Norway for a while now. They
were created as a smaller company that is focused on growth, to take advantage
of the possible LNG boom.
As already mentioned, they also did a private placement for
$300 million, that is significant on the current market cap of $600 million.
When it comes to earnings, it all depends on spot rates and
whether they will lock long-term contracts when those spot prices are higher.
They assume a cash breakeven level of $50,000 per day which means that if rates
are higher, profits will also be higher.
I have no idea where will rates go in the future and when.
In 2018 rates went above $200,000 for a short period of time, but that wasn’t
Rates really depend on demand, how hot will the summer in
Asia be (airco) and how cold will the winter be (heating).
We also have a fleet oversupply at the moment but growth in
LNG demand should cover for that in the future. So, if prices are around
$40,000 with oversupply, those will probably be much higher when the supply of
vessels is not enough.
The trend remains positive with higher demand expected from
Further, one year charter rates are already at $85,000,
which means the company could make around $12 million per vessel in cash flow.
This would lead to free cash flows of above $150 million.
I somehow feel that if they break even at $50,000 with the
newest ships and good financing, the competition can’t do better. Therefore, it
is unlikely that prices remain below $50,000 for longer. At an average of $75k,
each vessel would make $9 million in free cash flows. This would lead to free
cash flows of $117 million on the 13 ships in operation. Not bad on a $600 million
market cap. If prices spike in a year, and go above $200,000, FLNG could earn
its current market cap in one year. The stock price would probably increase 10
times too in the process. This summarizes what investing in shipping means. But
there are also risks.
For a summary of risks, all well explained in the Annual
The covenants on the debt explain the risk when it comes to
investing in shipping. If those covenants are breached, ship values drop, the
company has to put up more money and there simply isn’t any (if there was
money, the covenants would not be breached).
Source: FLEX LNG Annual Report
This is the house of cards for most shipping companies. Keep
in mind the risks but also the upside and read the story of the owner and his
investing style in a nice Washington
On the other hand, in good times you make money, to quote: “Thanks
to his practice of awarding fat dividends from his companies when profits were
soaring, he had won the confidence of investors who might otherwise steer clear
of the battered tanker industry. In May, he raised $210 million in equity for
Frontline 2012”. (BTW, Frontline didn’t work out when oil prices collapsed).
Spot rates will remain volatile depending on short term LNG
shipping prices – depending on short term LNG demand and supply (mild or cold
winter in Asia).
The company is a low-cost provider thanks to new ships with
The key is to look at spot prices, if those really spike,
this will be a big winner.
On the other hand, you never know what will the market look
like and a longer period of lower spot rates, might turn this into an ugly
Therefore, if you fancy the risk reward, as it is positive,
you might dip your toe, but keep in mind portfolio exposure. If LNG rates
spike, you will do great. On the other hand, if it doesn’t go well, your
maximum loss can be 100%. However, be careful that the 100% doesn’t become
bigger and bigger if you add too much money to it.
The thesis here is that spot prices will spike in the future
and that is when the company might switch to longer term contracts. This might
lead or to vessel sales or dividends.
I will keep watching the stock and who knows…
The opinions expressed – imperfect and often subject to
change – are not intended nor should be taken as advice or guidance. The Sven
Carlin Stock Market Research Platform is not an investment advisor or financial
advisor. The Sven
Carlin Stock Market Research Platform provides research, it does not
advise. The information enclosed in this article is deemed to be accurate and
reliable, but is not guaranteed by the author.