Golar Lng Ltd Q1 FY2024 Earnings Call

Welcome to the Golar LNG Limited Quarter One 2024 Presentation. After the slide presentation by CEO, Karl Fredrik Staubo, and CFO, Eduardo Maranhao, there will be a question-and-answer session. Information on how to ask a question will be provided then. At this time, all participants are in listen-only mode. I will now pass you over to Karl Fredrik Staubo. Karl, please go ahead.

Thank you, operator, and welcome to Golar LNG's Q1 2024 earnings results presentation. My name is Karl Fredrik Staubo, CEO of Golar LNG, and I'm accompanied today by our CFO, Eduardo Maranhao to present this quarter's results. Before we get into the presentation, please note the forward-looking statements on Slide 2. We start at Slide 3 and an overview of Golar today. We own two FLNG assets: Hilli, the world's first FLNG with a market-leading operational track record of 100% economic uptime since operations started in 2018; and the FLNG Gimi recently delivered to the GTA Hub offshore Senegal and Mauritania to start a 20-year contract for BP. We are contemplating ordering our third FLNG, a Mark II, with an annual liquefaction capacity of 3.5 mtpa. During the first quarter, we took delivery of the FLNG conversion candidate, the LNG carrier Fuji LNG. We also own a legacy shipping LNG carrier, the Golar Arctic, which we are now considering for long-term charter or an opportunistic sale of the vessel. We have two financial investments, Macaw Energies, a small-scale land-based solution for capturing and monetizing flare gas, and a small-scale LNG carrier company called Avenir LNG where Golar was a founding shareholder together with Stolt-Nielsen and Hoegh LNG. On the right-hand side of the slide, we've summarized some of the key stats of Golar. We have a strong financial position with a market cap of $2.8 billion, a cash position of approximately $700 million, net debt of $550 million and significant financial flexibility in optimizing the debt of existing assets. For 2023 we had an EBITDA of $356 million and this is before the startup of Gimi under her 20-year charter with BP, expected to add approximately $150 million of EBITDA to Golar on an annual basis. We have meaningful cash flow visibility with an EBITDA backlog standing at about $5 billion with further upside once we recontract Hilli and move ahead with a contemplated FID on our Mark II FLNG project. We have a strong focus on shareholder returns. Last year, we reintroduced a quarterly dividend and accelerated a share buyback program. We're very enthusiastic about the state of the business and the progress made on attractive FLNG growth prospects during the quarter. Turning to Slide 4. Golar remains the only provider of FLNG as a service and we own the largest FLNG fleet by production capacity. This is relevant as gas resource owners of proven reserves, either stranded, re-injected, or flared gas, look to monetize proven reserves while maintaining meaningful ownership and exposure to these resources. Golar's position as the only proven service provider of maritime liquefactions enables us to offer a unique value proposition to these gas resource owners and governments. We own and operate the largest fleet by the number of units at par with ENI and Petronas and largest in the world by liquefaction capacity. Golar pioneered the FLNG concept with the construction and delivery of Hilli, and we've also demonstrated the lowest CapEx per tonne of liquefaction capacity and market-leading operational track record. Based on current yard discussions for the contemplated Mark II FLNG project, we expect to maintain this attractive CapEx per tonne of around $600 million per mtpa of production capacity. Turning to Slide 5. Demand for LNG remains strong with a healthy outlook. We continue to be constructive on the LNG market as demand outlook remains robust with an expectation of close to 70% growth in traded volumes between 2023 and 2040. LNG is the second fastest growing source of energy after renewables. From a geographical perspective, Asian nations drive LNG demand and make up more than 85% of expected demand growth through 2040. LNG demand is driven by decarbonization efforts in energy-intensive industries such as steel, cement, and fertilizer. LNG is favored due to its emission and flexibility benefits over other fossil fuels, and the transition from coal and oil to LNG and natural gas is an important driver of the target reduction in energy-related emissions towards 2050. This supports long-term offtake demand for our FLNG units. Moreover, the focus on data centers and AI is increasing, pushing energy demand in both the Eastern and Western hemispheres, offsetting some of the reduced energy demand from increased efficiency of other energy consumers. We also see an overall growth in power consumption in developing nations witnessing expansion in industrial production as outsourced overseas production moves from China to other low-cost regions. Countries such as Thailand and Bangladesh are rapidly boosting LNG consumption with anticipated demand growth from 20 million tonnes to 60 million tonnes through 2040. Turning to Slide 7 and the highlights for the quarter. Hilli continued her operational excellence, having now delivered 112 cargoes since startup and more than 7 million tonnes of LNG produced. Gimi is moored to the GTA Hub and ready to commence operations. The GTA FPSO remains on the critical path for LNG production on this megaproject. We have progressed the contemplated Mark II growth project closer to FID with strong progress across the three parameters for FID to be fulfilled. Those three are a final yard EPC contract, construction financing that Eduardo will elaborate on later, and commercial opportunities for FLNG deployments. If we FID the Mark II within '24, we expect to take delivery of the FLNG in the second half of '27. The framework agreement for potential FLNG deployment announced during Q4 has now progressed to detailed document negotiations for up to a 20-year potential FLNG charter with a 2027 startup. We'll elaborate on that later on in the presentation. On Corporate and Other, I'll let Eduardo cover the quarterly results later on. For Macaw Energies, we've now successfully developed the pilot LNG production unit named F2X. The F2X unit has already produced LNG during testing and is currently being mobilized to a flare gas site in Texas for live testing and commercial use. Once the Macaw technology is fully proven, we will evaluate alternatives to separate Macaw into a separate entity and build up a portfolio of F2X units. Turning to Slide 8 and an update on the FLNG Gimi. On the right-hand side of the slide, you can see Gimi moored to the GTA Hub. The vessel sits behind a 1.2-kilometer breakwater and is moored to the steel infrastructure which makes up the hub itself. On the right-hand side, you can see the BP-owned FPSO departing Tenerife on our way to our offshore location. The hookup and commissioning of the FPSO are now on the critical path to first gas and expected to occur in Q3 '24. While we wait for first gas, Golar has now started to receive standby day rates. We're also pleased to announce that we made positive progress with the GTA operators, BP and Kosmos to resolve the disputed pre-COD contractual mechanisms, as well as to optimize the commissioning period. We continue to build on the constructive cooperation between the partners to optimize time to COD. Slide 9 further highlights the key steps for Gimi and the GTA field to reach COD. As you can see, the first two milestones have been concluded and we're waiting to embark on LNG production. As explained, the commissioning period is expected to be approximately six months with commercial operations anticipated thereafter. We are now receiving standby day rates and daily commissioning payments ahead of COD. COD triggers the start of a 20-year lease and operations agreement that unlocks the equivalent of around $3 billion of adjusted EBITDA backlog to Golar, or about $150 million per year. Changing to Slide 10 and Hilli. Hilli continued her market-leading operational performance with another quarter of 100% economic uptime. In addition to the economic benefits to Hilli's stakeholders, including the host government, upstream partners and Golar shareholders, our FLNG operations have significant environmental benefits to the areas we operate in, especially if the source gas is being flared. We also serve the communities where we operate through a series of initiatives including local purchasing, hiring domestic staff. On Hilli today, we have 90% onshore support staff and 40% offshore staff being Cameroonians. We have local education programs and infrastructure support projects such as water wells, streetlights and other initiatives that benefit the communities we operate in far beyond the contract duration of FLNG operations. Hilli enabled Cameroon to become the world's 20th LNG exporting country upon startup of operations in 2018 and remains the only LNG facility in the country. Today, there are several nations with proven or associated gas reserves that would like to access these benefits and currently drive demand for Hilli re-contracting at the end of our current charter in July 2026. Turning to Slide 11 and Mark II. We continue to develop Mark II towards FID. As previously guided, we have committed more than $400 million to our planned next FLNG vessel where $266 million has been spent to date, all of which is currently covered by equity. Long lead items are now 58% complete. During the quarter, we have continued to work with the topside provider and the shipyard to reconfirm the yard slot and pricing. We still expect an all-in FLNG price to be in the industry-leading range of around $600 million per mtpa of production capacity. Should we order the vessel within the summer of '24, we expect sail away in the second half of 2027. Turning to Slide 12 and business development updates. Our focus remains on redeploying the FLNG Hilli following the end of our current charter in July '26 and thereafter, order and secure commercial terms for a contemplated Mark II FLNG. We are very positive about the development of the framework agreement announced in our Q4 '23 earnings release that has now progressed to detailed contract negotiations for up to 20-year FLNG deployments. We see strong alignment with the potential charter, host government, and site selection for the deployment of FLNG production. In addition to that specific opportunity, we continue to advance additional FLNG developments where most of the activity remains in West Africa and South America, but we're also pleased to see other geographies actively pursuing FLNG developments. On the back of this increased FLNG business development activity, we have now recruited a Chief Commercial Officer, Federico Petersen, and two highly experienced maritime and upstream development colleagues. Combined, the three of them have more than 70 years of business development experience, and we're very pleased to have them on the team as we already see benefits in terms of building the FLNG pipeline. We expect to continue to update the market once we have material news on this front. On Page 13, switching gears to Macaw Energies. On the top right, you can see the F2X units mounted outside of the factory where the unit is constructed in Texas, U.S. This is a modularized system that enables capturing and monetizing flare gas for land wealth, specifically targeting markets in the U.S., South America, and the Middle East. We're pleased to say that the first unit was delivered on time and on budget and has proven to already produce LNG from natural gas inputs. The unit is currently being mobilized to a site in Texas for commercial demonstration of the technology. We see the business opportunity as very attractive. From CapEx to cash flow, we're approximately 10 to 12 months to build one unit. Based on the current planned commercial model, we see a CapEx to EBITDA of around three to four times based on the existing commercial opportunities that we have identified. We currently have several large potential clients of Macaw and the F2X technology performing due diligence on the company, and some of them have expressed interest for off-take of multiple units. As explained earlier in the presentation, we will consider separating Macaw into a standalone entity during 2024 to roll out the business model and build a portfolio of F2X units. Turning to Slide 14. Earlier today Golar released its 2023 ESG report. The ESG report highlights some of the key achievements conducted over the course of the last 12 months, including the completion of Gimi with 38 million man-hours worked without any lost time incidents. The derisking of Golar from a single asset FLNG company to two FLNGs in operation with a further third unit contemplated. We elaborate on the benefits of the F2X system in Macaw and some of the developments in our carbon capture investments in Aqualung. We expand on some of the initiatives already mentioned under the Hilli section that we have conducted in Cameroon and we would encourage all of you to visit our website to further learn about Golar's ESG performance over the course of the last 12 months. I'll now hand it over to Eduardo to take us through the Q1 group results.

Good morning, everyone, and thanks, Karl. I'm pleased to share an overview of Golar's financial performance during Q1. Turning over to Slide 16, I wanted to show some of the highlights of this quarter. Total operating revenues amounted to $65 million with total FLNG tariffs reaching $86 million, down from $110 million recorded in the same quarter last year. This reduction can be attributed to lower realized Brent and TTF linked earnings when compared to last year. We always look at FLNG tariff as the appropriate metric, which reflects all realized liquefaction revenues, including gains on our oil and gas linked fees. We had a net income of $66 million in Q1. This figure represents a significant improvement on a year-on-year basis. Adjusted EBITDA came in at $64 million, down 24% when compared to the same quarter in 2023, as a result of lower Brent and TTF prices, which ultimately impacted Hilli's earnings. Our liquidity position remains strong with approximately $700 million of cash on hand and expected receivables from our closed TTF hedges. Based on that, our net debt at the quarter end stood at $550 million. We continue to execute on our share buyback program this quarter which reduced the number of outstanding shares to 104 million at the end of the quarter. So now moving on to Slide 17. Hilli maintained 100% economic uptime and its market-leading operational track record. Here we can see the evolution of Hilli's EBITDA contribution over the last quarter. When looking on a year-on-year basis, Hilli generated $64 million in Q1. This number includes $31 million from base tolling fees. Brent and TTF-linked fees were down to $15 million and $18 million, respectively. We retain exposure to Brent and TTF, so should prices continue to improve in the coming quarters, we should expect increased distributions from Hilli until the end of its current contract. Moving on to Slide 18. You can see that we remain exposed to oil and gas prices for the remainder of 2024, while at the same time expect to benefit from locked-in gains from our previous TTF swaps. Based on current forward prices, Hilli is expected to generate approximately $274 million this year, while debt service, including principal amortization, is expected to come down to $87 million in 2024, resulting in total free cash flow to equity of just under $200 million per year. So, moving on to Slide 19. We remain committed to shareholder returns and executing on our share buyback program. As you can see, in 2023, we paid over $168 million in dividends and share buybacks. With the recently announced dividend of $0.25 this quarter, the total amount of dividends and buybacks in '24 will exceed $40 million. We've bought back approximately 0.7 million shares this quarter, leaving 104 million shares outstanding at the end of the quarter. Out of the $150 million which was approved last year, $74 million remains available for further repurchases, which we will continue to opportunistically pursue. This quarter, we are declaring a dividend of $0.25 per share with a record date on the 10th of June and payment on the 17th of June. Now turning over to Slide 20. As we approach the startup of the 20-year Gimi contract with BP, we have the opportunity to improve our current debt structure and release a significant amount of equity which is tied to that project. We have been in close dialogue with various lenders and have recently executed term sheets for refinancing alternatives ranging from around $1 billion to up to $1.4 billion. As of today, we have drawn $630 million under the existing $700 million facility. So when running the numbers based on our 70% stake, a potential refinancing could unlock more than $0.5 billion net to Golar. This is another stepping stone towards our funding plan for the Mark II project. We have been actively negotiating a new long-term financing package for the Mark II of approximately $1.2 billion. So when considering the expected net proceeds from a potential Gimi refinancing, plus around $300 million which Karl mentioned earlier today, which has been fully equity-funded until now, which includes the purchases of long lead equipment and the acquisition of the donor vessel, the LNGC Fuji. This proposed financing will support our funding strategy to move ahead with the Mark II project FID in the coming quarters.

Thanks, Eduardo. I'll now turn to Slide 22 to outline the summary and the next steps. So, on Hilli, our utmost focus is to maintain the market-leading operational track record and focus on re-contracting the vessel at the end of the current charter. We're very pleased with the developments of the potential 20-year charter, which we are currently in detailed negotiations for. On Gimi, our ambition is to conclude the Pre-COD cash flow mechanisms with BP and continue the very positive progress to COD. As Eduardo just explained, we are also focusing on the debt optimization through a potential refinancing of this vessel. Turning to Mark II, we have spent $270 million to date with the target FID subject to a final yard contract, a construction facility being available, and charter visibility on either Hilli or the Mark II. As explained earlier in the presentation, we have received reconfirmation of a CapEx per tonne of $600 million per mtpa and a target 2027 delivery if ordered this summer. Under Corporate and Investments, we are targeting a separate listing of Macaw Energies, a sale or long-term charter of Golar Arctic, and we remain committed to strong shareholder returns supported by current strong cash flow generation with significant upside both from re-contracting of Hilli and ordering and contracting of Mark II. We have significant financial flexibility in debt optimization and continued capacity under the existing share buyback program. That concludes the prepared remarks and we're happy to open up for any questions.

Thank you. We will take our first question. Your first question comes from Ben Nolan from Stifel. Please go ahead. Your line is open.

Thank you, and good morning or afternoon, Karl and Eduardo. My first question is regarding the progress on the framework agreement. It seems like we are close to moving forward, though there’s some work left to do; I hope that’s not too optimistic. Can you provide more details on this? Specifically, should we be thinking of it in relation to Mark II? And could it potentially involve more than one unit?

Hi, Ben. Yes. It could potentially encompass more than one unit over time. And initially…

Okay.

Both us and the client are working on whether Hilli or Mark II should be the first or not.

Okay. All right. I appreciate that. And then, on the Hilli, comes off contract in the middle of 2026, is there any potential or is there a way at which it could start a new contract that same year just as there need to be a little downtime or upgrades and so forth?

That's 100% dependent on the location in which we recontract. Of course, if we were to stay on-site in Cameroon, we obviously do not need to go to a shipyard. If we go to one of the neighboring countries subject to water depth, we might not need to go for any vessel upgrades, but it's also linked to the duration of re-contracting. And if you're looking for close to 20 hours operations, we believe it would be beneficial to have a relatively short yard stay to ensure continuous operation in the 20-year period and not have any need to go for maintenance at that time.

Okay. All right. I appreciate it. Thank you.

Thank you. We will take our next question. And your next question comes from the line of Alexander Bidwell from Weber Research Advisory. Please go ahead. Your line is open.

Good morning. This is Alex filling in for Greg Waisikowski this quarter. Thank you for taking my questions. I have a quick one regarding Hilli. Could you provide a general timeline for her redeployment? Specifically, once she comes offline in July, what's the expected path to first gas for the new project? You previously mentioned considering bringing her into a yard for maintenance and refit work. Are we anticipating a similar commissioning timeline at the new site as we saw with Gimi?

Yeah. Hi, Alex. So provided she does not stay inland, what you would have to do is to decommission the vessel from its existing sites. We would likely then sail to a yard. We do not need to go to a dry dock at all. So that is most likely to be either to a dry dock in Tenerife or similar. The primary reason to do it is life extension for a longer-term contract. We expect the yard stay to take plus/minus three months, and then you sail down to the location of operation. We do not expect a six-month commissioning period once we're on site. We had a significantly shorter than six months commissioning period of Hilli when we first started operation in Cameroon. And given that the vessel has been producing for eight years, we know that all of the systems, pumps, generators and so forth are working well. So we expect a significantly shorter commissioning period. We would expect more in the tune of one to two months. But through the commissioning period, you are producing LNG, so it's not like the commissioning period is without revenue.

Thank you very much. I have a quick question about Mark II. What lessons have you applied from your Mark I designs to this new design? Do you expect to have an optimized design that will make maintenance easier or help reduce your maintenance costs at the facility?

That's a very good question. So dependent on how detailed we should go in this call, I suggest we keep it relatively high-level. But the key benefit of Mark II over Mark I is that the entire liquefaction plant is built on an entirely new mid-section. So if you look at the illustration here, you can see that all of the liquefaction is built on a new unit, which is 80 meters long and 60 meters wide. That means that we could modularize the whole construction of the liquefaction plant and then add the storage being the ship. That's the benefit of Mark II. On Mark I, we have the liquefaction on one side of the ship and support vessels on the other. That means that it's far more stick building in a Mark I than a Mark II, hence, on Mark II, it's quicker, easier to operate, less space restriction and enables modularized build, which is to a larger extent than Mark I repeatable. So yes, there are significant learning effects, more space, but the same technology.

All right. Thank you very much. That’s all from my side.

Thanks, Alex.

Thank you. We will take our next question. And your next question comes from the line of Chris Robertson, Deutsche Bank. Please go ahead. Your line is open.

Hey. Thank you for taking my questions. Good morning, or afternoon Karl, and Eduardo. My question is just centered maybe around more theoretical scenarios here in terms of how you're looking at ideal contract terms, let's say, for a re-contracting of the Hilli? I mean, it's given that you would potentially want the full utilization of the asset. But as we're thinking here about the choices kind of with the pricing outlook for LNG here, how much would, in your mind, be ideal for the base tolling arrangement versus commodity price exposure as it relates to just capacity?

Hi, Chris. That's an interesting trade-off. So I think it's fair to say that the higher base you ask for, obviously, the less carry you get on the upside and vice versa. What we tend to see is that the potential charter or upstream partners are far more open to share on the upside as opposed to cover on the downside. So on the balance, what we want to cover is debt service and sort of a minimal return to equity on the fixed tolling and then have an attractive breakeven on where we share the upside from.

Okay. That's fair. And I guess, Karl, you had mentioned some other geographies pursuing FLNG beyond the two focus regions that you typically looked at in West Africa and South America. Can you go into a little bit more detail on where you're seeing that?

Other geographies include further north in the Americas and the Middle East.

Okay. Got it. And then last question follow-up. As you brought in a new Commercial Officer here, as well as development personnel, you said that you've realized some gains so far or at least some help there. Can you go into a little bit more detail on exactly either what they bring to the table in terms of their network or expertise or how are they driving the process forward from a day-to-day perspective?

So with reference to your question on sort of the upside sharing, people with in-depth experience from upstream business development is very helpful to our commercial team because we have further insights into where and how much we can share on the upstream. And obviously, with the combined 70 years of successful industry experience, they have significant relationships with potential upstream partners. So it's both the benefits of in-depth knowledge of the upstream part of the value chain and the relationships.

Got it. That’s great color. Thank you very much for the time. I’ll turn it over.

Thank you.

Thank you. We will take our next question. Your next question comes from the line of Liam Burke from B. Riley Financial. Please go ahead. Your line is open.

Thank you. Hi, Karl. Hi, Eduardo. How are you?

Well, Liam.

Karl, in your discussions on the negotiations on the Mark II, are you talking with multiple parties or is this competition on the other side for the access to the first Mark II or is it one potential charter looking at multiple projects?

From the chartering side, it's more than one for sure. There are several different parties we're talking to about Mark II. What we see both across Hilli and Mark II and in this market in general is, time to cash flow is important, and therefore, we think it's important to safeguard delivery. Obviously, it's clear to the whole market from when Hilli is available, that's from July '26 onwards. We think it's important to safeguard a '27 delivery for Mark II because that's far ahead of where we think others could introduce liquefaction capacity. We also see a constraint on yard availability in general for maritime assets, and locking in the yard slot we think is an important step in securing attractive commercial results.

Got it. Great. Thank you. And on Avenir, I mean you mentioned it, but are you satisfied with the progress there or is that a source of cash that you can reinvest in other projects?

It's fair to say that Avenir was more central to us when we owned Golar Power, now known as Hygo, but we still value the investment. Avenir has recently added two new builds to its fleet, so we now have five vessels in operation and two under construction. The supply-demand balance for small-scale LNG ships is highly appealing, as a significant portion of the commercial fleet, including cruise liners, container vessels, dry bulk carriers, and tankers, are being ordered with LNG dual fuel, yet there is very limited LNG bunkering infrastructure. This, combined with the small-scale distribution of LNG, creates a very attractive environment for small-scale LNG. However, it is true that this investment is less strategic for us than it once was when we were more engaged on the downstream side.

Great. thank you, Karl.

Thank you.

Thank you. We will take our next question. Your next question comes from Greg Lewis from BTIG. Please go ahead. Your line is open.

Hey, thanks. Good afternoon, everybody. Hey, Karl. I'm looking for more clarity on the advanced negotiations mentioned in the press release or in the prepared remarks and presentation. When we did the Hilli project about a decade ago, we primarily wanted a proof-of-concept, so we had a unit with only two trains operational. You did a great job scaling it up to three trains. Considering the lessons learned, if we proceed with the new project, would we think about a scenario where the vessel might not be fully utilized, like with the Hilli, ensuring that the fourth train is operational?

Obviously, if we build more units, the plan is to fully utilize them for sure. But at the end of the day, as long as the client pays for it, we can utilize whatever they want to use. But we're sure the target is to fully utilize. I think part of the reason for the current contract structure of Hilli was that it's the first FLNG deployment in the world, and it was a proof-of-concept. At that time, the gas reserve and the flow rates from the existing wells did not allow for a higher production. Obviously, we are targeting full utilization of all of our units in all commercial discussions.

Okay. I know we've touched on the negotiations, including whether you want a higher base rate or a higher tolling fee and what the potential upside might be. Given that we can borrow against the unit, are there any floor levels we should be considering for EBITDA generation from the Hilli, particularly when thinking about borrowing for our next project?

So our focus is obviously to maximize economic returns based on the resources available to us, and that's our target for all of our projects. And we recognize that with a higher firm base, you get more attractive debt financing versus a lower base and more variable earnings. So we're obviously looking at equity returns in what we think are likely gas price scenarios and that's how we manage that side. When you say guiding on base, we have a base today, which is based on 57% or 58% utilization. I think we wouldn't talk to a new contract if it was less than at least 90% utilization. So I think it's fair to assume that you will have at least a pro-rata increase in the base rates that you see today.

Okay. Great to hear. Thank you very much for the thoughts.

Thanks, Greg.

Thank you. With no further questions, I would like to hand back for closing remarks.

Thank you all for dialing in. We hope you found the update interesting. We're certainly very pleased with the developments of the company. We look forward to speaking to you all soon, and have a great day.

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