Golar LNG Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 10, 2023

There are 6 speakers on the call.

Operator

Welcome to the Golar LNG Limited Q2 2023 Results Presentation. After the slide presentation by the CEO, Karl Friedrich Staubo and the CFO, Edouard Marrano,

Speaker 1

there will

Operator

be a question and answer session. Information, how to ask a question will be provided then. At this time, all participants are in a listen only mode. I will now pass you over to Karl Friedrich Staub. Karl, please go ahead.

Speaker 1

Hi, everyone, and welcome to Golar LNG's Q2 2023 Earnings Results Presentation. My name is Karl Friedrich Staubow, CEO of Golar LNG, and I'm accompanied today by our CFO, Eduardo. Before we get into the presentation, please note the forward looking statements on Slide 2. On Slide 3, we present our company overview. We are a focused FLNG player with 2 FLNGs: Hille, operating in Cameroon and Gimme about to deliver and start the 20 year contract for BP.

Speaker 1

The key changes to our asset portfolio in the quarter was high grading of our FLNG conversion candidate, selling the LNG carrier Gandria and acquiring the LNG carrier Fuji. Fuji has significantly more storage capacity, younger age and lower boil off and is therefore more suitable for our intended Mark II 3.5 MTPA FLNG conversion. Snam of Italy has an option to convert the Golar Arctic into an FSRU. This option lapsed in July, and we are now reviewing alternatives for her, including long term charter or asset sale. Our investments include Avanir LNG, a small scale LNG carrier business and Macau Energies, a company founded with Golar as sponsor, targeting small scale land based liquefaction and gas monetization true proprietary technology currently under construction.

Speaker 1

Golar is the world's only independent proven FLNG company. Turning to Slide 4 to illustrate our near term cash flow growth and further earnings upside in recontracting of the Hilli and potentially a Mark II FLNG. Hilli continues its market leading operational uptime with another quarter of 100 percent economic utilization. The vessel will operate for Perenco in Cameroon until July 26, and we see strong earnings generation supported by the increasingly attractive commodity post earnings for the unit. However, the vessel is currently only 58% utilized versus nameplate capacity, And we see significant potential for increased capacity utilization combined with higher earnings for a recharter of Hilli.

Speaker 1

The current contract was entered into when our FLNG technology was unproven, and Hilli's position as the earliest available FLNG globally continues to increase customer interest in the vessel beyond the current contract. Our second FLNG Gimi is about to deliver from Ctrip in Singapore to start a 20 year contract for BP. Gimi's shift from CapEx to earnings will significantly strengthen our free cash flow generation, And we also see significant potential in optimizing the debt facility on Gimme once she is delivered. Our contemplated 3rd FLNG would be a Mark II 3.5 MTPA vessel. If ordered within 2023, the vessel will deliver late 'twenty six and be ready for operations from early 'twenty seven.

Speaker 1

Mark II would increase our total liquefaction capacity from about 5,500,000 tonnes per annum to 9,000,000 tonnes or about a 70% increase. Hence, we see 3 cash flow triggers for the company: Delivery and startup of Gimi during second half of this year, shifting the vessel cash flow from CapEx to earnings. Number 2, recontracting of Hilli at increased capacity utilization and operational margin. And number 3, ordering and chartering of a Mark II FLNG. As you can see on the bottom part of the table, illustratively, we will have up to 3.22

Speaker 2

millimeters millimeters

Speaker 1

millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters BTU available for charter from early 2027 onwards. Tariffs in line with the current competitive U. S. Export market suggest earnings of about $1,000,000,000 from this available capacity. However, our FLNG technology enable monetization of stranded gas reserves that would otherwise remain undeveloped, hence, we believe significantly higher liquefaction margins should be obtainable.

Speaker 1

We are currently in discussion with more than 6 different gas resource owners at various geographical locations focused around West Africa for potential FLNG deployment, all of which with significantly better economic terms than current charters. Turning to Slide 5 and highlights for the quarter. Hilli continued its 100 percent economic uptime and we now have offloaded our 97 cargo. We're pleased to confirm that we have finalized the improved terms for the Hilli financing, reducing the debt margin and extending amortization profile and facility duration. Gimi is now 97% technically complete, And we expect Sail Away during September this year.

Speaker 1

On Business Development, we have further expanded the MoU we entered into with NNPC in April to now be further developed through a heads of terms, setting out the contractual framework for a joint development of specific gas fields towards potential FLNG deployment. Development of commercial opportunities also continues outside of Nigeria, including commercial term negotiations with gas resource owners and government interaction in potential countries of operation. It should be highlighted that the complexity of offshore gas development drives the time line for potential announcements of any binding terms for incremental FLNG work. Under Corporate and Other, Eduardo will cover most of that later in the presentation. But as per our guiding, in Q1, we have declared a quarterly dividend of SEK 0.25 also for Q2.

Speaker 1

During the quarter, we've also spent about $30,000,000 of our $150,000,000 buyback program announced in May, we have acquired and canceled about 1,400,000 shares. We remain committed to enhancing shareholder returns as our earnings continue to grow. We will now turn to a business upstate, starting with Gimi on Slide 7. As already mentioned, the vessel is now 97% complete and we expect sail away from the shipyard during September. System handover is underway and final testing ongoing.

Speaker 1

The arbitration process regarding certain pre commissioning contractual cash flows continue, but it's not expected to have a wider impact on the 20 year contract with BP. Moving to slide 8 and with the delivery of Gimi, we are now transitioning cash outflows two earnings for the vessel. The construction of Gimi commenced in 2019 and has been delayed due to COVID effects at the shipyard and for sub suppliers. Given that Golar is a company with 2 key assets, We have currently had around half of the balance sheet not generating cash flow. With Gimi going from CapEx to cash flow and the increase in commodity earnings from Hilli, we see continued earnings growth in the coming years.

Speaker 1

This is all before a potential FID of a Mark II, which would further boost earnings in the years to come. Turning to Slide 9. We have expanded our working relationship with NNPC to include a heads of terms signed in Abuja on August 1. The heads of terms set out a commercial framework for development of identified gas resources in Nigeria. In addition to the discussions with NMPC, we're also progressing potential FLNG deployment to the developments in Nigeria, we see similar developments of more than 5 potential FLNG deployment opportunities in other West African countries, where we are currently having commercial negotiations with gas resource owners and government interaction in potential countries of operation.

Speaker 1

Our priority remains to first recharter Hilli before FIDing a Mark II FLNG and then secure the charter for such vessel. Moving to Slide 10 and the developments we've done on a Mark II in the quarter. As announced and earlier mentioned on the call, we have high graded our FLNG conversion candidate, acquiring Fergie and disposing of the LNG carrier, Gandria. We've made significant progress Chinese financing houses for a debt facility of up to $1,500,000,000 not contingent on a charter. We'll continue to work with the shipyard to further derisk construction timeline and pricing.

Speaker 1

We have increased our pre FID commitments to about SEK 400,000,000 through a combination of long lead items, engineering work and the mentioned acquisition of Fuji. And as alluded to, if we FID that project this year, we will deliver within N26. Turning to Slide 11, we see robust long term fundamentals in support of LNG prices. From a macro perspective, the normalization of gas prices has not stopped the strong interest in securing future position. Asian importers are active in entering into long term SPAs.

Speaker 1

And as you can see from the left hand graph, 2023 is lining up to become close to 2022 in terms of total volume contracted. And in 2022, we saw the highest level on record. The consequence of this continued buying interest is a rising price environment. And what we show in the middle graph is the Brent linked pricing of long term deals, which is currently ranging between 12.5% to 13.5% of rent. However, there have been shorter term deals reportedly done between 16% 20% of brand parity.

Speaker 1

Hence, we share the view of major players Serge Shell and BP that LNG demand will remain robust in the long term as it is offering a solution to the Energy Trilemma the world is currently facing, balancing energy security, access to affordable energy And doing so in a sustainable manner. That's part of what we are trying to capture on land through Macau Energies, which we'll elaborate on, on Slide 12. Macau is progressing according to plan, targeting first operations in 2024. Commercial and Technical Development is ongoing alongside building commercial momentum with clients in the U. S.

Speaker 1

And South America. Additionally, the company is already positioning to access gas for its liquefaction technology with several discussions ongoing from gas suppliers. In order to capitalize on the market opportunity that Macau represents, we are evaluating alternatives to facilitate growth above and beyond the commitment already provided by Golar. I'll now hand the call over to Eduardo to take us through the Q2 results.

Speaker 3

Thanks, Karl, and good morning, everyone. Are very pleased to provide an update on our group results for the Q2 of 2023. So turning over to Slide number 14, I wanted to show some of the financial highlights of this quarter. We had total operating revenues of $78,000,000 up 5% versus Q1 2023. As a result of softer Brent and TTF prices in Q2, We had total FLNG tariffs of $99,000,000 down 10% compared to the previous quarter.

Speaker 3

FLNG tariff is a key non GAAP metric comprised of total revenues from liquefaction services, including realized gains on oil and gas derivatives. We expect to see a positive reverse of this item this quarter on the back of higher Brent and TTF prices. We also recorded an adjusted EBITDA of $83,000,000 pretty much in line with Q1 despite lower contribution from commodity linked fees as I mentioned before. However, reduced costs associated with the Tundra development agreement, which has been concluded in May, contributed to improvement in corporate and other adjusted EBITDA. This quarter, we had net income of CAD7 1,000,000 a significant improvement compared to Q1.

Speaker 3

This figure is inclusive of a total of CAD72 1,000,000 non cash items such as $77,000,000 unrealized losses from oil and gas derivatives, $10,000,000 unrealized gains in our interest rate swaps as well as a $5,000,000 impairment upon the sale of GENDRA. Our liquidity position remains strong with close to $1,000,000,000 of liquidity. That includes cash on hand and other receivables from the unwinding of our TTF hedges earlier this year. Our total contractual debt stood at just shy of $1,200,000,000 leaving us with a net debt position of €190,000,000 Turning over to Slide 15. I would like to provide a recap from our historical earnings from Hilli.

Speaker 3

This graph shows our net share of Hilli's adjusted EBITDA. And as you can see, the tariff can be broken down into 3 main components: a fixed tolling tariff of $34,000,000 which has been in line with the previous quarter, a Brent linked fee of $15,000,000 this quarter, down from $18,000,000 in Q1 and also a TTF linked fee of $30,000,000 which is also down from $37,000,000 last quarter. As I mentioned before, we expect that higher oil and gas prices should support increased tariffs for the rest of 2023. Turning over to Slide 16. We can see that we remain exposed to TTF prices for the remainder of 23 between August until December.

Speaker 3

So to give an idea of how this can improve our earnings, for every dollar per million BTU change in TTF prices, we expect to make an additional €1,400,000 in 2023. From 2024 until 2026, this will increase to €3,200,000 for every dollar of TTF prices. So just for example, if TTF prices average $15 per 1,000,000 Btu next year, we should make around $48,000,000 just from this tariff alone. In addition to that, when it comes to Brent, The incremental contribution is €2,700,000 for every dollar per barrel change above €60 per barrel. As discussed on our last call in May, we managed to negotiate and complete the amendment of the Hilli debt facility with improved terms, including a margin reduction and extension of tenure and amortization profile.

Speaker 3

These changes are expected to release additional free cash flow of approximately CAD75 1,000,000 until the end of the current contract in mid-twenty 26. Those new terms are already in place and have become effective since the end of June. Now turning over to Slide 17. Our balance sheet remains strong and we have a great level of flexibility to allow for progressive shareholder returns and at the same time to fund our FLNG growth program. Current liquidity, including cash receivables from TTF hedges, amounts to close to $1,000,000,000 and fully support the development and equity requirements for the construction of the Mark II FLNG.

Speaker 3

In addition to that, we have several alternatives that could further enhance liquidity in order to fund further growth, including potentially a refinancing of existing debt facilities for both Hilli and Gimi that could unlock significant amount of equity should we be required to do so. As discussed on the previous slide, Hilli's free cash flow generation of more than $200,000,000 per year fully supports the current dividend and buyback program. This will increase even further upon GIM is a start up, creating room for increasing shareholder returns in the future. This quarter, we have declared a dividend of €0.25 a share with a record date of August 21 and payment on or about August 29. Following the announcement of our $150,000,000 buyback program in May, we have spent $30,000,000 repurchasing 1,400,000 shares at an average price of around $21 After that, we had at the end of June 160,000,000 shares outstanding.

Speaker 3

I'll now hand over the call to Karl for some closing remarks.

Speaker 1

Thank you, Eduardo. And turning to Slide 19 for summary. Starting off on the left hand side, we see significant earnings growth from the existing asset portfolio with Gimi moving from CapEx to cash flow an increased future contribution from our commodity linked earnings from Hilli. So you can see from the graph all of the bars above the green line, which represents total debt service equates to free cash flow to equity. Turning to bottom left.

Speaker 1

We have an attractive pricing on EV over 1,000,000 tonnes of annual liquefaction capacity currently standing at around $680,000,000 per tonne, which is around half of what current shore based liquefaction projects with cost to develop in the U. S. Turning to top right, we have a balance sheet that enable us to continue to grow the company. Current cash sits at around $1,000,000,000 total net debt adjusted charge of SEK 200,000,000. We have initiated shareholder returns through quarterly dividends and $150,000,000 buyback program, of which NOK 30,000,000 has been spent in during Q2.

Speaker 1

We plan on distributing an increasing amount of the free cash flow to equity to our shareholders while using our balance sheet capacity for FLNG growth project, namely through Mark II FLNG with 3.5 Mtpa of capacity. On the bottom right, we have an illustrative CapEx to EBITA multiple subject to margin per MMBtu on the x axis versus what the CapEx to EBITDA multiple would be if we deploy at various different rates. We believe with more than 300 MMBtu available of liquefaction capacity from 2027 onwards that we're well positioned to capture monetization of stranded gas reserves, in particular in West Africa, but also in other geographical areas in discussion. This concludes our Q2 earnings presentation. Thank you for listening in, and we'll now hand the call over to the operator for any questions.

Operator

Ladies and gentlemen, we now begin the question and first The first question is from Ben Nolan from Stifel. Please go ahead. Your line is open.

Speaker 2

Hi, thank you. And hello, Eduardo and Karl. I have 2, hopefully that's okay. The first is when you move the or the transition on with Nigeria moving from a memorandum of understanding, go ahead to term, trying to understand how this. Big of a change that is and how close to a final contract do you think heads of terms Is it are we moving meaningfully closer to a definitive agreement in your opinion?

Speaker 2

Or is it just I don't know. Maybe frame that in for me.

Speaker 1

Hi, Glenn. Thanks for the question. So There is no recipe on how to fix an FLNG. The only independent provider of FLNG in the world is Golar, And we have done 2 contracts, 1 with Perenko and 1 with DP, and they were different in nature. However, the way it works on the ongoing discussions with NNPC is first, you sign an MoU to unlock resources, in particular on the NMPT side.

Speaker 1

Following the unlocking of these resources in late April and over a series of meetings in London and in Nigeria, we have together developed a framework, commercial framework for how to develop named resources. We have then agreed that commercial framework And that's what we've been signed up to through the heads of terms. By signing the heads of terms, we unlock another set of work, in particular then for NMPC to allocate further resources to further develop these projects. Given that all the FLNG projects are different in nature, it's difficult to guide on exactly when or how or how material, But it's certainly developing in the right direction.

Speaker 2

Okay. That's helpful. And then for my second question, You talk about the Mark II. If you're able to secure A contract on that asset before the end of the year, it would be available in 2027. And this.

Speaker 2

At the same time, you talked about the Hilli sort of being first in line. I'm just curious if you think It is reasonable to think that you could get a Mark II contract before the end of the year and stay on that sort of 2027 timeframe?

Speaker 1

So just to clarify, if we contract or recharter Hilli, we will proceed with Mark 2 without the contract. So you don't need to see both Hilli And Markku contracted. I think with all of the projects we have in the pipeline, we see ourselves increasingly confident both on the re chartering of Hilli and an attractive charter for Mark 2. It's just a matter of having a balanced risk reward before we add on close to $2,000,000,000 worth of CapEx.

Speaker 2

Okay. But you would I guess the implication is that you don't think that by the end of this year, that would be unreasonable. Is that fair?

Speaker 1

That's what we're working towards, yes.

Speaker 2

Yes. Okay. All right. I appreciate it. Thank you, guys.

Speaker 3

Thanks, Ben.

Operator

Thank you for your question. We are now taking the next question. And the next question from Chris Robertson from Deutsche Bank. Please go ahead.

Speaker 4

Hey, good morning and good afternoon, Carl. My question is a follow-up to Ben's. Just looking at the scope of work that might be done with NNPC. Is there potential to deploy Hilli as well as the Mark II asset with NNPC?

Speaker 1

They have more than enough gas to deploy multiple FLNGs in country, Yes.

Speaker 4

Okay. Yes, that answers my question. All right, thanks. And then looking at the 5 other countries or entities that you're kind of or conversations with now, do all of those, I guess, involve an NOC or are there any IOCs involved In the resources that are being looked at?

Speaker 1

Yes. But it's mainly focused on NOCs, but some of them also include IOCs.

Speaker 4

Okay, great. Thank you very much. I'll turn it over.

Operator

Thank you for your question. And the next question is from Chris Tsung from Webex Research Advisory. Please go ahead.

Speaker 5

Hey, good afternoon, Karl and Eduardo. How are you?

Speaker 1

Good. Thanks.

Speaker 5

Just following up on these And then PC questions and your other projects in West Africa, will those all be tolling or integrated? And just as a follow-up to that, like how should we expect like how much ownership should we expect Golar to have? Will it be like 100% or we see some NOCs or IOC partners coming on board.

Speaker 1

Okay. So all none of the Projects we're pursuing is a fixed tariff or like that of Gimi. They are either fully integrated Or a fixed tariff with the commodity exposure, more like Hilli, but even more exposed To commodity. The reason why we look to structure the charters In that way is that we see that it's a lot easier to get a better economics in the project, if you have some upside and downside sharing with the IOCs or sorry, with the NOCs. As long as that is done with linkage to highly liquid international price indices such as Brent, TTF, JKM or similar, we can always derisk such pricing movements in the paper market, and that's what we're targeting.

Speaker 1

In terms

Speaker 5

of it depends

Speaker 1

on project to project. Most of them Golar remains the owner of the LNG, the NRC remains the owner of the upstream and gas treatment. We both work to have as Slim economics on that side as possible. And then we share in the gas offtake pricing. And then you basically achieved the same.

Speaker 1

In some of them, it's being discussed to have shared economics across the value chain as well. If that is to be the case, the resource certainly need to be big enough to charter the vessel for remaining life, Whether it's Hilli or Marcu.

Speaker 5

Okay, great. Thank you. And to confirm the contract with BP for GMV starts up in Q1 next year when the vessel arrives on-site or is it contingent on producing for selling your commissioning cargo? Just What's going on from like BP and Kosmos' earnings calls?

Speaker 1

When it comes to that project, I think Golar's focus is to deliver the FLNG and to deliver it safely on-site into the hub. And then we are not taking risk or responsibility for other parts of the infrastructure. And the contract mechanisms work so that there will be cash flow to Golar once we start or arrive at the site irrespective of the status of other parts of the infrastructure. It is, however, fair to say that everybody around the table is incentivized to have the project up and running as soon as possible, but we are not Actively part of any other parts of the project than delivering the FLNG.

Speaker 5

Yes. That makes sense. Thanks. Thanks for that and I'll turn it over.

Operator

Thank you for your question. There are no further questions. I will hand back the conference to Mr. Staubo for closing remarks.

Speaker 1

Thank you all for dialing in. I hope you have a good day and hope to speak to all of you very, very soon. Thank you.

Operator

That concludes the conference for today. Thank you for participating. You may all disconnect.

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Key Takeaways

  • We high graded our FLNG conversion pipeline by selling the LNG carrier Gandria and acquiring the larger, lower-boil-off carrier Fuji, while exploring long-term charter or sale options for the Golar Arctic after Snam’s conversion option lapsed.
  • Our second FLNG, Gimi, is 97% complete with sail-away expected in September and will commence its 20-year BP contract, shifting the asset from CapEx to strong earnings and bolstering free cash flow.
  • Hilli delivered 100% economic uptime this quarter, completed its 97th cargo offload, and is positioned for recontracting at higher utilization and margins under improved financing terms that extend amortization and reduce debt costs.
  • We are advancing a 3.5 Mtpa Mark II FLNG project with up to $1.5 billion of non-charter contingent financing discussions and increased pre-FID commitments, targeting a late-2026 delivery if ordered by year-end.
  • Q2 results showed 5% revenue growth to $78 million, adjusted EBITDA of $83 million, net income of $71 million, nearly $1 billion in liquidity, and sustained shareholder returns via a €0.25 dividend and $150 million buyback program.
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Earnings Conference Call
Golar LNG Q2 2023
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