Golar LNG Limited (NASDAQ:GLNG) Q3 2022 Earnings Call Transcript

Golar LNG Limited (NASDAQ:GLNG) Q3 2022 Earnings Call Transcript November 16, 2022

Golar LNG Limited beats earnings expectations. Reported EPS is $0.48, expectations were $0.34.

Operator: Welcome to the Golar LNG Limited Q3 2022 Results Presentation. At this time, all participants are in a listen-only mode. After the slide presentation by CEO, Karl Fredrik Staubo; and CFO, Eduardo Maranhão, there will be a question-and-answer session. I will now pass you over to Karl Fredrik Staubo. Karl, please go ahead.

Karl Fredrik Staubo: Thank you, operator, and good morning and good afternoon to all. Welcome to Golar LNG’s Q3 earnings results presentation. My name is Karl Fredrik Staubo, CEO of Golar LNG. I’m accompanied today by our CFO, Mr. Eduardo Maranhão to present this quarter’s results. Please note our forward-looking statements on slide 3. Slide 3 provides an overview of Golar. We own two FLNGs, the Hilli, operating for Perenco in Cameroon, and the Gimi that was part 20-year contract for BP next year. We are focusing our efforts on FLNG growth projects and we have developed three different FLNG designs. All three designs are based on the same proven liquefaction technology and maritime interface, but defer in liquefaction capacity.

During the quarter, we have placed orders for long lead items for a new Mark II FLNG with a total liquefaction capacity of 3.5 million tons. The most notable change in the Company overview since our last quarters, our share sales totaling $430 million, reducing our CoolCo shareholding from 31.3% to 8.3%. And the sale of NFE shares, reducing our shareholding from around 6% to just shy of 3%. Turning to slide 4 and the highlights of the quarter. Hilli generated an EBITDA to Golar of $64.1 million, a 2.6 times increase from Q3 last year. Perenco declared its 0.2 million tons of production increase from Jan €˜23 to end of contract in July of 2026, meaning that we will maintain production at 1.4 million tons per annum for the period. The incremental volume has a tariff linked to TTF gas prices.

Photo by Sid Verma on Unsplash

During the quarter we entered into hedges for 50% of our Q4 2022 exposure at $70 per MMBtu. We hedged 100% of our 2023 exposure at $50 per MMBtu. And we hedged 50% of our 2024 gas exposure at $51.2 per MMBtu. In total, these hedges provide the cash flow visibility for EBITDA to Golar of around $260 million. As of today, the TTF hedges are currently about $75 million in the money. Turning to Gimi, she is now 90% complete and remains on schedule. We have engaged our three operations, and we’ll have a maritime crew of about 120 persons mobilized onboard a vessel by year-end. On FLNG growth, we continue to see increased client interaction and strong progress on potential new FLNG projects. During the quarter, we have been working with an upstream partner for a very attractive potential integrated FLNG project.

We have also signed to development agreements, one with a supermajor and another with an independent E&P company. Under these development agreements, both parties commit to deliver a defined scope of work within set deadlines to progress potential new FLNG opportunities and agree on key steps to reach FIDs. We believe that securing attractive delivery of our next FLNG unit will increase Golar’s ability to drive value with prospective FLNG clients. This is the reason why we have ordered long lead items to secure delivery within 2025. On corporate activities, we have sold 8 million CoolCo shares and 6.3 million NFE shares. The share sales resulted in net proceeds to Golar of $430 million and is in line with our communicated strategy to reduce our shareholding in financial investments to fund FLNG growth.

We also bought back 400,000 shares in the quarter at an average price of $23.25 per share. And our share count now stands at 107.5 million shares. We have committed to invest up to $10 million in Macaw Energies energy, a newly established small scale LNG liquefaction company, targeting land-based stranded gas and associated gas resources, as well as biogas. We’re excited about the strong track record of the Macaw Energies team and believe Golar’s liquefaction expertise combined with the small scale land focus of Macaw can create a successful combination for small scale liquefaction opportunities. We are also opportunistically considering strategic partnerships or M&A throughout the LNG value chain. I will now hand the call over to Eduardo to present our Q3 results.

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Eduardo Maranhão: Thanks, Karl. And good morning, everybody. I’m very pleased to provide an update on our group results for the third quarter of 2022. Turning over to slide number 6, I wanted to show some of the financial highlights of this quarter. Our operational performance continues very strong. We recorded total FLNG tariffs of $109 million, up 81% compared to the Q3 of 2021 on a year-on-year basis. FLNG tariff is comprised of total revenue from liquefaction services, and also realized gain on oil and gas derivative instruments. This quarter, we recorded an adjusted EBITDA of $85 million. When compared on a year-on-year basis, this represented an increase of 63% compared to Q3 2021. We recorded net income of $141 million for this quarter, including $51 million of unrealized gains on NSE shares, $25 million of unrealized gain on interest rate swaps, and other derivative instruments, $12 million of unrealized gains on TTF-linked derivatives, as well as $10 million in net earnings from other — in other equity method investments.

Our share of contractual debt at the end of Q3 was $993 million, a significant reduction when compared to the same quarter of the last year, when we had $2.1 billion of gross debt. So moving on to slide Number 7, we continue to strengthen our balance sheet which will allow the Company to pursue future FLNG growth projects. Our cash position currently stands at more than $1 billion today. Total cash at the end of Q3 was $612 million. Further to the end of the quarter, we sold, as Karl mentioned before, 8 million Cool Company shares and 6.3 million NFE shares, raising additional net proceeds of around $430 million. We now have total cash in hand of more than $1.04 billion. When we take into account the value of our listed securities in NSE, Cool Company and Avenir, our total liquidity position stands just a shy at $1.5 billion.

When considering our contractual debt, as I said before of $993 million, we now have a net cash position of $452 million. As you can see on the right hand side of this slide, we have no significant debt maturities until 2025, which is when our $300 million bonds mature. So, turning to slide number 8, we’d like to provide some further insight into our earnings from Hilli. And I think just by way of recap, so the Hilli tariff is comprised of three main components. We receive a fixed tolling tariff, we also have a Brent-linked tariff, as well as a TTF-linked tariff, which has started in the beginning of this year. Also, as Karl mentioned before, we have managed to hedge our TTF production at a very attractive level. And as a result of that, we continue to see a very strong increase in Hilli’s EBITDA generation, which this quarter totaled $64.1 million, which is 2.6 times the same amount that we had a year before.

So, moving on to slide number 9, I wanted to provide some further update regarding our hedging arrangements. We have entered into swap arrangements to hedge our exposure to TTF including 50% of Q4 2022 at the level of $70 per MMBtu which has secured $28 million of distributable EBITDA to Golar. We have also hedged 100% of 2023 and 50% of our 2024 TTF-linked production at levels of around $50 per MMBtu and $51 for 2024, which in total have secured an additional $233 million of distributable adjusted EBITDA to Golar. Based on that, our share of Hilli’s EBITDA generation is expected to reach $295 million in 2023. When we consider that our share of the debt service for next year is expected to be around $50 million, we see an expected free cash flow to equity of around $245 million just from Hilli.

I’ll now hand over the call to Karl, who will talk a bit more about our future FLNG projects.

Karl Fredrik Staubo: Thank you, Eduardo. Turning to Slide 11 and I’ll update on Gimi construction update. The unit is now 90% complete and remains on schedule for sail away during first half of next year, and contract startup during second half. We expect to start booking commissioning revenues during second half and contract startup in Q4 of next year. As a reminder, Gimi will generate $151 million in EBITDA to Golar, every year for 20 years, once contract startup. On slide 12, we elaborate a bit about what we are doing in terms of the scale of the Gimi construction project. We now have a construction team consisting of an average daily workforce of 4,600 with 24×7 activities. We have worked 26 million man hours to-date. We have done 37,000 tons of new steel and equipment installed on board.

We have installed 1,500 kilometers of cables that’s equivalent to the distance between London and Rome. Pre-operations are initiated and we will have a crew of more than 120 people mobilized to the vessel by year end. Once in operation, the unit will produce about 2.2 million tons of LNG per year, enough to power more than 3 million U.S. homes. Turning to slide 13 and an update on the long lead and commercial developments for new FLNG projects. Based on strong client engagement for FLNG growth projects, we are of the view that securing attractive delivery for a new FLNG unit increases our ability to drive value with prospective FLNG plans. We have therefore placed orders for main long lead items required for a new Mark II and 3.5 million ton FLNG with total commitments of around $300 million.

Included in that we have engaged more than 200 engineers from the topside provider, shipyard, the third party engineering company and Golar, all working on Mark II development and to secure attractive delivery within 2025. On the commercial side, we are working together with an upstream company to develop an attractive integrated FLNG project. As mentioned, we have signed paid development agreements with new prospective clients for potential FLNG deployment on large proven gas reserves on behalf of a supermajor and an independent E&P company. We see FLNG economics remaining attractive for both, the integrated and tolling fee discussions we are currently having. Turning to slide 14 and in support of the value of near-term liquefaction capacity.

In August Exmar announced the sale of its FLNG Tango, which is a 0.6 MTPA liquefaction unit, which was sold to ENI for a price ranging between $572 million and $694 million. This implies a price of around a $1 billion per ton of liquefaction capacity. In September, Kinder Morgan sold 25.5% of their Elba Liquefaction plant also at an implied value of close to a $1 billion per ton. This compares to the CapEx per ton that we have guided on of between $500 to $600 per ton. So, we see that the attractiveness from charters but also from people looking to acquire liquefaction assets are valuing near-term cash flows, which is further giving support and confidence to why we have placed the long lead items. Turning to slide 15, we have prepared an overview of historically liquefaction FIDs by year.

As you can see from the overview, so far in 2022, there’s been 26 million tons of liquefaction capacity entered into. One could argue that that’s somewhat surprising given the geopolitical scene and the gas prices, both in Europe and Asia. We are not surprised by this development, because we know how long the FLNG project takes in terms of environmental sign-off governmental approvals, and just the share size of the engineering required for large offshore infrastructure projects. We are however very encouraged by the activity. And we agree to S&P Connect’s view that next year, we’ll see significant uptick in FLNG — sorry, in liquefaction FIDs and hopefully a significant part of that will be FLNGs. Interestingly, U.S. is driving the majority of new supply growth with 95 million tons of the 148 million tons of new liquefaction capacity forecasted until 2030.

Turning to slide 16, we continue to mainly focus on African LNG project for three reasons. When you do an FLNG project, you have three key cost inputs: source gas, liquefaction costs, and shipping distance to end users. We believe we can source African gas reserves at around $1 to $2 per MMBtu versus current, and we have prices of $6. So, 65% of new liquefaction projects have a cost of 2 to 4 times our input costs from the outset. We think we’re advantaged. As alluded to, our CapEx per ton is cheaper than competition, both maritime and land-based liquefaction solutions. And West Africa happens to be closer to end users, both in Europe and Asia. And if you have a business model with three key call centers, and you’re lower on all three, we think that’s a good competitive advantage from the outset.

To summarize, turning to slide 18, a familiar slide from all of our quarterly presentations, but yet summarizing the company in one slide. In 2021, we have adjusted EBITDA in the Company of $74 million. Add to that the oil upside and the TTF linkage that Eduardo explained, we see commodity linked production adding another $200-plus-million delivery of Gimi will add another $151 million of contracted EBITDA, bringing our adjusted EBITDA at current market rates to well north of $400 million. As explained, we now have a cash and listed securities position of $1.4 billion where $1 billion in cash and the rest is liquid securities. Our contractual dept stands at just shy of $1 billion, leaving us with a net cash position of around $0.5 billion. We believe we’re uniquely positioned for FLNG growth, as highlighted on slide 19.

We have three FLNG designs ranging from 2.7 million to 5 million tons. On one slide to the right, you can see the track record of FLNGs globally. Stability and production reliability is key for any liquefaction project. And you can see that Hilli has had a very stable production since startup, which has not been the case for other FLNG solutions in the same time period. We have the lowest CapEx per ton, and we also have the lowest carbon footprint per ton of liquefaction produced, which altogether gives this compelling story for people considering FLNG. To summarize, we are focused on attractive FLNG growth projects and have now placed orders for Mark II long lead items. We expect our earnings growth to quadruple from 2021 to 2024 levels. We have $1.4 billion of cash and listed securities.

We have a book value of $2.8 billion and building as we continue to generate healthy free cash flow to equity. Golar has been around for 75 years, 50 of which in LNG where we have been a market leader in FLNG, both with our proven design and strong operational track record, and combined, this is what gives us confidence to focus our growth efforts on FLNG. That concludes the prepared remarks, so I’ll hand it over to the operator for any questions.

Q&A Session

Operator: Our first question comes from the line of Chris Tsung from Webber Research. Please go ahead. Your line is open.

Chris Tsung: Just touching on the divestments of CoolCo in NFE share, I guess financing FLNG project. Do you plan to divest the rest for future projects or will there be some percentage of these companies you plan to hold on to? And also what about Avenir?

Karl Fredrik Staubo: I think what we have previously said and definitely stand by, is that we view all of our shareholdings as attractive financial investments, but we will reduce financial investments to focus on core growth, if and when we have core growth. We feel like with our current cash position we are very comfortable to fund the Mark II project that we are now undertaking. It’s safe to say that we don’t need to sell any of our shares to fund that project. But if we do other growth initiatives, we will consider to further reduce our shareholdings. But at the moment as we have previously communicated, we’re happy to be shareholders in all those names and view being shareholders there as better than sitting cash.

Chris Tsung: Great. Okay, thanks. And another one is just I know that you — in this press release, you guys have all the long lead items for Mark II. Does that more or less secure timing of when it could be delivered in 2025, or does that depend on when you guys take FID?

Karl Fredrik Staubo: That is what is required to ensure that we still can deliver in 2025. So, by definition, a long lead is the critical timeline. So, as long as you secure the delivery of those, you ensure that you can still take €˜25 delivery. But of course, you need to progress the Mark II investments to safeguard that delivery. So, that means formal FID at some point as well. But for now, we have done everything to ensure that we are on track for delivery in €˜25.

Chris Tsung: Great. Thanks. And just to confirm, the Mark II, that’s an integrated model, right?

Karl Fredrik Staubo: So, the units can be used on integrated and tolling. It’s not like a ship is customized to the commercial model of the ships. The ship is hardware at the end of the day. So, we have discussions for Mark II, both for integrated and tolling, and there are several attractiveness of Mark II. One thing is construction timing. But, the way the engineering has been put together, we have received very strong feedback on that design.

Chris Tsung: Great. Thank you. That’s it for me. Thank you, Karl.

Karl Fredrik Staubo: Thank you.

Operator: Thank you. We’ll now move on to our next question. Please standby. Our next question comes from the line of Ben Nolan from Stifel. Please go ahead. Your line is open.

Frank Galanti: Yes. Hi. This is Frank Galanti on for Ben. I wanted to actually dig into Chris’s last question there on the Mark II design, specifically around the vessel. Given that that’s a conversion, have you sort of — can you talk about what vessel type you need? Have you guys sort of already picked that out and can you sort of talk around how much that’s going to cost?

Karl Fredrik Staubo: Yes. So, basically you use Moss design ships, so you can take an existing carrier. There are plenty of Moss designs out there. One of the disadvantages of Moss as a shipping vessel is that they’re all steam fired, which means that especially with the new regulations coming into effect from first of Jan next year, these ships are far less competitive than the more modern ships for shipping activities, meaning that you should be able to pick them up, if you want to require them for conversion. We have inspected several suitable candidates, and we are discussing to if and when we will acquire a ship for conversion. We can also use the Gandria, which we own.