Flex LNG, a prominent player in the LNG shipping sector and known for its generous dividends, recently declared another substantial payout of $0.75 per share. With a dividend yield of approximately 11%, it's no wonder investors are drawn to this stock. However, beneath the appealing exterior of surging revenues and impressive contract backlogs, a crucial question arises: can Flex LNG sustain its dividend?

At first glance, the outlook for continued dividend payouts seems promising. The company boasts a remarkable 50 years of minimum charter backlog, a figure that could potentially reach 75 years if pending options are exercised. Flex LNG recently secured a 10-month contract for Flex Constellation, strategically removing it from the current soft spot market. Their robust financial position, with $383 million in cash and no debt maturities until 2028, appears unshakeable.

However, a closer examination reveals a more complex picture. CEO Øystein Kalleklev acknowledges the prevailing "softness" in the spot market, attributing it to a near-term oversupply of vessels. While this doesn't immediately impact Flex LNG, as 94% of their fleet is contracted for 2024, the long-term implications are undeniable. The rate curve is in contango, meaning shorter-term rates are actually *lower* than longer-term ones, a clear indication of market apprehension about the future.

Kalleklev contends that this softness is temporary, caused by a timing mismatch between new vessel deliveries and the arrival of new LNG volumes, anticipated in 2026 and beyond. He predicts a surge in scrapping of older, less efficient steam ships, making way for modern tonnage like Flex LNG's fleet. However, this argument relies on two critical assumptions: widespread scrapping and sustained growth in LNG demand.

The company is placing a significant bet on a "technology change" – the inevitable obsolescence of older steam vessels, clearing the way for their modern, fuel-efficient fleet. But accurately predicting scrapping patterns is notoriously challenging. Ship owners are known to hold onto their assets, even when operating at a loss, hoping for a market rebound. The emergence of an "LNG dark fleet," where older vessels are absorbed into less regulated markets (potentially Russian), could further postpone the mass exodus of steam tonnage that Flex LNG is counting on.

And then there's the question of demand. While Emerging Asia is experiencing a gas boom, fueled by low prices, Europe's energy policy is, to use Kalleklev's words, "living on a prayer." Their dependence on spot cargoes and reliance on mild winters create a volatile demand scenario. The U.S. moratorium on new LNG export licenses further adds to the uncertainty. Although Kalleklev confidently predicts a lifting of the ban after the upcoming election, its impact on long-term contracting and demand remains a major unknown.

The crux of the $250 million question arises from a seemingly casual remark by Kalleklev. He mentions that their current cash position would allow them to "pay a huge one-off dividend of $250 million or so." This, coupled with the statement that they "can run this company with less than $100 million of cash," raises a significant concern. Is Flex LNG tempted to deplete their cash reserves through a massive one-time dividend, potentially jeopardizing long-term stability for short-term shareholder gratification?

Let's delve into the numbers. Flex LNG is currently paying out approximately $40 million per quarter in dividends. Their projected adjusted earnings per share for Q1 2024 are around $0.70, translating to roughly $38 million in earnings. The implication is clear: they are already distributing more in dividends than they are earning.

Dividend Payout vs. Earnings

The following table illustrates the disparity between Flex LNG's dividend payout and earnings.

While their substantial cash reserves can temporarily conceal this imbalance, the long-term outlook is unsustainable. Factor in the uncertainty surrounding scrapping, future LNG demand, and the possibility of a $250 million "dividend recap," and warning signs emerge.

Flex LNG's dividend narrative is compelling, but its future is uncertain. Investors should exercise caution, closely observing evolving market dynamics and the company's future capital allocation decisions. The $250 million question serves as a potent reminder that even the most alluring dividend stories can harbor hidden risks.

"The journey of a single LNG cargo from Qatar to Europe, if routed via the Cape of Good Hope due to Suez Canal disruptions, can take over 30 days and cover a distance exceeding 11,000 nautical miles. That's nearly half the circumference of the Earth!"