Golar Lng Ltd Q2 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Golar LNG Limited Q2, 2021 Results Presentation Conference Call. Currently, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please follow the operator's instructions. I would now like to hand the conference over to your speaker today, Karl Fredrik Staubo. Thank you. Please go ahead.

Hi, everyone, and thank you for bearing with us. We would like to welcome you to Golar LNG’s second quarter earnings results presentation. We thank you again for taking the time to dial in. My name is Karl Fredrik Staubo, the CEO of Golar LNG. I’m accompanied today by our CFO Eduardo Maranhao, to present this quarter’s results. Before we get into the quarterly results, please note the forward-looking statement on Slide 2. Turning to Slide 3, we are delighted to announce Golar’s best-ever quarterly net income at $471 million, including a gain on disposal of Hygo Energy Transition and Golar LNG Partners, LP, to New Fortress Energy. The gain on disposal proves that there is significantly embedded value in our asset portfolio. EBITDA for the quarter came in at $67 million. Turning to the segment, Hilli continues to deliver 100% uptime with its 59th LNG cargo offloaded. In July, we concluded an agreement to increase the capacity utilization of Hilli. The increased production will deliver near-term cash flow with no additional CapEx to Golar, while delivering on our targets to increase commodity exposure to LNG prices. We will explain this increase in further detail later in the presentation. In addition to the newly acquired GAAP exposure, we are currently generating Brent-linked revenue for Hilli’s operation. Gimi remains unscheduled and is currently 72% technically complete, under construction in Singapore. Turning to shipping, our shipping portfolio achieved a Time Charter Equivalent of $46,700 for the quarter. We have seen an increase in counter-seasonal strengthening of LNG freight rates in the quarter and recently fixed one of our carriers on a five-year charter, increasing our shipping revenue backlog to $259 million. We continue to see strengthening near and long-term fundamentals for our shipping segment, with upward pressure on both rates and asset values. Turning to corporate, following the close of the sale of Hygo and GMLP to NFE, which closed on April 15, we booked a book gain of $575 million. The book gain records our 18.6 million shareholding in NFE at the NFE share price of $35.38. Following the proceeds from the NFE transaction, we now have cash and marketable securities of approximately $1 billion. Our cash balance for the quarter ended at $287 million. We are currently in discussions with key relationship banks for new and refinancing term sheets in excess of $500 million that, if concluded, would release more than $250 million in additional liquidity to Golar. I’ll now turn the call over to Eduardo to discuss the second quarter results.

Thank you, Karl, and good morning, everybody. I'm excited to provide an update on our financial results for the second quarter of 2021. This has been a fantastic quarter for us, as we have managed to close both the Hygo and the GMLP transactions on April 15. We have also continued to observe great commercial and operational performance from our FLNG segment. If we turn to Slide number 5, we can see that the group had a solid performance in Q2. Total operating revenues this quarter were $104 million, or approximately 2% above the second quarter of 2020. The greatest portion of our revenues came from our FLNG segment, where operating revenues from the Hilli, which includes the base tolling fees, increased from $54 million in Q1 to $56 million in Q2. This can be attributed to a result of overproduction in the quarter. This number does not include the Brent oil linked component, which further enhanced this figure by another $3 million in the quarter, and we will continue to record those gains as realized gains on derivative instruments. Revenues from shipping were $42 million, down from the $63 million we observed in Q1, but in line with the numbers of the same quarter last year. This has been a result of seasonality in the market, which has pushed overall time charter equivalent rates down from the previous quarter. Overall, adjusted EBITDA for the group was $67 million, in line with the same quarter of 2020. The main contributor to that has been the FLNG segment, with $45 million from the Hilli, while shipping added $27 million to that figure. Continuing on, our corporate overhead costs recorded a slightly higher number this quarter with $5 million due to one-off redundancy costs following the sale of Hygo and GMLP. As alluded to by Karl before, we recorded a record net income of $470 million in this quarter, compared to $25 million in Q1. The total gain on disposal from the sale of Hygo and GMLP to NFE contributed to $574 million, while unrealized gains from the Hilli Brent oil derivative added another $71 million to that figure. This has been further offset by a provision for tax liabilities, which we have accounted for in this quarter, along with unrealized mark-to-market losses from our NFE shares. As of the end of June, the carrying value of our NFE stake was equivalent to $35.38 per share. Likewise, we ended the quarter with total net debt of $2 billion and total cash reserves of $287 million, out of which $207 million was unrestricted cash. We have also continued to receive term sheets from key relationship lenders for new and replacement facilities in excess of $500 million. If we move to Slide number 7, I will provide further information related to the performance of the FLNG and Hilli. The Hilli continues to deliver excellent performance with 100% commercial uptime. She completed her 59th cargo during this quarter and contributed a total of $45 million in EBITDA in Q2, with further upsides to be captured. Our oil-linked fee benefits from a high Brent price, and we expect to generate an additional $9 million in the next quarter, up from the $3 million we recorded in Q2. We have also agreed with Perenco to increase production in 2022 by 200,000 tons, with the option to further increase it by 400,000 from 2023 to 2026. I will now turn the call back to Karl, who will talk in more detail about these arrangements.

Thank you, Eduardo. Turning to Slide 8, one of the more exciting developments during the quarter was our announced capacity increase for Hilli. Hilli has been delivering contracted for 1.2 million tons per year of its total 2.4 million tons per year liquefaction capacity. The announced increase in capacity will see volumes increase for next year by 17%, or 0.2 million tons per year to a total of 1.4 million tons. In addition, Perenco has committed to a drilling campaign of two to three wells, and been given an option to declare an additional 0.4 million tons every year from 2023 to 2026, increasing total annual production in that period to 1.6 million tons per year. The tariff on the incremental production over and above the existing 1.2 million tons will be linked to TTF, delivering on Golar’s expressed target to increase gas price exposure, and there will be no changes to the tariff on the existing 1.2 million tons. Golar will incur no capital expenditure to facilitate the capacity increase and only minor adjustments to OpEx. Hence, the majority of cash flows will flow to free cash flow, of which Golar has an economic interest of approximately 89% in the oil derivative, and 87% in increased capacity production. Therefore, the built-in EBITDA growth for Hilli between 2022 and 2026 consists of our Brent linked revenue, which can add $40 million on current forward curves. If you believe that the current Brent price will prevail, the same number increases to $155 million. The increased production will be based on TTF forward curves at around $113 million, but if you instead believe that the current TTF will prevail, that could increase to $373 million. To put those numbers into perspective, the base remaining EBITDA for Hilli is $751 million. On forward curves, we will see an increase of around $153 million, or on current rates for the same volumes, you will see an increase of $528 million. There are significant embedded upsides. As we further elaborate on Slide 9, both oil and TTF gas prices are currently in backwardation with forward pricing lower and current spot prices. You can see the sensitivity where the Hilli Brent link, as mentioned, is worth 40 on the forward price and 155 on current Brent around $71 a barrel. The sensitivity to be aware of here is that a $1 change in Brent price equals a $3 million change in EBITDA for Hilli on an annual basis. On the right, you can see the TTF price on the same sensitivity. For 2022, on the forward curve, we expect an incremental earnings of $26 million. If current spot prevails, the same number is $49 million. For 2023 to 2026, it’s $87 million versus $324 million. Thus, there's significant embedded upside in our existing assets. Turning to Slide 10, Gimi is now 72% technically complete, on track and on budget. We have worked 10.7 million man-hours, and the fifth and final drydock is now complete. We expect the sale away from Singapore during the first quarter of 2023, and we will start to generate commissioning revenues from the second quarter of ’23 before we begin the full contract for 20 years with BP, with a total backlog of $4.3 billion in Q4 2023. Turning to Page 11, we continue to view the underlying macro as highly supportive of our strategy to move further into upstream. The combination of economically attractive gas fields and our low-cost FLNG solution creates a favorable risk-reward backdrop, considering where LNG prices are trading today and historically. Further progress has been made on our announced initiative to increase our gas exposure. We have added to our upstream LNG team with very experienced personnel from NOV and Shell. We're currently exploring several fields already producing associated gas, along with stranded gas opportunities, and we will update the market as we make further progress on these projects. On the tooling side of our FLNG business, we continue to work with existing and prospective clients on attractive growth projects, and we have seen specific commercial and technical discussions with an existing client for the use of a 5 million ton Mark III new building design. Turning to Slide 13, switching gears to shipping. Our shipping TCE for the quarter came in at $46,700 per day, and we expect Q3 to be more or less in line at $47,000. This arises from taking too much charter coverage into 2021, but we are seeing increasing spot exposure, both for the remainder of 2021 and significantly more into 2022. As mentioned, we used the counter-cyclical strength to fix one of our ships on a five-year charter during the quarter, increasing our backlog to $259 million. Additionally, as announced during Q1, we repaid $60 million in upfront debt repayments, resulting in a total debt reduction of $102 million on four of our ships. Turning to Slide 14, both the LNG market, encompassing the commodity itself and shipping freight rates, have witnessed a significant upturn in the first half of the year. From a shipping perspective, China's considerable growth in imports, along with higher prices in Asia, is pulling tonnage demand higher, as evidenced by the 15% growth in ton-miles compared to the first half of 2020. Although LNG prices remained high, they have been somewhat volatile, benefiting an active trading environment, which again benefits shipping. Another interesting factor to monitor is the steep rise in asset values, as steel prices and reduced shipyard availability start to reflect on LNG new building quotations. LNG carriers were quoted around $180 million newbuild price about 12 months ago, and it's now up to around $210 million for new orders placed today. We are starting to see early signs of this trend also affecting secondhand values across LNG shipping. Turning to Page 15, we not only see the market being strong at the moment, but we also see fundamental support for the continued strength of LNG freight rates. From a volume perspective, we notice the geographical imbalance between growth in supply, primarily occurring in the Atlantic, and growth in demand, which remains focused in the Asia Pacific. We anticipate that this imbalance will continue to materialize over the next five years, driving ton-miles. As we have previously mentioned, the shipping market is also likely to experience a capacity constraint due to new emission regulations that will impact, particularly the older part of the fleet on steam propulsion. The increased obsolescence of vessels constructed in the 1990s and earlier, combined with limited additional orders, should, along with an expanding LNG trade, translate into a tight shipping market balance going forward. Based on the current positive market outlook for LNG carriers, we have re-engaged initiatives to refinance our shipping fleet non-recourse to Golar and explored alternatives for a separation of our shipping segments. Finally, in the last section of today’s presentation, corporate and strategic focus. On Slide 17, we've outlined the earnings power of Golar’s existing asset portfolio. To start with the top-line, you can see that our last 12-month adjusted EBITDA for shipping is $119 million, assuming $48,400 in average TCE. A $10,000 change in TCE across our shipping segment will increase or decrease EBITDA by $32 million. Thus, if you mark-to-market the fleet to the current one-year TCE, there's $140 million applied to the EBITDA generation of our shipping fleet, potentially bringing it to around $262 million. For Hilli, our pro-rata last 12-months EBITDA was $84 million. As we have discussed today, we have a considerable oil upside currently generating cash, along with the agreed Train 3 production with Perenco, adding around $70 million of incremental EBITDA based on current TTF and Brent pricing. This would then increase our pro-rata EBITDA from around $84 million to $154 million. Gimi remains on track to start a 20-year contract in October 2023, which is projected to contribute pro-rata EBITDA of $151 million. After netting off corporate investments, we estimate an EBITDA based on the last 12-months plus the contracted EBITDA of Gimi at around $340 million. With embedded upside included in our asset portfolio, we can easily see this increase by over $200 million to approach the $500 million mark. Comparing this to our contractual debt position of around $2.2 billion, remaining CapEx of around $400 million, cash and liquid assets of approximately $1 billion, and a market cap of $1.2 billion, you will observe that we are currently trading at an EBITDA to last 12 months adjusted EBITDA of 8 times, or 5 times if you include the embedded upside in the asset portfolio. We believe that trading between 5 and 8 times represents a significant discount relative to our ability to monetize 20-year cash flows to BP, and this is before factoring in any growth across Golar’s platform. We remain optimistic and encouraged by the supporting fundamentals across shipping and FLNG. We believe we are now in a very healthy capital structure with a significant capital buffer of around $1 billion. Turning to Slide 18 for a summary and outlook, we have announced the increase in capacity utilization for Hilli, which will add anywhere between $113 million in EBITDA backlog on current TTF, or $373 million on the current price. We are progressing with an existing customer for the contract over 5 million ton Mark III new buildings. We have expanded our FLNG team and are currently evaluating several integrated FLNG projects. On the shipping side, we see term rates trending higher than spot rates, supporting further fundamental strength. We have increased spot exposure across our asset portfolio and we notice asset values rising on the back of a stronger freight market and higher new building prices. In corporate and investments, our adjusted EBITDA came in at $67 million. Our net income following the sale of NFE was $471 million, resulting in a book equity of $17 a share. Our strong cash and liquid asset position of approximately $1 billion enable us to focus our efforts on refinancing our upcoming convertible bond maturity, including further group simplification by separating FLNG and shipping. That concludes the prepared remarks of today's call, and I would like to hand it over to the operator for any questions.

Please follow the operator’s instructions. As your first question comes from the line of Ben Nolan from Stifel. Your line is open. Please ask your question.

Hey, good morning. So, I'll start off with the Mark III that you talked about and the potential development there. Can you maybe frame how far those conversations are at the moment? Or when you would think is a natural progression towards something more definitive?

Sure. There are a couple of things to consider when discussing these types of agreements, as it's always dependent on the charter taking a binary yes/no decision in the end. Several factors support why both the charter and every other stakeholder in the project would see the benefits of progressing as quickly as possible. The most important driver right now is, of course, the gas price, as there is a significant amount of money left on the table each day. Second, it's the cost of building a Mark III. With steel prices rising and yard activity sourcing significant orders for complex vessels, even just waiting one day for an investment decision can cost more due to lack of yard capacity. Lastly, in the search for alternative liquefaction solutions, we have proven that our FLNG technology is more competitive than others on cost point, carbon footprint, and operational track record. We are confident that studies have now concluded, enabling us to move into the next phase, which should align with everyone's interests to expedite progress.

Okay. So is this something that you see as a 2022 kind of event? Is that a fair framework?

Yes, I would say within the next six to 12 months, it’s likely on the shorter side. We should be able to see some significant progress and be able to update the market then.

Perfect. Thanks, Karl. My second question relates to the five-year contract and contracting in general. Could you provide context on the type of rates applicable for a five-year contract? Is there room for the Tundra to be contracted as an FSRU on a long-term basis?

Certainly. When it comes to the five-year charter we concluded, that is specifically for a carrier, not for Tundras or FSRUs. One of the reasons we decided to engage the charter was due to beneficial rates well above or better than cash breakeven. Fixing a five-year term on one ship helps in discussions with the bank as we consider refinance options for the shipping fleet non-recourse to Golar, preparing for separation from our FLNG business. The reason for fixing was due to attractive rates compared to what we've historically made on the ships, along with decent free cash flow. As for Tundra, we are increasingly confident we will find work for her as an FSRU; there are several projects where Tundra’s specifications are advantageous. If we pursue a shipping spin, it is unlikely to include Tundra, as we would prefer to have her fixed before considering alternative options.

Perfect. Thank you.

Please follow the operator's instructions. As your next question comes from the line of Chris Tsung from Webber Research. Your line is open. Please ask your question.

Hey, guys, good morning. This is Mike Webber actually on for Chris. How are you?

Hey, Mike.

Good. I wanted to follow up on the carrier spin specifically. So refinancing the carriers presumably aims to consolidate them under a single facility for easier spinning, but it seems leverage levels will remain relatively flat post-refinancing? What timeline are you targeting for this?

Yes, that's a fair assumption. We’re down to around 108 per TFDE. In the leasing market, you could likely achieve slightly above that. Normal bank financing would yield slightly less, but it hinges on the final structure we find most suitable. Depending on the chosen arrangement, we may see minimal further deleveraging, but on a standalone basis, we can refinance the fleet non-recourse without additional cash injection.

Okay. That's clear. Given the changing circumstances across the company portfolio with the NFE transactions concluded, what timeline are you considering for spinning the carriers?

Well, mid-year is a time of review. We've seen substantial changes across the company portfolio following the NFE transactions. We will now take a thorough examination again. It's noteworthy that we were quite close to resolving this around two years ago, but it had been parked for some time. However, we will re-engage in discussions. The current corporate activity in the LNG sector presents viable opportunities. With the present rates, there is a heightened interest for investors in acquiring pure play shipping exposure, which we find encouraging.

Understood. Are you still focusing primarily on scenarios involving a specific counterparty or exploring a standalone public market spin?

Both options are on the table. We're exploring several alternatives that we believe would be the best fit, but a long-term solution without any other partners is certainly viable.

Regarding the Hilli, you've outlined various scenarios for additional volumes in the deck. Is there an extension discussion in train regarding the contract for the baseline volumes?

We have made it very clear in the market and with Perenco that we are not discussing extensions until we see expansion. We just concluded the expansion in July, so until it’s fully developed, we will not engage on extensions. However, as the expansion now unfolds, the door is open for future discussions. Our primary aim would be to redeploy Hilli on the gas field we control ourselves, but we are open to finding solutions with partners.

Thanks for the clarification.

Please follow the operator's instructions. Our next question comes from the line of Chris Wetherbee from Citi. Your line is open. Please ask your question.

Hey guys, James on for Chris. I wanted to follow up on the shipping spin. How will the new regulations play into this timeline? Are there milestones we should be aware of?

The new regulation becomes effective on January 1, 2023. We anticipate this will mainly affect steam carriers, which we view positively as they constitute over 40% of the fleet. If a significant portion of the fleet becomes obsolete, this will yield positive supply effects. We only have one steamer left in our fleet, the Arctic, while our TFDEs should be less affected but will contribute to upward pressure on rates.

Would it make sense to wait until the back half of 2022 or 2023, to potentially capture upside? Or will the outcome reflect the pricing you expect?

We believe, as shareholders, that holding LNG shipping in that timeframe is highly beneficial. However, we do not view a spin as simply a sale. As long as we spin while maintaining equity, we find this feasible. The current challenges with efficient pricing stem from the blend of FLNG and shipping risks. What we are considering is separating the shipping fleet into a standalone entity and potentially issuing shares in that venture. Rather than holding one Golar LNG share that combines FLNG and shipping exposure, shareholders would receive one share for FLNG and another for shipping.

Understood. Switching gears to the structure of potential FLNG deals, how would you envision funding them? Would you need partners?

For new builds similar to Gimi, we would like to secure yard financing as equity requirements during construction would be lower. If we were to execute an integrated FLNG project, likely we would require partners. However, we are exploring options for redeploying Hilli in 2026 when its current contract concludes. The debt will have been significantly amortized by that time, and we should have ample capacity to do so from our own balance sheet.

Thank you.

As the next question comes from the line of Randy Giveans from Jefferies. Your line is open. Please ask your question.

Gentlemen, how’s it going?

Hey, Randy.

Question about the term sheets you've received for new refinancing facilities aimed at providing $250 million liquidity. What assets will be used for collateral? What hurdles or timing considerations exist?

We have explored some alternatives to release additional liquidity under favorable terms. This includes undelivered assets, such as Tundra, which currently has around $107 million collateral. We also have some letter of credits that are cash-backed and approximately $100 million in our shareholding in NFE. In addition, Gimi is also under-levered; we have $700 million against a $4.3 billion backlog project. We've observed increased capacity utilization of Hilli, with neither Train 3 nor the oil derivative having leverage against it. We are price sensitive in our discussions but recognize the advantages in raising liquidity if we can do so at attractive terms, especially given the significant growth pipeline across FLNG and integrated upstream alternatives.

Will this refinancing approach help you repay the convertible bond without selling NFE shares at lower prices?

Yes, we have tried to maintain consistency regarding the NFE transaction since it was announced. Now that our lockups expired on July 15, we will assess our options based on Golar’s and NFE’s share prices while considering near-term liquidity needs. At present levels, we find it preferable to tap alternative sources for addressing the upcoming convertible bond rather than divesting our NFE shares.

Lastly, on pages 8 and 9, there are significant upsides or downsides linked to Train 3's EBITDA contribution. Given TTF linkage, will you hedge any of this? Is there a floor for expected EBITDA contributions next year?

Yes, considering the TTF contract structure, both us and Perenco would not accept any losses on the incremental production associated with TTF. The contract is structured to prevent losses, enabling us to capture extensive upside. While we don't currently plan to hedge, we prefer to remain flexible in the dynamic LNG market as hedging curves appear steeply backwardated.

Got it. That’s all for me. Thanks so much.

Thank you.

Our next question comes from the line of Sean Morgan from Evercore. Your line is open. Please ask your question.

Hey guys. Regarding the priority on additional development from the FLNG side, will the Mark III newbuild affect the future of Gandria? Is there a market preference for bespoke builds for certain projects?

It can still be a viable solution. We want to differentiate between FLNG in tolling arrangements versus integrated. As of now, our most advanced discussion for new builds relates to Mark III. While we are advancing with integrated solutions, Gandria could also be a viable option for deployment. Gandria's operational advantages could make her quicker to deploy, but Mark III is a more probable short-term choice than anything with Gandria. Currently, Gandria is parked outside of Singapore and carries no debt, with a scrap value around $20 million.

Thank you.

Our next question comes from the line of Ken Hoexter from Bank of America. Your line is open. Please ask your question.

Great morning/afternoon. Concerning the Hilli, congratulations on achieving 100% uptime. Are there any scheduled dry-dockings to be aware of? Can you provide updates regarding the agreement on the third train and progress on the fourth train?

Regarding Train 4, Perenco is now exploring drilling two to three new wells with the option to increase production by 0.4 million tons. However, current expectations suggest no utilization of Train 4 during the existing contract period due to current reserve estimates. Regarding your first question about dry-docking, there are no current plans for dry-docking for the remainder of the contract period. Scheduled maintenance windows have been executed successfully with no anticipated unscheduled downtime.

Excellent clarification. What about COVID impacts on Gimi’s construction? Are there constraints or penalties on delivery timelines?

The 11-month COVID response has accumulated some effects, but we continue to monitor the situation closely. The fifth and final dry-dock is complete, with 10.7 million working hours logged. The project is adhering to planned timelines, although ongoing sourcing of non-Singaporean workers poses potential sensitivities. We are collaborating with Keppel to mitigate these complications, as they are a 30% stakeholder here. We currently have around 2,500 people working daily on the vessel with no current significant COVID outbreaks to report.

Great insights. Eduardo, excellent slides summarizing the various updates. Quick final question regarding monetizing the NFE stake. Has the simplification changed your outlook?

Let me address that before Eduardo adds further insights. When we sold GMLP and Hygo to NFE, approximately half a billion dollars of EBITDA was injected, along with the significant growth potential from Hygo with numerous terminals in Brazil. We feel encouraged as NFE is building critical terminals. Despite disappointment with share price decreases since the announcement in January, we believe in the strategic importance of NFE’s projects, and the fast LNG solution aligned with our growth ambitions makes it a valuable stake. We prefer holding this asset for future growth.

I'd like to emphasize the terminal developments at NFE. We remain highly confident in their ability to implement their business plan. Significant progress has been observed since announcing the transaction. We maintain close dialogue with NFE and trust in their capacity to execute. Thus, we see that the market does not fully recognize the value NFE represents, and we expect ample liquidity for Golar to meet our refinancing needs, as highlighted in the presentation.

Thanks for your time, everyone.

As your next question comes from the line of Liam Burke from B. Riley. Your line is open. Please ask your question.

Thank you. Hi, Karl. Hi, Eduardo, hope all is well.

Hey, Liam.

Karl, could you discuss the Mark III's contract pricing? Will it be tied to TTF or tolling or both?

For the Mark III, we are currently discussing the contract arrangement as a fixed price tolling similar to Gimi. Regarding the Mark III's pricing structure, we anticipate a fixed price EPC contract.

Great. With attractive returns for these FLNG projects, are you seeing competition from lower-cost alternatives?

There are about three or four players in the FLNG space, including us. If we briefly exclude NFE, we remain highly competitive in costs per liquefaction. Our operational track record—100% uptime since delivery—significantly distinguishes us from competitors. Moreover, our OpEx is favorable as well. Ultimately, reliable service that captures upside during high gas prices is critical in driving our FLNG economics. Generally, we are competitive on most fronts, but reliability and service capability are what really matters. We don't consider NFE a competitor in the tolling space; their focus is primarily on their own production needs.

Thanks, Karl.

There are no further questions. Please continue.

Thank you all for dialing into the call. Again, I apologize for any delays and the challenges with the conference call setup. We're glad you stayed with us and appreciate the relevant questions. Let's speak soon. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.