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Golar LNG Limited (GLNG)

Q1 2022 Earnings Call· Thu, May 26, 2022

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Transcript

Operator

Operator

Good day and thank you for standing by, and welcome to Golar LNG Limited Q1 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Karl Staubo, CEO. Please go ahead.

Karl Staubo

Analyst

Thank you, and welcome to Golar LNG's Q1 earnings results presentation. Thank you for taking time to dial in. My name is Karl Fredrik Staubo, CEO of Golar LNG. Before we get into the presentation, please note the forward-looking statements on Slide 2. I am accompanied today by our CFO, Mr. Eduardo Maranhao to present this quarter's results. On Slide 4, we have outlined the company overview. Golar today owns two FLNGs, the Golar Hilli in operation in Cameroon, and the Golar Gimi under construction to start to 20 year contract with BP from Q4 of next year. Furthermore, we own an LNG steam carrier, the Golar Arctic, where we announced last week that we have agreed with Snam to forward sell the ship as a converted FSRU. Lastly, we own the Golar Tundra, the most modern promptly available FSRU globally, currently operating FLNG carrier. We have developed three FLNG designs that form the basis for our growth. All three designs are based on the same proven liquefaction technology, and we will highlight some of the key characteristics of the different capacities of the units later in the presentation. Other result of significant corporate transactions over the last 12 months we have three listed shareholdings. We own 6% of New Fortress Energy valued at $558 million on yesterday's close. We own about 31% of Cool Company Limited, the shipping spin-off we established during Q1 of this year. We own around 24% of Avenir LNG, a small scale LNG shipping and terminal business. And the total value of these investments amount to approximately $720 million. Golar celebrates its 75th year of operation this year, 50 of which we've been actively involved with LNG maritime infrastructure assets. Golar has through its history pioneered some of the key developments in the sector, including…

Eduardo Maranhao

Analyst

Thanks Karl, and good morning, everybody. I'm very pleased to provide an update on our group results for the first quarter of 2022. So turning over to Slide Number 7, I wanted to show some of the highlights of this quarter. Starting with our FLNG units. Our first vessel, Hilli, continues to operate with a very solid performance, delivering 100% uptime. The Brent linked kicker in our contract generated an incremental EBITDA of $16 million this quarter, or 36% up when compared to Q4 last year. Since 1st of January, we've started to realize our TTF linked production from FLNG Hilli, which added an incremental EBITDA of $22 million. I will explain those different elements in more details further in this presentation. Construction of our second FLNG unit, the Gimi, continuous in Singapore, and is now 83% technically complete. We continue to make substantial progress on commercial discussions for future FLNG units, and we have a strong pipeline of opportunities for growth projects. So moving on to shipping in FSRUs, the formation of Cool Company was successfully completed this quarter. We've raised $275 million in a private placement in January, followed by the listing of its shares in the Euronext exchange in Oslo. In connection with that, Cool Company acquired eight of our TFDE vessels. In May, we announced the award of EUR269 million contract which Snam for the conversion of the Golar Arctic into an FSRU. Due to the current geopolitical situation in Europe, we continue to see a very active FSRU market and have received inquiries from multiple European counterparts for the deployment of our last unit to Golar Tundra. We continue to strengthen our balance sheet and since the start of this year, we have released $470 million in cash proceeds from the Cool Company spin-off and…

Karl Staubo

Analyst

Thank you, Eduardo. Turning to Slide 11 which elaborates on the embedded upside on the commodity exposure of Hilli's tariff. As you can see during 2021 Golar pro rata share of Hilli's EBITDA was $99 million. This is expected to grow by 2.5 times for 2022 on the back of higher Brent linked earnings where Golar generates $2.7 million of EBITDA for every dollar Brent is above 60. This is expected to generate about $91 million of EBITDA for 2022. Furthermore, the startup of the incremental 0.2 million tons of TTF linked production that commenced in January other than other $22.6 million in Golar share of Hilli Q1 EBITDA. For the full year, the TTF linked production is expected to add $81 million in incremental revenue where the TTF gas price exposure for Q2 and Q3 has been hedged at $25.38 per MMBtu. We remain open for Q4 TTF gas price exposure. Perenco, the charter of the unit has a onetime three year option to declare up to 0.4 million tons of increased production from 2023 until end of the contract in July 26 on the same TTF linked tariff as the current 0.2 produced this year. The option is declarable within end of July, and we see it as increasingly likely that Perenco will take up the option on the back of strong gas prices, but subject to the final outcome of the drilling program to tie in more reserves to Hilli. We do not expect Perenco to take up the option until closer to expiry of the option in July. The commodity exposure on Hilli enables as an FLNG provider to charge significantly higher tolling fees for traditional long-term tolling arrangements. As you can see from the boxes on the slide, the effective tolling fee for Hilli during…

Operator

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from the line of Chris Tsung from Weber Research.

Chris Tsung

Analyst

Can you provide some color on the decision for Snam to convert to Arctic? Was it based on price or timing deployment or price preference by Golar Tundra between any of the two vessels?

Karl Staubo

Analyst

This is a project that we have developed with plan over a long time, it predates the geopolitical situation in Europe. I think the backdrop for their decision is the success of the LNG Croatia and the capacity needs in Sardinia and that this would be a cheaper alternative than to buy more modern tonnage for that specific project.

Chris Tsung

Analyst

I see. And just a follow-up for that. Can we think of the difference between the sale price at EUR269 million and the conversion costs for change? Is that the vessel sales price, is that the right way to think of it?

Karl Staubo

Analyst

Sorry, you're breaking up a bit, is that the difference between?

Chris Tsung

Analyst

The EUR269 million and the conversion costs, is that effectively the vessel sale price?

Karl Staubo

Analyst

That's of course one way you can put the two, if you take the difference between the deal and net of outstanding debt of around $30 million, you get to the equity balance ownership.

Chris Tsung

Analyst

And just one last quick one, just -- of the three designs to Mark I, II and III, which one could we deployed the fastest?

Karl Staubo

Analyst

We're currently working on projects on a tolling fee basis for Mark III, I'm going to integrate the basis where we are balancing the decision between Mark I and II. So it's difficult to say which one comes first, currently, it's tempting to say Mark I or II

Operator

Operator

Next question comes from the line of Sean Morgan from Evercore.

Sean Morgan

Analyst

Hey, Karl and Eduardo. Question on the potential conversions and new FLNG. As you said that, net cash balance is obviously -- net debt balance is actually quite low. So you could potentially finance these out of cash. Would you want to do that or would you look at a more balanced approach to incorporate more debt? Or do you kind of look at potential expansion of FLNGs as a way to sort of deleverage as you grow?

Karl Staubo

Analyst

I think first and foremost, we have cash investment security of $1.4 billion on the company's free cash flow positive every quarter going forward based on the current performance of the group. So that means that all that money can be deployed to growth and around half of it is already in cash form. So I think we can fund one FLNG project just out of available cash the way we see it right now, and should we get more than one FLNG project, we could look up the list and securities position or reliever on Hilli and Gimi which on average has very low leverage at the moment.

Sean Morgan

Analyst

And then another question we get a lot, it's sort of difficult to gauge is in terms of counterparties, off the coast of Africa. And you talked about the low price to extract the gas reserves from that region, but when you think about contracting a new FLNG, do you go to sort of the nation state that controls the oil field or is there like a series of EMP partners that you would kind of be negotiating with first? And how's that process work in terms of converting an idea into an actual FLNG project?

Karl Staubo

Analyst

If you think about it, we've worked for BP -- well, we're about to start to work for BP in Africa. We are working for Perenco in Africa. So on both of those that explains to you who the counterparts are, in that context, it's BP and Perenco and they are the ones interfacing with the local government. And to some extent, they're a good representation of the different sort of opportunity sets, one of them on a fixed tolling fees to a solid counterpart for a long time, and one of them with more commodity exposure. So the way we're working this is mainly with partners with a significant presence in country. But it also explains some of the reasoning why it's a bit difficult from consequent to guide on exact findings of when projects will be sanctioned. Because we can want to have done it yesterday and so can the charter, but you're reliant on governmental with all this environmental sign-offs and upstream to be in place. And that's really what's driving the timeline more than the interest from either us or the charter.

Sean Morgan

Analyst

And so beyond your two existing counterparties, though, is there like five to six other EMPs that are working in that region or is it more limited scope of potential partners?

Karl Staubo

Analyst

That's a fair statement that you have several other guys operating in that area, [Indiscernible] really look them proven and associated gas reserves and in this market not to waste the resource.

Operator

Operator

Next question comes from the line of Ben Nolan from Stifel.

Ben Nolan

Analyst

So I guess I'll start again on the FLNG side, there's been -- you guys have been working on this for a while. And maybe could you just characterize what the conversations are like today with your customers versus maybe a year ago? There's obviously been some thought that there will be some positive developments, but there haven't been any major incremental ones in last number of years. So how do you think now is different, I guess, is the question.

Karl Staubo

Analyst

I think what's happened, this is mainly currently a driver of the gas development, and the fact that the gas price -- gas market is tight. You just see the amount of interest when the gas price is high the economics for this project is significantly better, and that's what drove the incremental increase in interest, the first six -- well, up until the Russia-Ukraine situation. After the Russia-Ukraine situation, you've seen first, a massive scramble from Europe to secure FSRUs. Now, they're slowly moving into the LNG carrier market and you can see term rates almost being the below that was operate, even as we enter into the soft part of the air, because Europe is scrambling to secure energy security. And then, ultimately, they now understand that the market was tight. They have created import terminals, but they haven't got their hands on the hydrocarbon. So you now see a lot of these countries leading the way. You've seen the likes of Germany first go to Qatar, then to U.S., and yesterday, they announced that they think that African gas is a significant part of European -- Europe's energy solution. So that's coming and with the European countries, you can more easily secure offtake and financing than you could pre the Russia-Ukraine situation.

Ben Nolan

Analyst

So the people seem to be more serious, is that sort of the takeaway here?

Karl Staubo

Analyst

The economics are better, and the financing and offtake are more available than ever?

Ben Nolan

Analyst

And then for my second question, I might slip in a twofer on this one. But so you talk primarily about Africa, and you gave the illustrations about Africa, although in the past, you guys have talked about other regions like the Middle East and Mediterranean, different other places. Are those still on the table first of all, or are they substantially behind? And then for part number two, you talk about two, being able to fund two incremental units, but Mark III, the cost is substantially different than a Mark I. So is that assuming like one Mark III and one Mark I or how should we think about how you're thinking about two units?

Karl Staubo

Analyst

First part of the question is yes, it's also other geographies than just Africa. So that's why we say mainly African gas, because we see the attractions of the input and the distance. But there are other areas, for example, in the Middle East where the gas is essentially free. So that's obviously still part of the project and the considerations or development. But we are focused mainly on African, but there are other projects as well both in the Middle East and elsewhere. Sorry, the second part of your question.

Ben Nolan

Analyst

How to think about when you say you can internally fund two projects, Mark I versus Mark II or a combination?

Karl Staubo

Analyst

If you take the CapEx on these, you have -- of course, you can source that funding. So if you take the example of Hilli, for example, we have -- when we built our home, it was a $1.4 billion CapEx and we have $960 million of debt available. So that's call it, $500 million equity check, and with a $1.4 billion cash investment securities balance and the free cash flow to equity positive operation, we can fund it through balance sheet. When it comes to the larger assets, you can typically get yard financing which you can look at -- easily get for conversion.

Ben Nolan

Analyst

So when you talk about self-funding two of these it's one of each, is that how to think about it?

Karl Staubo

Analyst

We will take the project that we think makes the best economics, if that's two Mark IIs or one Mark III and a Mark I, remains to be seen when we announced the project.

Ben Nolan

Analyst

But just two in general, that's the capacity is the takeaway. Okay.

Karl Staubo

Analyst

We can comfortably fund two from the current balance sheet, and the rest is a timing thing. So you'll -- we generate cash flow pretty much every day. So it depends on the timing or when further units beyond those two, but I think if we double the FLNG fleet, we can look at our situation at that point. But for now, the focus is on getting to the next two.

Operator

Operator

Next question comes from the line of [Craig Lewis]. Please announce your company name.

Unidentified Analyst

Analyst

Karl, I was hoping you could comment a little bit on the ongoing drilling campaign you highlighted in the press release and the well past thing that's going on in West Africa. And really what I'm curious about and maybe it's a little bit of both is, is the driver or the customers doing those drilling campaigns? Is that going to potentially lead to more volumes for the Hilli or is it potentially going to lead to maybe an extension on the Hilli in -- with Perenco?

Karl Staubo

Analyst

That's a good question and it's kind of yes to both. So the primary purpose of the drilling campaign we understand is to tie in more proven reserves, so that you increase the gas flow and enable the 0.4 million in increased production. But we have very clearly publicly stated, both to the market and of course to Perenco, and SNH, the governmental body [indiscernible] is that we will not enter into extension discussions until they declare that point four, because currently, we of course, have paid for equipment that’s not fully utilized and every incremental production is straight through to net income or free cash flow to equity utilized. And we don't want to be working on any extensions until we better utilize the equipment already in place. But you know, it can show gaps that could lead to an extension discussions as well. But for us, it's sort of, you have to tackle one obstacle at a time and for us, it's the increased production of the key driver on Hilli right now.

Unidentified Analyst

Analyst

And then realizing that we were selling the steam, the Arctic, obviously, you're highlighting the Tundra and the opportunities for the Tundra. I guess a two part question there. One is, as we think about the path forward for the Tundra, is that more around an asset sale? Or could we potentially just see that be contracted and remain a core part of the fleet? And just piggybacking on that question, are there opportunities for Golar to expand its FSRU footprint?

Karl Staubo

Analyst

So to the first part of your question. At the beginning of this year, there were several FSRU projects being worked, none of them in Europe. I think with both happened in the geopolitical situation, as we tried to highlight on the slide, the incremental increase in new FSRU projects out of Europe is unprecedented. And on the balance, we are very confident that unit will end up in Europe and not elsewhere. If you look at what's communicated by the various governments in Europe, some of them are targeting and chartering opportunities, and some of them are targeting acquisition of units. I think, for us, we remain agnostic whether we sell or charter, we will do what we think caters for the best risk adjusted economics. And that's our target and with the amount of interest and the specification of Tundra, we feel very comfortable about that situation. When it comes to the second part of your question, what we want to focus on going forward is FLNG project, because we think we have a unique competitive edge. And we still think that the economics of FLNG projects is the most compelling in the LNG value chain, at least for the next decade or so. However, we have no non-compete with any of the corporate transactions, but we have come to that over the last 12 months. And should there be an attractive FSRU project coming up, there's no reason why we should not take it on. However, I would highlight that our focus is FLNG growth, but we remain open to anyone who wants to talk to us or any attractive LNG infrastructure business.

Operator

Operator

The next question comes from the line of Craig Shere from Tuohy Brothers.

Craig Shere

Analyst

So besides the gander that you already have, how do you see availability of vessels for acquisition for additional Mark I or Mark II conversions? And do you have any thoughts about timing and announcement of a full 2.4 MTPA deployment of the Hilli post your mid 2026 [Franco] contract expiration?

Karl Staubo

Analyst

So, when you talk about source vessels for Mark I or Mark II, those will most likely be based on the most design carrier, so the one with a bolt on top. Those carriers are mainly steam carriers that will face significant operational challenges due to the new environmental regulations from first of January, so basically the new EEXI and CII regulations. Hence, these ships will be less suitable for -- to operate as LNG carriers and more suitable for floating storage jobs or as conversion candidates, whether for FSRU or FLNG. Because of the amount of those ships that will become less competitive for shipping and therefore need to find alternative works with a limited amount of companies with a track record of successfully redeploying or re-characterizing those types of ships, we're confident that there will be vessels available for conversion candidates. To the second part of your question when it comes to Hilli, I think we always try to do A before we do B before we do C and so forth. And for us, the next step on Hilli is to secure the 0.4 million tons in July of this year. After that, I think it's for sure in depending on Cameroon's government to try to find solutions to keep that unit in concrete. For both of them, this has been a massive economical success. And we think both of them have an interest in keeping the unit in country. On the other hand, I think the operational track record and the fact that the unit has no construction risks, and lastly that is very soon, the quickest FLNG you can get your hands on internationally, we think that in this gas price environment her attractiveness for potential work outside of Cameroon is increasingly attracted by the day. So to try to give some guidance on when we think we have development there, we would say it's hard to -- probably up to 12 months after the 0.4 or so, by summer next year or so, in that time period.

Craig Shere

Analyst

And one last question on FLNG negotiations for new projects. I think we all understand that the upstream producers are your counterparties. But how many upstream producers have -- in Africa have set in stone relationships as far as royalties, profit sharing, what have you with the host governments? And to the degree, there's a major upsizing of a play with say, your FLNG that that reopen these things and make very complicated discussions where obviously the host governments want to get as much value from the current market as possible?

Karl Staubo

Analyst

That's an extremely qualified question. And I think you're touching upon parts of the core of why the reason some of these projects, it's a bit difficult to guide on exactly when they will happen. I think it's fair to say that neither us nor any upstream partners would enter into such projects without very clear agreement with host governments on these specific points that we touched on, like the agreements on how things should be shared, flexibility and so forth. This is basically the key gating item in terms of timeline for the new FIDs. The flip side of the argument is that these are stranded gas reserves that are proven, and no one has the technology to monetize those fields. That's what we cater for. Today, we don't see anyone else doing FLNG or floating liquefaction as a service. We have a very proven track record of this. So therefore, I think we are the solution in terms of monetizing the unit. And it's a matter of finding a fair framework that works for the government, the upstream partner and for us.

Operator

Operator

Next question comes from the line of Chris Robertson from Jefferies.

Chris Robertson

Analyst

On the NFE shares, how are you guys thinking about those in terms -- are you just wanting to hold them until you need to monetize ahead of a new FLNG project or what's the thinking there?

Karl Staubo

Analyst

And that's a good question, Chris. So I think as you know, we got 18.6 million shares in total consideration when we sold high growth -- the share component of the consideration. Earlier in May, we sold one-third of that holding, freeing up $253 million. We liked the development of NFE. We like the direction they are taking the company. However, we have no lockup and no board system, no access to any nonpublic information. Hence, we're pretty much free to do what we want with that shareholding. The way we see it now, it's far better to sit NFE than to sit cash. And we have significant balance sheet flexibility to fund at least 1 FLNG project without touching that facility -- I'm sorry, those shares, and for now we are holders of the name.

Chris Robertson

Analyst

Is there any room for I guess a greater partnership with New Fortress now that they're getting into some floating LNG with offshore rigs, any expertise that you could offer or discussions there?

Karl Staubo

Analyst

I think, it was disclosed by NFE and Wes Edens on his earnings calls. We are as Golar, working together with NFE helping them out to develop their first LNG solution both on the engineering side and also on the operational side. Keep in mind, Golar still operates all of the maritime assets like the ships and the FSRUs that we sold to NFE. So we have a good working relationship on sort of all levels of the organizations. There's currently no specific plans, but I think we would certainly be open to working together when the right opportunities arise.

Operator

Operator

Next question comes from the line of Nick [Linan] [indiscernible].

Unidentified Analyst

Analyst

How many yards are there that you think can do Mark I or Mark II conversions? And how many do you think could do Mark III new builds? And do you have any guaranteed slots for either of those types of work? And if so, like when you have options on those slots until -- because it seems like the odds are getting quite --

Karl Staubo

Analyst

That's a very correct observation. They are getting extremely busy. So to some extent, that's a bit of an unusual situation for I think anyone in the maritime space, we haven't seen that since sort of the 2006 to 2008 cycle. But then again, the yard capacity has been built down significantly since then. And then the resurgence in activity has caused longer lead times, and obviously the general surprise squeeze globally. But to answer your question on Mark III, we think it's essentially one shipyard that we are -- that we think is up to the part. And on that one, we are in detailed discussion about securing slots. The way the shipyards think about things is that they are of course selling most of the capacities to fairly aggressive LNG carrier and container orders, but they are saving some space for what they call large offshore infrastructure projects. They have learned over time as most other people have the shipping markets are cyclical. And it's not wise of them to build down engineering and offshore capabilities because you never know when they are in demand and when that ramps up activity. So they are saving some slots for larger projects, but it's a limit to how long they hold the slots given the pressure on container and LNG carrier orders. That said, I think we have long standing relationships with the key yards in question and we are currently working to secure slot options for Mark IIIs. When it comes to Mark Is we have built Keppel in Singapore, and we think that’s the best shipyard to build Mark Is. We have not explored others and we have no intention to explore other for Mark Is either. When it comes to Mark IIs that's considered to be done at a different shipyard from both Mark I to Mark IIIs. So basically, we have one select shipyard we’ve been working on with -- for quite some time on Mark II and III and we're already having a very established relationship with Keppel on Mark Is.

Operator

Operator

Thank you. There are no more questions at this time. I would like to hand back over to Karl Staubo for final remarks.

Karl Staubo

Analyst

Thank you all for listening in and for good questions and we look forward to connecting with you next quarter. Have a great day.

Operator

Operator

That does conclude our conference for today. Thank you for participating. You may all disconnect.