Golar LNG Limited (NASDAQ:GLNG) Q3 2023 Earnings Call Transcript

Golar LNG Limited (NASDAQ:GLNG) Q3 2023 Earnings Call Transcript November 21, 2023

Operator: Welcome to the Golar LNG Limited 3Q 2023 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.

Karl Fredrik Staubo: Thank you, operator, and good day to all of you. Welcome to Golar LNG’s Q3 2023 Earnings Results Presentation. My name is Karl Fredrik Staubo, CEO of Golar LNG. And I’m accompanied today by our CFO, Mr. Eduardo Maranhao, to present this quarter’s results. Before we get into the presentation, please note the forward-looking on slide two. Turning to slide three and an overview of Golar today. We own and operate two FLNGs. The Hilli operating for Perenco in Cameroon and the Gimi, which delivered from Seatrium Shipyard in Singapore now on Sunday and is currently sailing towards Mauritania/Senegal to start its 20-year contract for BP. In Q1 next year, we expect to take delivery of the LNG carrier, Fuji, which we acquired in May and intend to convert into a 3.5 MTPA Mark II FLNG vessel.

We also own one LNG carrier, Arctic, which has just been through its five-year class. Arctic has a membrane storage system and is therefore not suitable for FLNG conversion. And we’re, therefore, currently considering alternatives for the vessel, including chartering or sale. We remain committed to FLNG growth and have in addition to the Mark I FLNG design of Hilli and Gimi, spent considerable time and resources to develop two incremental designs. Mark II with 3.5 million tons of annual liquefaction capacity and Mark III with 5 million tons of annual liquefaction capacity. We’ll elaborate more on our growth ambitions later in the presentation. We also have two investments in Macaw Energies, a land-based liquefaction company, targeting monetization of flare gas and focused on operations in the Americas, and Avenir LNG, a small-scale LNG company, owning five small-scale LNG carriers servicing local distribution trades and the growing maritime LNG bunkering market, as well as an LNG Terminal in Sardinia, Italy.

Turning to slide four, we’re pleased to announce that Gimi has completed its construction at Seatrium Shipyard in Singapore and is currently on its way to the GTA field offshore Senegal and Mauritania. The construction of an FLNG is a major milestone for Golar. We have highlighted some key statistics to give some perspective on the scale of the conversion work now complete. During the conversion, we’ve added 44,000 tonnes of steel equivalent to 3,650 double-decker buses. The liquefaction topside requires 215 megawatts of power equivalent to the output of 150 wind turbines sufficient to power 80,000 homes. We’ve added 1,500 kilometers of cabling, which is almost eight times around Singapore, where the vessel has been constructed. The conversion itself has taken 37 million man-hours or 18,500 working years.

Through adding sponsons, we’ve added the equivalent of 20 basketball courts of deck space to fit all the topside equipment needed to liquefy natural gas. This construction was undertaken in the midst of COVID, which caused significant challenges to the conversion project. However, we are now very pleased with the outcome of the vessel and look forward to get the vessel into operation for BP under a 20-year contract on the GTA field. Turning to slide five and another milestone for the quarter. Hilli delivered its cargo number 100 on the 16th of October as the first FLNG in the world to meet this milestone. The unit continues to deliver and just offloaded its cargo 102 or more than 7 million tonnes since production started up in 2018. The stable operations of Hilli since start-up as represented on the right-hand side of the slide, speaks to the testimony of the quality of the sign and operational performance of the Golar team and execution model.

We’re seeing increased interest for re-chartering of Hilli upon the current contract expiry in July ’26, including detailed commercial discussion for three different re-contracting opportunities at higher capacity utilization compared to today’s contract and with more compelling economics. Turning to slide six with an overview of the Global FLNG Fleet. Golar owns the largest fleet of FLNGs in the world, measured by million tonnes of installed capacity and at par with Petronas and ENI in terms of number of FLNGs. Golar pioneered the FLNG concept with the construction and delivery of Hilli and have also demonstrated the lowest CapEx per tonne of liquefaction capacity. We are today the only provider of FLNG as a service. All the other owners of FLNG tonnage utilize FLNG technology for owned or controlled gas reserves or to service their own portfolio of downstream demand for LNG.

Golar’s position as the only service provider of maritime liquefaction enables us to offer a unique value proposition to owners of stranded and associated gas reserves. We offer gas monetization through a targeted integrated approach, where Golar align its commercial model with the gas resource owner in a partnership. We ensure aligned economics through the commodity cycles and price volatility. It’s worth to know the relative size of the company’s controlling FLNG assets, for example by market cap. Golar market cap is around $2.3 billion compared to NFE and Petronas of $7 billion to $8 billion, ENI of $55 billion, and Shell at $215 billion. We’re not suggesting that FLNG evaluation alone justifies the value of these companies, but this gives insight into the relative scale of the players involved in maritime liquefaction.

Turning to slide seven and rationale for why we believe FLNG developments in Africa are attractively positioned for FLNG exports. Africa has 620 Tcf of proven maritime gas reserves, the energy equivalent of 110 billion barrels of oil that today are either stranded, flared or re-injected. A significant portion of these reserves are best monetized through FLNG technology. Golar’s proven market-leading CapEx per tonne compared to other liquefaction solutions including shore-based developments set for attractive cost of production. Africa’s closer proximity to key LNG markets in Europe and Asia compared to US export projects reduce shipping costs. Hence, if you have a business with three cost drivers, an African FLNG projects are cheaper on all three inputs.

We believe the ingredients for an attractive business model is present. Golar’s position as the only proven service provider of FLNG as a service is well positioned to take an active role in further expanding African gas exports. Turning now to slide nine and business update. Hilli as referred to continued its market-leading operational track record and have now delivered its cargo number 102. Gimi’s sail from Singapore on Sunday on our way to the GTA field for commencement of a 20-year contract. On business development, we continue to target an integrated model where we align FLNG economics with the upstream partner to have shared exposure to LNG offtake prices. On Hilli, we continue to target commitment on re-chartering of the vessel within 2024.

Current discussions include detailed terms for three different redeployment opportunities. On Mark II, we continue to progress the signed long-lead items and the owner vessel delivery expected in Q1 2024. The next step is to obtain commitment on commercialization projects before proceeding with the final investment decision. On corporate and other, adjusted EBITDA for the quarter came in at $75 million. Golar cash position is about $840 million and north of $920 million including of the TTF swap receivable. We finalized the sale of the LNG carrier, Gandria, in the quarter for a net consideration of $15 million. We also continue our focus on shareholder returns and declared a dividend for the quarter of $0.25 and continued our buyback program acquiring 0.2 million shares in the quarter with total shares now outstanding at 105.9 million shares.

Our fully owned subsidiary, Macaw Energies, acquired a majority stake in Logas, an established natural gas distribution company in Brazil. Macaw remain on track to deliver its first flare-to-LNG pilot in the US within 2024. Turning to slide 10. With Gimi delivery, we now expect a transition from CapEx to cash flow. We look forward to get started on operations and to see Gimi go from cash outflow through CapEx to cash inflow through earnings. As construction risk is now taken out of the project, we will focus on debt optimization for the unit. We will target an increase in facility size, a reduction in debt margin, and extended repayment profile and duration compared to the current facility. We are in discussions with potential lenders and have received term sheets with improved terms for potential new vessel debt.

We also see further earnings upside upon Hilli re-contracting at limited incremental CapEx, extracting the full value of the installed liquefaction capacity in our portfolio. Turning to slide 11 and elaborating on the next steps towards contract start-up for Gimi. Gimi is now sailing under own propulsion assisted by one tug. Two stopovers in Mauritius and Namibia is planned to undertake refueling and crew changes. The total voyage until we’re onsite is expected to take about 60 days, but can be shorter or longer subject to weather conditions. Once we reach site, we will notify BP that we’re ready for mooring and physical connection of FLNG. We will then start upstream — the project will start upstream commissioning and supply of gas to the FLNG.

Once first gas is introduced to the FLNG, we then target a commissioning period which originally scheduled to take six months, but we’re actively working with the GTA partners to make further efficiencies on the commissioning period. Once commissioning is complete, we will reach commercial operations date and the start of the 20-year contract at the GTA field. Turning to slide 12 and progress on our Mark II FLNG. Major long-lead items have been orders and are under construction. So, you can see from the picture on the right-hand side, several of the equipment is now taking shape. This combined with more than 250,000 engineering hours to date allow for fasttrack project execution, which will reduce execution risk and shorten construction time by about 12 months from when we take FID.

We expect the Fuji LNG to be delivered to us in Q1 2024. The vessel is intended as the donor vessel for the project. EPC contract negotiations and engineering have advanced significantly and Mark II is ready for execution as soon as we have commitments on commercialization of a unit. We continue to see increasing interest for Mark II and several work streams are ongoing for project-specific applications. Turning to slide 13 and Macaw Energies. As explained, the company is on-track to have the first flare-to-LNG liquefaction pilot available in the US, in Q1 of next year. We also recently teamed up with Pilot Gas to provide the first LNG to EV charging, expected to take place in Q2. Operational start-up of midstream commercialization platform in Brazil is expected to start-up now in Q4.

We’re also actively looking at further expanding the asset portfolio of Macaw and this could include a potential separate listing of Macaw Energies into standalone entity during 2024. I’ll now hand the call over to Eduardo to take us through group results.

Eduardo Maranhao: Good morning, everyone, and thank you, Karl. Let me share an overview of Golar’s financial performance during Q3. This quarter has been marked by significant milestones, including the delivery of Gimi and the continued operational excellence of Hilli. Turning over to slide 15, I wanted to show some of the financial highlights of this quarter. Total operating revenues amounted to $67 million with total FLNG tariffs reaching $95 million. FLNG tariff is a critical non-GAAP metric, which reflects a comprehensive approach to liquefaction revenues including realized gains on oil and gas derivatives. Despite a marginal dip compared to Q2, this robust performance underscores the resilience of our commercial model. Adjusted EBITDA came in at $75 million, affected by lower realized contributions from commodity-linked fees.

However, we anticipate a positive reversal in Q4, driven by higher Brent and TTF prices. Important to note that these fees are calculated on a rolling average basis of the previous three months for Brent and one month ahead pricing for TTF. This quarter, we had a net income of $114 million, a significant improvement compared to Q2. This figure includes a total of $39 million non-cash items such as $34 million unrealized gains from oil and gas derivatives and $5 million boost from unrealized gains in our interest rate swaps. Our liquidity position remains robust standing at close to $1 billion when including cash-on-hand and other receivables from the unwinding of our TTF hedges earlier this year. With total contract of debt just under $1.2 billion, our net debt position was $251 million.

Now moving to slide 16, we can see how Hilli’s performance compared to previous quarters. When looking on a year-on-year basis, Hilli generated $73 million in Q3, which is 14% greater than during the same quarter of last year. When we break down these numbers in comparison to Q2, we maintained consistency with a fixed tolling tariff of $32 million. Brent-linked fees slightly decreased to $13 million from $15 million last quarter and TTF-linked fees of $28 million were down from $30 million last quarter. As I explained on the previous slide, we see lots of tailwinds from this variable fees and expect a positive impact from higher oil and gas prices driving increased tariffs for the rest of 2023. Moving on to slide 17. We can see that we remain exposed to TTF prices for the remainder of 2023 and 2024, while at the same time, we expect to benefit from locked-in gains from our previous swaps.

The locked-in TTF gains resulting from the effective unwinding of our hedges will be allocated in addition to our fixed tolling fees and variable Brent and TTF revenues. So between now or between in the Q4 of 2023, we expect to recognize approximately $23 million in EBITDA from those locked-in gains and for the full year of 2024, we expect approximately $49 million of EBITDA secured or approximately $12 million per quarter. We illustrate how this can improve our earnings for every dollar per million BTU change in TTF, we expect to make $3.2 million per year. So based on forward prices for next year, we should make around $39 million just from this. In addition to that, when it comes to Brent, the incremental contribution is $2.7 million for every dollar-per-barrel movement above $60.

So when we look forward to ’24 prices, the total contribution next year should be around $56 million. As previously announced in Q2, we managed to improve certain terms of the existing Hilli financing, including lower margins and extended repayment profile. As a result of that, and based on current forward prices, Hilli alone is expected to generate an impressive $650 million of free cash flow to equity between 2022 and 2024 as you can see on this slide. Now moving to slide 18. Our balance sheet remains strong and we have a great level of flexibility to fund increased shareholder returns and at the same time back our growth ambitions. Current liquidity position, including cash receivable from TTF hedges, amounts to just under $1 billion and fully supports the development in equity requirements for the construction of new FLNG units as described by Karl on the Mark II slide.

We continue to explore alternatives that could further enhance liquidity in the near term, including the optimization and refinancing of Gimi, now that she has left the yard and construction is complete, potential asset sales, such as Artic and Avenir, the spin-off of Macaw, and further optimization and refinancing of Hilli upon a new contract, among other initiatives. This quarter we declared a dividend of $0.25 a share with a record date of December 1st, and payment on or about December 11th. We have repurchased 0.2 million shares this quarter, leaving 105.9 million shares outstanding. Out of the $150 million approved share buyback program, $117 remains available for further repurchases, which will continue to be opportunistically pursued.

Hilli’s strong free cash flow generation will continue to provide the backbone and support the current dividend and buyback program. On top of that, Gimi is expected to start-up next year, will pave the way for increasing shareholder returns. Now, I’ll hand over to Karl for some closing remarks.

Karl Fredrik Staubo: Thanks, Eduardo. And turning to slide 20 for summary and next steps. Hilli has diversified revenues from its base Brent and TTF-linked earnings as just described by Eduardo. Secondly, with Gimi about to start-up contract, will double the amount of FLNGs making cash flow. We see increased interest for re-chartering of Hilli beyond July 26 and we are in detailed commercial discussion for three different opportunities with several other parties interested in the ship. Long-lead items are well-progressed for a Mart II FLNG, the yard contract, design, and engineering are ready and our focus is now on the charter commitments. We continue to target integrated projects with exposure to commodity prices. Potential start-up of operations could be in 2027.

As Eduardo explained, we have around $900 million in liquidity. With the delivery of Gimi, we now allow for debt optimization. There is further potential liquidity in potential asset sales of non-core assets and we are targeting a spin-off of Macaw Energies within 2024. There is upside to the dividend following the start-up of FLNG Gimi cash flow there is potential further liquidity boost by debt refinancings and debt optimization, and we also have continued capacity under the existing share buyback program to continue to return value to shareholders through share buybacks. That concludes the prepared remarks for the Q3 presentation. Thank you all for dialing in. I’ll hand the call over to the operator for any questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Ben Nolan from Stifel. Please go ahead.

Benjamin Nolan: Great. Thank you Karl, Eduardo, first, congrats on getting the Gimi out. I’m sure it is a welcome relief to see that leaving the yard. As it relates to the Gimi, could you maybe just help me think through what — what the revenue and the cash flow looks like until the commissioning period, how — I know you get some payments, but maybe any color as to sort of what that should look like prior to commissioning?

Karl Fredrik Staubo: Hi, Ben, and thanks for the question. So, the commissioning revenue only starts upon commissioning and at which point we make a fixed contribution per day plus a tolling fee for any LNG actually produced in the commissioning period. As alluded to the commissioning period is targeted to take six months, but as also explained, we are targeting to reduce the commissioning period and working with the GTA partners to shorten that timeframe and get into COD earlier. As you correctly pointed out, there are also contract mechanisms that would provide Golar with further day rates in addition to commissioning revenue. Those day rates are the contract mechanisms that we currently are in discussion with BP on the relevance of and given that we are in these discussions, we would disclose the details of those at a later point in time.

Benjamin Nolan: Okay. All right. Well, I guess I’ll just wait for that. And then, for my second question, I’m curious about the refinancing of the Gimi, is that something that you can do or anticipate being able to do prior to the final commissioning, and then you mentioned maybe using some of the proceeds for capital return, just curious, it would seem to me that buyback is overwhelmingly the easier option relative to a dividend, but maybe how you think about that?

Karl Fredrik Staubo: So to answer the first part of the question, yes, we think refinancing is doable before commissioning is complete. As we have explained on several previous quarterly calls, we have looked at different alternatives for refinancing the vessel for some time, but it’s been important to us to take the construction risk element out of the equation in seeking to get the best terms available. Now that the vessel has sailed, we are increasing focus on these refinancing alternatives, and as we have explained, we have already received term sheets, which we find attractive for refinancing of the vessel. Our primary focus is to return operating cash flow to shareholders and use other liquidity for attractive growth, expanding our FLNG portfolio.

Benjamin Nolan: Okay. Thinking between dividend versus buyback.

Karl Fredrik Staubo: At the end of the day, that’s a Board decision, but we still have around $117 million worth of buyback program under the existing allowance and we’re currently paying out less than half of free cash flow to shareholders. So we think that there should be capacity to continue to do both and as long as the share is trading at a discount to where we think fair value of the company is, we think buybacks is a sensible way of continuing parts of shareholder return.

Benjamin Nolan: All right. I appreciate. Thank you, Karl.

Karl Fredrik Staubo: Thank you, Ben.

Operator: Thank you. We will now move on to our next question. Our next question comes from the line of Greg Lewis from BTIG. Please go ahead.

Gregory Lewis: Yes, thank you, and good afternoon, and thanks for taking my questions. You know, I guess maybe this is for Eduardo, as we think about the daily expense of the Gimi, any kind of variance versus what it’s costing to run the Hilli and is there contract language that differs much in terms of the operating cost side?

Eduardo Maranhao: So, hi, Greg. So when we look at the forecasted operating expenses for Gimi and as pretty much the same as we have in Hilli, the bulk of the expenses are related to crew. According to our contract arrangements with BP, all of the operating expenses are basically passed through under the contracts, so they should follow that arrangement once we start operations.

Gregory Lewis: Okay. And is it — I guess it’s, I mean realizing the vessel is still sailing, I guess it’s safe to assume during the commissioning process at a minimum we’re going be able to pass that through or we’re going to realize a revenue number higher than that?

Eduardo Maranhao: During the commissioning phase, that’s correct. We will be able to pass through the operating expenses to our customers.

Gregory Lewis: Okay, great. And then, my other question is related to, you know, thank you for the detail on the active discussions with the Hilli perpetual re-chartering. You know, I guess it’s a two-part question, one is, there isn’t — as we think about these conversations, is there a potential for any of those conversations to spill over into the Mark II if the Hilli gets contracted? And then really broadly speaking, just given the fact that the Gimi is more of a tolling arrangement, is it safe to say going forward, we’re not interested in that type of work?