Golar Lng Ltd Q1 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Golar LNG Limited Q1 2021 Results Presentation. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the call over to your speaker today, Mr. Karl Staubo. Thank you. Please go ahead.

Thank you, speaker, and welcome to Golar LNG’s Q1 earnings release. Thank you for taking the time to dial in. My name is Karl Fredrik Staubo, the recently appointed CEO of Golar LNG. Before we get into the quarterly results, please note the forward-looking statements on slide 2. I’m joined today by Mr. Eduardo Maranhão, who’s taken over my former role as CFO of Golar. Eduardo was formerly the CFO of Hygo and is well-known to the majority of Golar’s stakeholders. We are both looking forward to contributing to the continued success of Golar. Turning to slide 3 for Q1 highlights. We report adjusted EBITDA for the quarter of $78 million and net income of $25 million, both ahead of consensus estimates. Our shipping portfolio achieved a TCE of $61,700 a day for the quarter and our shipping revenue backlog stands at $187 million at quarter end. Hilli continues to deliver 100% uptime with the 56th LNG cargo currently being offloaded. Gimi remains on schedule and is currently 69% technically complete. During Q1, we announced and, on April 15th, closed the sale of Hygo and GMLP to New Fortress Energy. The transactions will be accounted for in our Q2 numbers, but it’s expected to generate an accounting book profit in excess of $650 million and increase liquidity and liquid assets by around $900 million. We have initiated the announced buyback program of up to $50 million with 1.2 million shares bought back to date. Our cash balance at the end of Q1 stands at $245 million and does not include sales proceeds from NFE transactions. I’ll now turn the call over to Eduardo to take us through the first quarter numbers.

Thanks, Karl, and good morning to everyone. I’m excited to provide an update on our financial results for the first quarter of 2021. So, turning to slide 5. We can see that the group had a very strong performance in Q1. Total operating revenues for the first quarter were $126 million, which was 7% above the numbers we had in Q4 of last year. Adjusted EBITDA came in at $78 million and was in line with the previous quarter. A key driver for this performance came from the high utilization and higher charter rates of our carrier fleet, which contributed to total revenues of $63 million. We were able to execute on our shipping strategy and increase TCE rates up to $10,000 a day from the last quarter. FLNG revenues from the Hilli came in line with our expectations at $54 million. Although lower than the previous quarter when we had the effect of overproduction revenues from past years, those numbers reflect the exceptional operational performance of our team, which again delivered 100% commercial uptime. The commencement of operations of our long-term O&M agreement with LNG Croatia resulted in higher management fees, which has also contributed to the increase of our other operating revenues, totaling $9 million in the quarter. Net income was $25 million, which is $17 million higher than the previous quarter. This was mainly driven by improvements in non-cash mark-to-market gains in our interest rate swaps, following favorable rate movements. On the financing side, our net debt position at the end of Q1 was just close to $2.1 billion and slightly higher than Q4. That was mainly driven by the $45 million drawdown under the gaming facility. We’re going to provide further updates on that later in the presentation. So, at the end of Q1, our total cash position, as previously mentioned by Karl, was $245 million. This did not take into account the sales proceeds from the NFE transaction. So, moving on to slide 6, the closing of the Hygo and GMLP transactions last month has further enhanced our liquidity position. With $150 million of unrestricted cash on hand at the end of the quarter, and $131 million of cash proceeds received on April 15th, our balance sheet has been materially strengthened. Based on yesterday’s closing price, our stake in NFE is now worth close to $800 million. This creates a lot of optionality for our funding strategy. Considering that, we have now over $1 billion in liquid assets, as you can see on the left-hand side of this slide. We’re now well positioned to meet our existing CapEx commitments and also to fund future attractive investment propositions. I want to highlight that our focus for 2021 will be centered on optimizing our debt structure, which includes the refinancing of our April ‘22 convertible bonds. We’re going to continue to simplify our group structure, and we will also focus on FLNG and upstream business developments. So, with that, I’ll turn the call back over to Karl.

Thank you, Eduardo. Turning to slide 8, and our shipping performance. As mentioned, our shipping TCE for the quarter came in at $61,700 a day. We have fixed 90% of remaining vessel days for 2021. Out of the 90% contracted days, 19% is index linked and 71% is on fixed rate charters. We took a cautious approach to shipping exposure coming into 2021 as we saw around 50 newbuild deliveries coming this year, or about two-thirds of deliveries have charter parties and one-third of newbuilds remain open. We are, however, positively surprised by the strong LNG freight rates we’re currently seeing, despite the normal seasonal weakness during spring and summer months. This further supports our positive outlook for our shipping segment going forward. In line with our increasingly optimistic outlook for shipping rates, we have an increasing exposure to LNG freight rates through floating rate charters and forthcoming off fixed charters. We have 3% spot exposure for the second quarter, 11% for Q3, and 40% for Q4, aligned to match the normal seasonal strengthening of LNG freight rates as we enter the winter months. For Q2, we expect to see TFDE TCE rates of around $47,000 a day with 98% fleet utilization on the back of our high contract coverage for the quarter. Turning to slide 9, we are increasingly optimistic about the future outlook for LNG carriers. The total current LNG fleet on-the-water stands at 597 ships. The fleet comprises 254 steam carriers, 183 TFDE carriers, 44 Q-Flex and Q-Max, and 116 mega ships, plus another 130 on order. On the supply side, we believe the order book will be offset by less efficient steam carriers coming off their long-term charters and facing new and stricter emission standards, forcing these vessels to slow steam or be uneconomical for international trading. By number of vessels, the 22% order book compares to 42% of existing vessels on the water being steam ships. So, we think that more than offsets the order book. Demand continues to build with 361 million tons of LNG transported last year. According to Clarksons, 1 ton of LNG transported consumes 1.4 LNG carriers per year on average. With an anticipated growth over the next three to four years of almost 100 million tons, this assumes 140 incremental ships are needed. Furthermore, increasing distances as most of the incremental volume is transported from the U.S. to the Far East, consumes two LNG carriers per ton and hence would require almost 200 ships. Lastly, the three Korean shipyards capable of building high-quality LNG carriers are filling up with container orders, and hence there cannot be any meaningful additions to the order book with delivery before 2024 at the earliest. This makes us very optimistic about the medium and longer-term outlook for LNG carriers, and we are positively surprised by the current seasonal strength in a year of 50 newbuild deliveries and our demand still negatively affected by COVID. Turning to slide 10 to elaborate on some of the environmental regulations coming into play. First and foremost, the EEXI, which stands for Energy Efficiency Existing Ship Index, will come into play from 2023. EEXI is a pledge made by IMO to work towards reducing CO2 emissions by 50% within 2050. That’s still far ahead, but due to the long life of assets operated in the LNG industry, this is, in many ways, a current problem. Additionally, the first goal after 2030, IMO targets a 40% cut in carbon intensity. IMO will require all ships across all segments to comply with a commonly agreed index before January 1, 2023. In order to meet these requirements, all ships trading in international trade need to take action in the form of either reducing speed, changing to cleaner fuels, such as LNG, ammonia, or hydrogen, or making other retrofits to the ship design to increase energy efficiency. For LNG shipping, this will likely result in slow steaming or redundancy of a significant part of the steam carriers. And as mentioned on the previous slide, this represents 42% of the global LNG carrier fleet. Turning to FLNG and starting with Hilli on slide 12. Hilli continues to operate with 100% commercial uptime with its 56th cargo currently being offloaded. We’ve made continuous progress with respect to increased utilization of the Hilli. We have executed all documentation required to remove any production caps on gas reserves and to enable production above the current contract capacity. We are in advanced discussions for additional production anticipated to start in the first quarter of next year. Additionally, we would like to remind you that we are now in a territory where we will recognize Brent linked earnings from the second quarter of this year. Golar makes $2.7 million in annual EBITDA for every dollar the Brent curve is above $60. Based on current Brent forward curves, we expect to continue to see Brent contribution for Hilli in the coming years. Turning to page 13 and an update on Gimi. The conversion project is now 69% technically complete, on track, and on budget. We have surpassed 9 million man-hours, with around 2,400 yard workers currently allocated to the conversion on a daily basis. The vessel’s fifth and final drydock has seen all remaining sponson blocks attached to the vessel and is on schedule to be completed within this quarter. Gimi is expected to sail away from Singapore in the first quarter of 2023. It will start to generate commissioning revenues from the second quarter of 2023 and it will start its 20-year contract with BP from the fourth quarter of 2023, with a total EBITDA backlog of $4.3 billion. We also note that Kosmos, BP’s partner on the Tortue field, stated in their Q1 report that they are working to maximize the FLNG capacity that fits their current infrastructure. By that infrastructure, they mean the FPSO and the breakwater that the project is putting in place. That would equate to 5 million tons per year. Gimi, as a reminder, has a capacity of 2.5 million tons. Hence, in order to meet 5 million tons per year of liquefaction capacity, that will support another Mark I design FLNG or alternatively a Mark redesign FLNG to satisfy the full 5 million tons. Turning to slide 14. We are now in a territory where the gas price suggests that LNG economics are strongest in upstream. We made an illustrative example of FLNG economics on the left-hand side. With gas reserve and lifting costs assumed at $1 per MMBTU, a $2 tolling fee, which includes a 10% unlevered return to the FLNG owner, we can deliver through FLNG technology, FOB gas at $3 per MMBTU. Based on current healthy shipping rates, shipping to the Far East would add another $1.5 per MMBTU and have delivered LNG price of $4.5 per MMBTU. As you can see on the right-hand side, this equates to a very attractive downside versus historic JKM pricing with a very healthy upside potential. So, to illustrate, whenever the dark blue line is above the green line, the FLNG provider will make money. With current JKM price of $10 per MMBTU, this leaves a healthy margin for the gas producer of around $1.4 billion per year. The risk-reward, coupled with gas forward prices, is what drives both increased interest from majors for our FLNG tolling arrangements, as well as Golar’s desire to revert our focus on the integrated upstream model where we can capture more of the gas upside. We further elaborate what the potential economics of gas upside could look like on page 15, using a Mark III or a 5 million ton per annum FLNG. 5 million tons of liquefaction capacity equates to 250 million MMBTUs per year. Hence, a $2 margin equates to $500 million in annual EBITDA. Again, current and forward LNG prices should suggest that economics for such projects will be between 2 to 4 times EV EBITDA. Integrated gas acquisition and production is not a new concept for Golar, but we see fundamentals for this potential upside in Golar’s business model stronger than ever, due to the supportive gas forward prices, our proven track record of 100% utilization on Hilli, and, lastly, because we have a balance sheet now capable of lifting such projects and execute on this strategy. We’re currently pursuing stranded gas and associated gas reserves that may enable the rollout of our integrated upstream strategy, and we will update the market as soon as we have further developments on this front. Turning to corporate and strategic focus. We announced today our 2020 ESG report that can be found on our website. Although ESG has been an integral part of Golar’s operations since the formation of the company, we are increasing our transparency through the market on our performance. Some highlights of this year’s report can be found on slide 17. The carbon footprint of our FLNG technology is competitive to shore-based liquefaction mega projects. We have reduced fleet-wide carbon emissions from an AER of 9.95 to 8.71. And on Hilli, we have 35.4 local employees and have spent more than $10 million on purchases locally. We’ve also published our ESG targets until 2030. These are either aligned with or exceed any regulatory requirements for our fleet and operations. Turning to slide 18 and the earnings power from our existing asset portfolio. Following the sale of Hygo and GMLP to New Fortress Energy, Golar is significantly simplified, and our asset portfolio and financial performance should be easier to predict and follow. Our shipping segment comprises 10 vessels, of which 8 are TFDE carriers, 1 steam carrier, and 1 FSRU currently operating as a carrier. The fleet is fully delivered and generated an EBITDA over the last 12 months of $121 million. A $10,000 change in rates equates to a $32 million change in EBITDA. We are optimistic that this segment will see improved performance on the back of the strengthened LNG carrier market outlook. On Hilli, we continue to see 100% utilization. With a pro rata last 12 months EBITDA generation of $93 million, we do expect to see further upside on her performance as well. This upside will be driven by building potential overproduction, oil derivative earnings, and execution of the advanced discussions on increased capacity utilization from the first quarter of 2022. Gimi, as mentioned, is on schedule to start its 20-year contract with BP in Q4 2023, adding another $151 million in contracted EBITDA to Golar. We also have further EBITDA potential in uptime bonuses on Gimi. Hence, we expect to see a run rate EBITDA based on the existing asset portfolio, once Gimi delivers of at least $352 million versus EBITDA for the last 12 months of $201 million. As previously discussed, there is significant further upside in FLNG tolling and integrated projects that may add significant further EBITDA potential. So, to conclude on slide 19, we are optimistic about increased earnings power for our shipping business as we are seeing stronger than our anticipated current rates, a positive market outlook, and have increasing exposure to shipping freight rates through our charter portfolio. On FLNG, we expect increased earnings from Hilli due to the oil derivative earnings and progress on discussions of increased capacity utilization, and Gimi remains on time and budget. Gas prices are supportive of FLNG growth, and we experienced increased interest for tolling business and are very excited about the potential to develop integrated gas and FLNG upstream opportunities. On corporate and investments, we have a strong liquidity position following the sale of Hygo and GMLP. This will enable the financing of growth projects and debt optimization. Lastly, we will continue to work on further group simplification, likely splitting our midstream shipping business and upstream FLNG business into two separate vehicles over time. That concludes Golar’s Q1 earnings presentation. We thank you all for dialing in, and I’ll turn over to the operator for any questions.

Thank you. Our first question is from Randy Giveans from Jefferies.

First off, obviously, congrats to you, Karl, on the CEO role; Eduardo, on the CFO role. It seems like a great time to begin these new roles here. With that, for the LNG kind of business first, some people are counting the Qatar expansion as somewhat unbeatable, right, because its $5 or so landed costs. Your slide 14 shows that, first, your FLNG projects can beat that. So, I guess two-part question here. Any interest in participating in that tender offer for the 100 to 150 LNG carriers from Qatar? And then, more importantly, for Golar, with trains 3 and 4 having better economics, what are the hurdles and maybe expected timeline to get Perenco to ramp up trains 3 and 4? I know you mentioned Q1 ‘22, but any chance for an earlier commencement?

Thanks, Randy. So, when it comes to the Qatar tender, we’re obviously aware of it. However, we believe our edge is in upstream and FLNG development. Our incremental dollar is more likely to be spent on that than shipping. So, we have no current plans to attend that tender. When it comes to Hilli and the upside in production, I think most of the agreements that could fit between us and the local government and us and Perenco are closely finalized, if not finalized. There are, however, existing off-takers and other parties that need to have agreements with Perenco in place, and such agreements are outside of our control. But with this gas price, it’s sufficient economics for everyone around the table. Every day it’s not producing is an opportunity dollar lost. So, we are encouraged and hopeful that we will find a good common solution for all parties. We do not expect a further ramp-up of significant incremental production. Some production we might be able to bill under the existing overproduction arrangements, but not any substantial increase until Q1 next year.

Okay, answered everything there. Good. Now, I guess, for your balance sheet. Obviously, it’s in stellar shape here following the New Fortress shares. I guess, what are your plans for the $1 billion in liquidity? It’s well above your $500 million in remaining CapEx, as you showed on that slide. You have some expensive sale leasebacks you can repay. At the same time, your shares are wildly undervalued. So, do you expect to complete the remainder of the $50 million repurchase in the second quarter? And, can you provide some updated details on the convert refinancing, timing, and options there, as well as the NFE for GLNG share exchange?

Okay. That’s a few questions. I’ll start, and then Eduardo, please chime in as we go along. So, on the buyback program, you saw that we repurchased 1.2 million shares that we basically have to stop as we entered the blackout period prior to Q1 numbers. The initial framework we have approval for at the Board level is $50 million. I think it’s fair to assume that as long as the share price keeps trading at a discount to both, book and underlying values, we expect to continue the buyback program. The next sort of question is on the CB. I think what we have said there is that we have a few different alternatives open to us. I think by no specific order, we could do an exchangeable offering at exchangeable internal fee shares. We could do a CB or unsecured bond on the GLNG level or we could settle in cash either through cash available from the balance sheet or sell-down of de-risked assets such as Gimi. We have several different venues of addressing that maturity. When it comes to exactly what route we plan to take, that depends on the relative share price between NFE and GLNG, to some extent, it depends on the absolute share price of GLNG. But by that, I mean, if you were to do a CB on GLNG, you obviously wouldn’t do it around current levels. Lastly, it depends on near-term growth projects. We are planning to address it in the second half of this year. The primary reason for addressing it at that point is that then we have no restrictions on any of our liquid assets and therefore are in a position to better weigh the alternatives. In the interim, we are keeping a close dialogue with constructive investment banks and other investors proposing different alternatives, and we are keeping them on file and comparing where we think we can find the best solution.

Okay. That’s noted. And then, I guess, quickly on the NFE GLNG share exchange. Any additional details or color on that possibility?

We have options like the exchange offer or distribution of NFE shares; which one are you referring to?

You mentioned in the press release, you could exchange NFE shares for Golar common shares in terms of a...

Yes. So, that is also down to the relative share price of NFE versus Golar. It’s something we will consider once we’re out of the lockup period, which is 90 days after closing, which was the 15th of April.

Our next question is from the line of Chris Wetherbee from Citi.

Good morning, everyone. James is here for Chris. I wanted to follow up on some of your comments regarding priorities. When you consider the end markets for LNG carriers compared to FLNG, which one do you think will allow for earlier capital deployment? Additionally, is there anything that needs to be addressed before we might see a transaction in either of those areas?

Okay. I’ll kick it off again. So, when it comes to our incremental dollar, I think where we as Golar have more of a unique edge is on upstream and FLNG. As we said in the presentation, we’ve now delivered the 56th cargo of LNG from the Hilli and an unprecedented operating utilization of 100% in delivery. So, we believe that our edge is in FLNG and upstream, and our incremental dollar will go to FLNG and upstream growth as opposed to shipping. However, as we’ve said in the presentation, we have 10 ships. We have meaningful exposure. We like the outlook, but we do not intend to add ships to our portfolio. When it comes to the next steps in terms of when we can do either, we’ve just concluded the $5 billion EV transaction in selling GMLP and NFE. On the one hand, that closed on the 15th of April, but for us, we see no immediate pressure to resolve the two. At the same time, we believe part of the reason why we’re trading at a discount to the underlying value is that investors are seeking clearer exposures to either upstream or shipping. So, we will be opportunistic and try to execute a further simplification as soon as we have an attractive way of doing so. We’re exploring different alternatives, both for spinning out shipping and to also create an upstream company. So, we’re open to either.

Got it. Regarding the shipping aspect, are you implementing any strategies in your chartering approach to enhance coverage or make it more appealing in the market? Is there work to be done on this, or do you believe that if an opportunity arises, you could separate it sooner rather than later?

Yes, sure. So basically, a little while back, 12 to 18 months ago, we changed our shipping strategy somewhat to take more coverage. That was driven really by two things. Number one, we saw a lot of newbuilds entering the market in ‘21, and we did not want to have too much exposure, given the fact that we had 50 new builds coming to market on top of COVID. So, we tried to take quite a bit of coverage. To some extent, we’ve been positively surprised by how strong the rates are. We might have gotten a bit too conservative. The second reason or driver for taking this much cover as early as we did was that this was all done prior to the NFE transaction, where we did not have the same balance sheet position as we have today. So, we wanted to be cautious, not to sort of get any surprising rates. However, as we tried to state clearly on page 8, we have an increasing exposure to the market as we are very optimistic about what the outlook is. For now, I expect us to be increasingly exposed to the spot market, either through floating rate arrangements or just from vessels naturally rolling off the fixed-rate charter.

I understand what you're saying. What I'm trying to clarify is whether you believe that to pursue another strategic transaction, you require a few key factors: first, improving the quality of your assets in some way; second, if you feel the market timing isn't favorable; or third, if you think you need more time considering the recent significant transaction. It seems like your assets are positioned well, you're not taking a stance on market timing, and you're focused on creating some distance from your last major transaction. Is that the correct way to interpret your situation, or am I misinterpreting?

If there is an interesting transaction we can do tomorrow, I don’t think we have any problems doing it. I think it’s commonly known in the marketplace that we’ve been actively looking at alternatives for our shipping fleet, including creating a sort of a consolidation play. We do not think we need to do any high grading of our fleet. TFDE carriers are, if you like, the workhorse of the industry. We see the pressure to be more on the steam vessels. So, for us, we don’t expect a high grading. I think we’ve rested out and are complete with the NFE deals. So we certainly have enough energy and opportunism in the Company that if we find the right transaction tomorrow, we’re happy to go for it. For us, it’s a matter of finding the right home for the shipping fleet. We like it the way it is today. We think it’s going to get better. But, at the same time, we do believe that we are somewhat penalized from keeping it in the same company as the upstream. So, we’re open to resolve this as soon as we find the right home.

Our next question is from the line of Mike Webber from Webber Research.

I want to focus on slide 23, if that's okay, as I believe it provides valuable insight. I want to ensure that I'm understanding this correctly. Your last question pertained to the carrier fleet, and it seems that a good comparison is the overall value of Golar. Just like TK in 2015, if we can find a buyer for the carriers, the value proposition for Golar becomes much clearer and simpler. I understand you've addressed this, but I noticed that distributing or sending the carriers did not appear on the strategic initiatives slide on slide 23. Considering the challenges of finding a buyer for such a large fleet or potentially needing to inject some equity for distribution, would you agree that, at this moment, this looks more complicated than the initiatives you've outlined on slide 23, such as distributing NFE shares?

Yes. I don’t know exactly what you referred to on slide 23 in the appendix. But, when we say further group simplification, we mean finding a home for shipping or creating the same simplification by potentially spinning out the upstream. We’re open to both. When it comes to debt optimization on the shipping fleet, we stated in the earnings release today that as part of following the NFE transaction, we have agreed to reduce the debt on four of our ships where we basically invest $60 million of cash into four of the ships, reducing debt by $15 million a ship in return for a total debt reduction of $102 million. So, we pay in 60, which will be done during the early part of Q3. In return for that, we get $102 million of debt reduction. So, if you want, that’s a $42 million debt saving to Golar, and to some extent, should be seen as further enabling the shipping fleet.

I imagine if it had significant value, you could simply spin it off. However, evaluating this is a complex challenge, and you're not the first Golar management team to address it. It's still an unanswered question. Regarding the strategic options for the carriers and the realization of hidden value in FLNG, what does the current sequence look like? Is it more feasible to explore opportunities with the FLNG assets before addressing the carriers, or do you believe it's more likely to find a solution for the carriers first?

To address its current status, I believe it would involve shipping out GLNG and then FLNG, followed by an upstream company.

That makes sense. Regarding FLNG, could you provide more details about Mark III in the presentation? At 5 million tons, it’s clearly larger than the Hilli and the original technology. I’m comparing that to fast LNG, which New Fortress has recently introduced, and you have a special relationship there. How should we view those as competing technologies, or have you shifted towards a larger market size? If you’re planning to develop something that produces 5 million tons of LNG, are you exploring different projects than those associated with FAST LNG?

I think we’re excited about NFE's developments as well. To the way we see it, they’re highly complementary. FAST LNG is based on somewhat lower liquefaction capacity; it obviously stands on the seabed as opposed to floating. To some extent, it’s more suited for shallower waters. On the other hand, jackups don’t have storage. What you gain in terms of cost advantage of the liquefaction kit itself, some of that’s offset by the need for an FSU lying next to it. We believe that the two technologies are complementary. We believe that FAST LNG has one very significant advantage in being fast. It’s very suitable for certain geographies on shallow water, but we think for larger stranded or associated gas projects at deeper waters, you need a floating unit simply due to water depth. In those areas, we can either use our existing Mark I; our Mark III design, which is based on a Mark I; and we’re also looking into our former Mark II design. We like the FAST LNG. We also like our FLNG. We don’t see them as direct competitors; we see them as complementary technologies to exploit the same very interesting opportunity in producing cheap upstream gas.

Is the $2.5 million the estimated capital expenditure for Mark III? Does that involve a significant amount of equipment for separation and treatment, or would you still need to locate 5 million tons of relatively dry and clean gas to utilize that technology?

That’s mainly based on sort of similar gas pack as a Mark I. Just because Mark III is a new build, you have significantly more deck space. So, there is room to fit more gas treatment, should you want to do that. One of the attractions of our FLNG technology is that we are not custom-made to one specific gas field; we’re reusable and redeployable. So, we don’t want to make it too specific, but we can certainly add gas treatment. We’re looking at that in light of the associated and stranded gas fields we are reviewing these days. Based on that analysis, I think the technology and stripping opportunities we have on board should be sufficient to produce some of those fields.

Yes. And one more for me and I’ll turn it over. Again, on slide 23, you referenced the target distribution of NFE shares to Golar shareholders. And forgive me if you mentioned this publicly already, but do you have the ballpark approximation of what you think you would realistically look to distribute to Golar shareholders of that side?

I think as we say in the press release, it’s linked to the relative share price of GLNG and NFE. It’s linked to near-term growth projects and to some extent, it’s linked to the absolute share price of GLNG. What we mean by that is if we continue to trade at very suppressed share price levels, you kind of need to distribute more of the NFE shares to unlock the value. But if you can redeploy the capital in near-term attractive growth plays, that can be sort of 2 to 4 times EV EBITDA, as we highlighted in the presentation on integrated upstream opportunities. To some extent, we think that’s arguably even better than what investors can do if we were to distribute the cash. For us, we will weigh the two, but we will not sit on the NFE shares just to sit on the NFE shares. We will not do it if we think we have a growth project five years out; that’s not the right thing to do. So then we need to execute way quicker than that.

Our next question is from Omar Nokta from Clarksons.

I wanted to ask about the Hilli to better understand the opportunity. When you consider the ramp-up you’re anticipating or the discussions you’re having for the ramp-up in Q1 '22, is that focused on ramping up train 3, or is it both train 3 and 4? Or is it primarily about maximizing the output of trains 1 and 2? Any insights you can share would be appreciated.

Okay. So, we’ll try to give as much color as we can. So basically, we’re today producing flat out on trains 1 and 2. Given that we have spare capacity and trains 3 and 4 are there and kind of well-functioning, from time to time, we are utilizing trains 3 and 4 for certain overproduction. We also switch between which trains we produce from to make sure that we maintain the ship at a very high capability. The primary reason for the slow deployment of incremental capacity on Hilli is the need to tie in additional gas fields to produce the gas. What we assume will happen is partial utilization of increased capacity. So, if you want to define it, according to your question, Omar, we’re flat out on trains 1 and 2, and we’re talking about partial utilization of train 3. But in real life, we’re sort of shifting between all 4 trains to keep the vessel truly operational, but that’s how we see it.

Okay. Thanks, Karl. That makes sense. And is there any added CapEx that you need to take on if you were to start partially utilizing 3 in that context?

No. No CapEx and very minimal OpEx increase.

Okay. And then, just a final follow-up on this is that the contract for the Hilli goes until 2026. I know it’s still five years away, but given the current situation in the overall commodity market and the encouragement to invest upstream, is there any discussion about extending this contract, or is it still too early?

We are not looking to extend that contract until we receive payment for the full capital expenditures. We have invested in four trains and are currently using two. If we discuss expansion, it must be for the full capacity, or we need to be compensated for the entire capacity of the unit. At the same time, we are increasingly optimistic about the integrated upstream model, and having the vessel back in 2026 could align well with acquiring a gas field where we can deploy the ship. Another advantage of Hilli is her proven track record, which makes her appealing to those interested in using her for tolling operations and is certainly appealing to us if we can produce our own gas reserves.

Our next question is from the line of Sean Morgan from Evercore.

I’m sort of intrigued by this concept of moving from pure tolling that you’ve traditionally done with the FLNGs to more of an integrated upstream model. Would you seek to partner with an E&P, or would you step out of your comfort zone and seek to actually handle the production and all of the operations that traditionally was done by your partner outside of the vessel?

I think we definitely see the advantage of teaming up with someone who has upstream capabilities. We also see that there are several oil producers currently flaring or reinjecting associated gas, which is an opportunity lost for them and an opportunity for us to exploit. If you were able to produce that gas, not only will it significantly improve the carbon footprint of such oil production, it will generate very significant incremental earnings for the owner of the field, very similar to that of Perenco in Cameroon. So, we most likely would target an area where we will have a partner upstream. But again, we’re looking into a few different alternatives these days.

Okay. And then going back to your ESG report that you released, I was interested to see that 25% lower carbon intensity that you see versus, I guess, your terrestrial peers. How do you sort of get to that number? And also, would that take into account existing operations without the ability for terrestrial LNG producers to reinject liquefied carbon? Is that something you could do offshore as well?

Yes. So, if you’re referring to the AER number, which has now been reduced from 9.95 to 8.71, that’s sort of CO2 per ton mile. The way we obtained that is with certain installations on board ships that increased efficiency. When it comes to the FLNG, it’s also increased utilization of the ships that reduced the carbon footprint on per MMBTU produced. These are the primary areas of improvement. We constantly look into other engineering tweaks we can do to our existing asset portfolio to improve. We have an internal, what we call, the green team that’s constantly working on improvements across the fleet. We continue to use Golar’s innovative engineering capability to make improvements. If you’ve seen some of our previous reports, we’ve, among other things, improved the cooling of our FSRU portfolio, now sold to NFE, where we’ve been able to reduce fuel consumption by 15% to 20% by improved cooling.

Okay. So, that’s mostly on the fleet though. So for the FLNG relative to land-based, I think you termed it a mega project. Where are the savings there?

That’s mainly due to the efficient liquefaction technology that we utilize and the fact that there’s no physical footprint of the ships that we deploy, given that they’re floating.

Your next question is from the line of Ben Nolan from Stifel.

I want to revisit the situation with Hilli and Perenco. If I remember correctly, there was a discussion last quarter about how you essentially issued them an ultimatum. If they did not restructure the contract by the end of this year, you would not renew it at the conclusion of the current term. Do you have any updates on that? How confident are you that they will respond, resulting in an increase in both the duration and volume?

I think we are very confident that we will find a solution. The primary driver is that there is money to be made from all sides of the table. That includes us, Perenco, and the gas off-taker, and it certainly includes the local government. With current gas prices, there’s sufficient economics for everyone around the table. To that extent, we should see increased capacity. There have been regulatory challenges that have been resolved when it comes to production caps. There’s also increased confidence in sufficient gas flow and gas tie-in for increased production. We are confident that we can meet that increased capacity from basically early next year. As we’ve learned over time, nothing is done until it’s done, but we remain very optimistic. Arguably, we believe we’re closer than ever to having a resolution in the not too distant future.

Okay. As part of that, we need to consider the first quarter of next year because the timeline has shifted significantly in recent years. Do you anticipate that the first quarter of next year will be when the volumes start to increase and mark a solid beginning?

I think it’s fair to say that it’s not been enough. We’ve been extremely keen to increase utilization for Hilli since she was delivered on site. I think for a period of time, we had a non-cooperative gas price. There were certain regulatory challenges in gas production cap that needed to be resolved. Finally, it’s a commercial agreement between the various parties. I think where we are now is that we’re done with all but the commercial agreement. A part of us around the table already agree. It’s a matter of getting, I guess, another signature or two on the agreement, and then we’re done. It makes sense economically for everyone around. We are confident that’s the timing. Both gas flow and gas reserves support that. We’ve had some insight into that, which we pushed hard for a long time. So, we think that’s the timeline we can meet.

And then, lastly for me. Coming back to something you talked a little bit about with Mike in terms of the FAST LNG and your helping the New Fortress guys and the idea that it’s complementary, appreciating that it is complementary. It’s not the same exactly, but there are some similarities. I’m curious why you just didn’t do it yourself and have them as an off-taker, or why that wasn’t part of the arrangement, like it would be for an FLNG unit. They’re complementary, but it’s certainly, I would think, within your capability to do.

Absolutely. First off, we’re a 9% shareholder of NFE. We’re very optimistic about that story. We think including Hygo and GMLP, they have a very interesting future. We see the benefit of that model securing long-term certain supply of fixed price gas. That’s part of our motivation to ensure that our investment in NFE continues to see positive momentum. In upstream, we are exploring different alternatives. I think Mr. Wes Edens said on one of the calls in conjunction with the merger announcement that we might, over time, look at creating a common upstream or common holding company. When we look at upstream investments, especially the integrated model, one key attraction is that you fix enough of the off-take to cover all of the costs of the project, and then you sit naked on the open capacity, and therefore have a cash breakeven of zero. Anything over that is profit. So, someone like NFE would be an interesting off-taker. After the acquisition of Hygo, they have sufficient demand to be a sizable off-taker. It should be a win-win. Nothing is carved in stone in that regard. We enjoy working with them, and we think they’ve made a lot of inroads for downstream development and penetration of FLNG. We see synergies on the upstream side.

Our next question is from the line of Greg Lewis from BTIG.

Hey Karl, it's the top of the hour, so I have one question. Can you provide more details about your current relationship with New Fortress Energy? Are you receiving a consulting fee for your services, or do you have a right of first refusal on the project or the option to invest? Or is it more about collaborating closely and figuring out how to benefit from any potential success? Is there a written contract in place?

As part of the merger, this has largely been made public. Regarding the operation of the assets they acquired from us, we continue to operate and provide certain transition services from Golar to NFE. For these services, we receive a pre-agreed fee. For any additional services beyond that, we are compensated on a consultancy basis. In terms of certain development projects, we view it as an investment for both us and NFE to enhance NFE’s value. It depends on the specific services mentioned, but generally, we are paid for the hours dedicated to such projects. In terms of collaboration beyond that, we maintain a good working relationship across all levels of both organizations. It's somewhat flexible; if we identify an attractive solution, we will explore how to develop it together or determine if it is more suitable to proceed independently. We are doing some activities jointly and others separately, and we have a solid understanding of the different goals of both groups. Thank you.

So, that does conclude our conference for today. You may all disconnect.