Golar LNG Ltd

NASDAQ:GLNG

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today’s Golar LNG Limited Q1 2019 Results Presentation. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator instructions] I must advise you, the conference is being recorded today.

I'd now like to hand the conference over to your first speaker today, Iain Ross. Please go ahead.

[Iain Ross, CEO]

Thank you, operator. Good morning, good afternoon, everyone and welcome to Golar’s Q1 2019 earnings call. Today, I'm joined by CFO, Graham Robjohns; Head of IR, Stuart Buchanan, and we're pleased to advise that our Chairman, Tor Olav Trøim, is also on the call.

Turning to slide three. We have a lot of feedback over the last few months about the things we can do to try and make the Golar story more simple, more appealing to some of the longer term investors that we're trying to attract. And we hope to cover some of that today.

Our vision is to participate competitively sustainably and of course safely in owning and operating of LNG infrastructure assets, which we believe are part of the world's needs to move towards cleaner energy. And slide three is a reminder of our current assets. Let me move to slide four and just cover the highlights before handing over to Graham, to go through the numbers.

The main achievements during the quarter were clearly to conclude all of the contractual agreements in order to get going on a Gimi FLNG Conversion project for BP, which is now up and running and progressing to plan. As a reminder, the vessel should be on station and producing LNG in 2022, at which point it will start running down an EBITDA backlog of over $4 billion associated with the project. A $700 million debt facility is in place. Our partner in this development Keppel Capital has subscribed to 30% share in the project.

The second project that we made the final investment decision on is a Viking conversion from a carrier to an FSRU for LNG Croatia, and that project will commence next year. And whilst we grew the EBITDA backlog, the amount of EBITDA that we generated during the quarter was about half of its Q4 2018 number, largely due to seasonally reduced shipping rates, which still was well above the first quarter last year.

And importantly, subject to the shipping markets improving as we think it will, we're getting closer to a spinoff of the TFDE fleet, having received approval from the Board to move forward on that basis. Spinning off the ships will create two separate businesses that should be more appealing to investors individually than as a combined group.

I'll now hand over to Graham, to take you through the numbers in more detail, before coming back to talk through the business segments.

[Graham Robjohns, CFO]

Thank you, Iain, and good day, everybody.

Starting on slide five and our income statement. Our net operating revenues were down this quarter at $97.8 million from $141.8 million last quarter, primarily as guided as a result of a weak Q1 spot shipping market, which was largely driven by seasonality, as well as early Chinese LNG buying in Q4 leading to weak Asian LNG prices in Q1, which removes inter-basin some trading opportunities. As a result, fleet utilization fell to 51% and TCEs to $39,300 per day. Reduction in shipping revenues was the key driver behind the adjusted EBITDA of $62.9 million. Although realized earnings from the Brent linked element of the Hilli Episeyo contract were also reduced to $2.2 million for the quarter.

The fair market value of the Hilli Episeyo linked oil contracts, i.e. the unrealized elements recorded a gain of $28.4 million in Q1 as oil prices recovered from year end. This of course compared to the very large loss of $196 million for Q4. We recorded a $34.3 million impairment in the quarter in respect of the steam LNG carrier Golar Viking, the vessel being converted for a Croatian FSRU project. Although the sale is not expected to close until Q4 2020, the transaction triggered an immediate impairment test. As the current carrying value of the vessel exceeds the price a market participant would pay for it as an LNG carrier today, a non-cash impairment charge of $34.3 million has been recognized. A profit is however expected to be recorded when the sale actually closes along with the net cash inflow of approximately $40 million. And finally, equity in net losses of associates was significantly reduced this quarter due to the impairment of our holding in Golar LNG Partners that was recorded in Q4.

Turning over to the balance sheet. On the next slide are unrestricted cash balance was $213 million as at March 31 as compared to $217 million year-end. Included in our total restricted cash of $478 million is $175 million relating to Hilli Episeyo letter of credit facility, approximately $29 million of which is expected to be released to free cash in Q2 2019 with a further $85 million scheduled to be released by May 2021.

Turning over to slide seven. Our last 12 months further adjusted EBITDA, which is adjusted for non-recurring items and Golar LNG Partners share of Hilli annualized for the full year was $186 million, which you would expect to increase as a function of an improving shipping market. This is, as I say, after deduction of a one-off gain associated with the Golar Tundra contract and also let's say Golar Partners share of Hilli but does not include distributions that we receive from Golar LNG Partners, which is currently approximately $37 million per annum.

Moving over to slide eight and staying with EBITDA. Our cash generation from our FLNG and downstream assets in contracts will now start to ramp up. We also expect our current base level adjusted EBITDA will improve as a function of improving shipping market given the $186 million for the last 12 months numbers equates to an average TCE of only $44,000 per day. Cash generation was increased significantly over the next few years as a function of the startup of the Sergipe power station together with the Nanook FSRU, expected increase in utilization of the Hilli and of course the new Golar Gimi FLNG contract. And this will bring us to over $500 million a year. And these numbers, as I say, again, exclude any contribution from Golar LNG Partners in the form of dividends.

Third slide on -- EBITDA on slide nine. You can see that even without the assumption of the proposed shipping spin-off, our earnings will become far more predictable as fixed contracts start to demonstrate -- dominate, and we move from a fixed element of contracts, 23% currently to over 70% once the Gimi is operational.

Turning over to slide 10. Here we show a breakdown of our debt. Our adjusted net debt position as at 31st of March, including 100% of Hilli’s $894 million debt was $2.3 billion or $1.75 billion if you exclude Golar Partners share of Hilli’s debt. We've also set out on this slide, the split between short-term and long-term contractual debt, which as you see, differs mostly from the balance sheet position as a result of the requirement to consolidate the Chinese banks leasing companies, so called VIEs. An important part of the proposed shipping spin-off is of course debt reduction from our balance sheet. The debt associated with the vessels earmarked for the proposed shipping spin-off equates to approximately $1.17 billion.

In terms of new debt, as Iain has mentioned, and as we reported in our earnings release, on April 16, Gimi MS, a 70% subsidiary which owns the vessel Gimi, received a firm $700 million fully underwritten financing commitment. The facility will be available during construction of the tenor of seven years and has an amortization of 12 years. We also expect that as we get near to commercial operations, this level of debt will increase as was the case with Hilli.

In terms of other debt facilities, we have agreed a two-year extension on the Golar Tundra sale and leaseback facility and a five-year amended facility in respect of the Golar Arctic got credit approval during the quarter.

Thank you. I’ll now hand back to Iain to carry on the presentation.

[Iain Ross, CEO]

Thanks, Graham.

So, I'm on slide 11, taking the business sectors in turn, firstly, FLNG. Hilli is going well, currently offloading cargo number 20 this week. And we recently achieved a contractual milestone of 1.2 million tons of LNG produced that led the LC to be reduced as Graham mentioned.

On the back of our continued satisfactory performance, discussions with Perenco are in progress with a view to increasing the production volume beyond the first three trains and potentially extending the overall duration of the contract. We expect to conclude these discussions well before the year end, and I'm sure that you'll understand if we don't go into any further details at this time, but we will update you fully when we’ve concluded the agreement.

The Gimi conversion project with BP has been kicked off, as mentioned. We recently cut the first steel on the sponsons. And as the project progresses, we're making sure that we -- that anything that we can learn from the Hilli operation is built into the design and operations of Gimi. And it’s this recent and relevant operations experience that’s making our discussions with other potential FLNG customers so constructive. Our pipeline of prospects remains very healthy. But, it should be noted that these deals are complex and take time to conclude. And although we're confident that FLNG economics and risk profiles will result in readily refinanceable assets post star-up. One of the key challenges for Golar is our ability to commit our portion of the equity required during construction phase of a project. Payment terms are a key component of this. And we continue to work with yards and suppliers to try and optimize the commercial model, which will allow us to make this business more scalable.

Turning to shipping on slide 12. So, shipping market did experience the seasonal decline with the TCE effectively halving from the fourth quarter. And as usual, it was a combination of factors that led to the swing in rates. With a mild Asian winter despite continued growth in China, we saw some nuclear restarts in Japan and Korea that largely offset that Chinese demand. They are closed and the Atlantic basin cargoes from the U.S. and Russia into Europe doubled by volume compared to the first quarter 2018. With these additional volumes remaining in Europe, ton miles and the shipping rates continued to fall throughout the quarter, leaving spot TFEE and steam rates at $40,000 and $24,000 respectively by the end of March. And of course with weight reductions we also experienced reduced utilization, which in a down cycle has a greater effect on TCE.

And although the rates softened further in Q2, we’ve recently seen the low point and shipping rates are now into their seasonal recovery. Forward gas prices of $9 per MMBTU being quoted for December give solid support to an improve shipping market. And our view on the coming structural shortage in shipping remains unchanged.

Leading brokers continue to forecast a 10-plus vessel shortage at the end of 2019, increasing to more than 20 at the end of 2020. Rates are expected to reflect this from the second half of this year onwards and remain strong for the next two years. This has resulted in an increase in requests for medium to long-term charterers. We have a couple of deals already concluded and several more under discussion, based on index linked rates, which will secure full utilization of the chartered vessels. These deals will provide some support to the fleet TCE moving forward.

And as mentioned in the introduction, at our recent Board meeting in Bermuda, a decision was made to proceed with a spin-off of the Company's TFDE LNG carriers into a separate business, subject to satisfactory market conditions, which will allow us to focus the Company's future activities around FLNG, Golar Power and the downstream assets. We believe the spin-off will allow LNG shipping investors more direct exposure to the LNG carrier market without having to consider the longer term CapEx projects. Golar is also in talks with other owners of similar tonnage to potentially join the new shipping company. And under the new arrangement, it should be noted that management of Golar's vessels will remain with Golar Management Norway.

Turning briefly to the FSRU business on slide 13. The Viking conversion project has taken FID with long lead equipment now in order. She’ll enter the conversion yard at Hudong at the beginning of next year, and will trade as a carrier until then. This conversion contract will not consume any material amounts of cash due to the milestone payment structure agreed under the contract. Other FSRU prospects are being pursued but the approval process remains slow and the returns are less attractive than other parts of the business can be.

Turning to slides 14 and the Sergipe power station. Construction remains on track for commencement of operations on January 1, 2020. Power station is now nearing mechanical completion, and precommissioning of selected systems has commenced in anticipation of first firing of the gas turbines currently scheduled for early July. Transmission lines from the substation to the grid were connected on the May 3 and the FSRU Nanook with its commissioning cargo is ready for hookup to the mooring. And as a reminder, Golar’s share of the earnings from this project are around $99 million per year for 25 years regardless of whether power is dispatched or not.

As discussed on the last call, Golar Power commenced a strategic review, which focused on how we can ramp up the business now that Sergipe power plant is nearing COD. We had a progress update a couple of weeks ago and there are a number of ways that we can growth the power business. Of course, we can continue to pursue Brazilian, the power options to underpin for the developments like Sergipe, and we do have a couple of locations already permitted and wit well developed business plans, one Barcarena in the north and other at Santa Catarina in the south.

We will continue to pursue these projects, because the problem is that we have the timeframe between now and when we see cash flow is quite long, it’s between 4 to 6 years away. So, in thinking about smaller amounts of CapEx and shorter payback times, we've been closely examining the downstream distribution market for some time. And the clear conclusion of the review is that the immediate focus of Golar Power will be to utilize the strategic position of the Nanook FSRU to access the downstream small scale LNG market in Brazil.

If we turn to slide 15, we try to illustrate that there are several ways the Brazilian Energy market is being serviced. We included the current reference price for different forms. For example, the industry is paying about $15 per MMBTU for piped gas, isolated communities are paying about $14 for HFO generated power. Domestic consumers are paying about $20 per MMBTU for piped gas. And diesel for transport costs about $26 per MMBTU.

In the slide, we're attempting to show that we have a small scale rollout solution for gas fired remote thermal power, both domestic gas consumption and remote LNG transport. In all modes, you can generally beat the reference price for supply of LNG versus the current fuel. And if you consider the 95% of the cities in Brazil are not connected to pipeline gas, there's an opportunity to displace expensive diesel and other fuels. The market in Brazil is large with diesel consumption across the whole country equivalent to approximately 40 million tons per annum of LNG demand.

So, the key to this plan is to use the FSRU Nanook. We've already invested $300 million to $400 million in the vessel, the pipeline in the mooring. And that expenditure is justified and supported by the Sergipe power station project. But, when the Sergipe power station is running at full capacity, it will only require a fraction of the volume of the FSRU. We therefore have access to around $200 million MMBTU per year spare capacity.

If you turn to slide 16, the model we're developing involves breaking bulk from Nanook and transporting LNG to other coastal locations before transferring to storage tanks, secondary terminals, or truck loading stations for further transport to the destination. We have had detailed discussions with many of the small cities that can be served from the Nanook FSRU and have received such strong interest from these communities combined with a strong drive from the Brazilian government that we're moving ahead with a detailed planning and costing. The key will be to understand not only the cost of conversion for the consumer, but how we can make it as easy as possible for them to take advantage of the lower costs and improve environmental performance. The Nanook is a strategic asset and creates a very high barriers to entry.

By means of example, if we use all of the excess capacity of the Nanook and assume that it saves, $1 per MMBTU can be captured, this is equivalent to around $100 million per annum in additional EBITDA for Golar Power. Importantly, the time between investment and cash flow is relatively short with returns commencing in 12 to 18 months. We believe this model is replicable with other locations such as Barcarena and Santa Catarina. And importantly, can accelerate the positioning of strategic FSRUs in those locations in advance of a power station contract being awarded.

Turning to slide 17, shows another example, this time with the transportation. Diesel for transport costs $26 per MMBTU, as illustrated by the petrol pump or the diesel pump price that you can see in the slide. It’d probably be delivered in the form of LNG for about half the cost. And interestingly LNG trucks cost about the same diesel ones. And right now there are around two million trucks on the road in Brazil using about 32 million tons per annum equivalent of LNG in the form of diesel.

LNG cuts CO2 and nitrous oxide emissions by 30%, particulates by 70% and it basically takes out any sulfur. It’s cleaner and much cheaper to use LNG for transport than diesel and infrastructure is relatively cheap and fast to roll out.

Moving now to slide 18. This summarizes our contract earnings backlog which is around $6.6 billion versus a current market capitalization of $2 billion and an enterprise value of $4 billion. We continue to look to build a strong and sustainable business with some high quality customers. And this seems like a good time to hand over to Golar's Chairman, Tor Olav Trøim for his views and some closing outlook comments.

[Tor Olav Trøim, Chairman]

First of all, I want to thank all of you for listening in to the call. The reason why I wanted to participate in this call was to give an unfiltered message from the Board to the Company's shareholders and prospective investors about the strategy we have set and the focus the Board will have for the Company going forward.

To build a great company is never easy. I’ve had a pleasure of being a part of a group, which historically bid some great companies, made a lot of money for shareholders, and nearly all of them went through some tough times before the shareholders ultimately got their award.

Even our vision to sell cheap and healthy fuel through the consolidation of the salmon industry and then with big losses, no investor confidence on our market capitalization of $1.2 billion in 2012, before the investors saw the value of cheaper healthy fuel and today the price of the Company’s $11 billion after our pay down another $2 billion. [Ph]

I’m proud about of what our employees in Golar have done and have achieved over the last year. We delivered the world’s first FSRU. We delivered the world’s first FLNG. And we delivered under budget and on time. We had 100% uptime of operations in the first year of operation. We started the construction of the second one, after BP has spent three years in our offices investing in the vessels. We are seen as a top class operator of LNG carriers. And we're in the process of completing structure of South America’s largest thermal power plant, which will generate a $1 million in EBITDA everyday for the next 25 years.

We have also gathered a backlog of more than $10 billion for the grid with a very good margin. Not that bad for a company with a market capitalization of $2 billion. However, we are as Board also ultimately responsible for giving return to shareholders. That is the most important thing you have in mind running a company, and we have not delivered over the last five years. I have to admit that it feels touched to announce a 20-year deal BP with an unleveraged return of 13.5%, at the same time see the share price fall. Particularly, it is hard when we are approached by pension firm out there, but we are happy to see half of that return for a 20-year deal to an oil major, we can’t blame it on the market. The LNG market is the fastest growing energy market in the world, outside renewables and growing more than 10% a year. It’s a great history, as Ian said, has a significant pollution reduction, CO2 down 30%, SOX 100%, particulate is 60%; it is really the case.

The biggest three sounds we have had probably been -- and ultimately have been the hurdle in developing this company over the last years have been the slowness of the decision making in this industry, the time it takes to execute from project to planning to permitting to construction and completion, and then a lack of developed financing for the LNG industry which is a new industry.

We went out and let Nanook pick up the cargo from Hilli, use FSRU capacity and send gas into our power station in Brazil, [indiscernible] which comes in the end of the year, started distribution of small scale LNG in Brazil from Nanook. It’s a result 10 years of hard work in permitting, negotiating, finance and executing on the very firm conviction. LNG is cheap and clean energy, that’s why in percentage term grows close to 10 times more than oil.

I dare to say that the biggest value in Golar today is not the contracted cash flow which all the analysts kind of estimate on a quarterly basis. It’s the execution experience we have gained and the strategic value of that infrastructure we have built strongly in the side. Because only Golar and Petrobras today who can deliver LNG into Brazil. And it costs hundreds of million dollars for anybody else and years to challenge us.

The main target for the Company now going forward as Iain said, it’s the production capacity of Hilli for a longer term than initial contract. It is to increase throughput and it is to produce power in Brazil in the periods it may not dispatch. It is to replace these in the downstream markets. It's all incremental revenue and EBITDA on a CapEx which already has been taken by the Golar shareholders. It is to use the entry points -- the further entry points we know are permitted in Brazil, to deliver further LNG to the customer. The term price for diesel in Nevada was yesterday equal to $26 LNG price. At the same time, LNG price in the U.S. market was yesterday 3.85, in Europe it was 4.24 and the JKM price was 5.32 in Asia. They're all prices which are equal and less than $30 oil.

Gas LNG is significantly cheaper. What we need in addition -- to go after this Brazilian market is a small scale vessels. If some LNGs storage tanks typically costing $500,000, than some ISO containers typically costing $110,000, it’s filling station for trucks costing around $0.5 million and then some trucks costing around $100,000. We're talking about less than $100 million to make a showcase for an energy revolution in what is the world’s fifth most populated country. A country which last year had these rights. I’ve never seen a more obvious and stronger and more profitable ESG investment case. This is what Golar ultimately is about, cheaper and cleaner energy solution.

In order to streamline the Company for long term [indiscernible], the Board has decided to spin off the carrier business. We will remain operators of the ship but we think the volatility we are seeing in the shipping, it did make it difficult for investors to really understand what Golar is about. At the same time, we know we are heading into some interesting time in shipping. So, rates crossed $200,000 per year last year, we did some in the first part of the year but they have already seen clear signs of recovery. For the next two years, we know that LNG production coming on will offset the amount on new shipping capacity coming from the yard and thereby should lead to a tighter market in the two years to come. It is time now if any time to grade the pure-play LNG shipping company.

We have invested more than $5 billion to get to where we are today. From here on, it's much more a story about capital discipline, increased utilization of existing assets. It's all about return on assets with limited investor -- with limited investment materially in order to create significant value for the Company. We know we have the permit to build for instance, a necessary new terminal in Barcarena, we know the grid has an FSRU laid up. We know that we through these assets can establish what normally is a $400 million terminal at the marginal cost of probably $50 million to $100 million. If we after couple of years can get $1 in tariff on that throughput capacity, we’re talking about an earnings potential of $180 million having throughout capacity on that. It does illustrate the economics of going downstream. We're talking about downstream investment, typically pay back in two to three years. At most, at least, they come quickly compared to FLNG. They've also created very strong relationship to our customers long term.

We’re often asked why haven't completed more FLNG bids? People say things asking us are there enough opportunities? I'll tell you that's wrong. We have three guys from Golar basically, one of the biggest energy company in the world last week. The Company showed up with 40 people and presented us with 10 opportunities for FLNG development. It's just an example. The reason we haven't concluded more FLNGs are twofold. The time it takes for oil companies and governmental institutions to get FID and ability to get debt financing in a period between FID startup. When you start production you can usually leverage the contracts to leave no equity. We have wanted to protect upside for existing shareholders and what we have already operated by not diluting the capital . My friend Wes Edens who runs New Fortress, and I share vision, the biggest energy companies 10 years from now might not exist today. I am in no way saying that it will be off but I think as Wes and I say because what we do is to give customers cheaper and cleaner energy, we can make a lot of money in between. I think this is genuinely a fantastic business model.

I hope that in the next year with that capital discipline and increased utilization of our assets and some of these unique downstream assets we’re talking about, can give back a high return again and can complete our integrated energy company. And we can increase both short and long term earnings and that we maybe even can make Golar great name. Between 2002 and 2014 we were the second best performing stock in the OSX index and we were up 1,500%. We have a history to take care of and we need to get back there. With $10 billion in grid backlog and $6 billion in order backlog in Golar itself and a significantly reduced debt load of after spinning of the shipping and then mission to lower energy costs for everybody, I think we’re on the right track.

I'm very confident about the future, the team we have put together and assets we have and I'm excited. Thank you.

[Iain Ross, CEO]

Thanks, Tor Olav. And with that, I'd like to hand back to the operator for questions.

[Operator]

Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] First question today is from the line of Jon Chappell from Evercore. Please go ahead.

[Jon Chappell, Evercore]

Thank you. Good afternoon, everybody. I wanted to ask about the key growth focus, the final bullet point was additional FLNG awards. I understand you can't really say much on Hilli. So, I'll ask about the other two that are kind of in the probability tree. Any update on a second potential asset for BP or just any thoughts about the timing of how that may transpire? And then, also, you introduced in the press release this comment about Delfin term sheet expected basis of a shareholders agreement. If you could just explain a little bit of what that means, and how that project’s developing?

[Iain Ross, CEO]

So, there's no further update on the BP second vessel. BP still retained that right. And we’ve had no formal communication back on that. In terms of Delfin, we just wanted to update everyone that we have made a bit of progress and revising our term sheet from the previous agreement that we had. The challenge of that project remains and the focus of that project remains on trying to link an off-taker and the supplier to allow that project to proceed, because that will be key to the financing of the opportunity. We've made good progress on the technical aspects of the project that are happening in the background. But, we're still trying to push and make some progress on the off-take. So, that's the critical part as it has been for the last 12 to 18 months.

[Jon Chappell, Evercore]

Okay. So, no real change in timing?

[Iain Ross, CEO]

No.

[Jon Chappell, Evercore]

The second question has do with the shipping business. And it's just comment that you made in the release and also in your comments about the recently concluded charters. I get that their index-linked. So, that's both good and bad, exposure to the market. But obviously, locking down the utilization is a huge positive when you remove one of the two variables from your net TCE. So, can you provide a little bit more clarity as to how many of those -- how many of your ships have been contracted on these index-linked, and also the durations for those contracts. Is it just bridging you to the winter or is it a multi-year period?

[Iain Ross, CEO]

So, I'm not going to give specific details. But, it's -- we hope to end up basically with a large handful of ships that have got some degree of contract in that order. And the duration that we're talking about is sort of north of 12 months for anything up to five years. So, there's a quite a wide range. But, there is a flavor coming through of a tradeoff between us getting utilization and relating it to the market. And my view is there are positive developments for shipping fleet.

[Jon Chappell, Evercore]

Okay. And is that something you think you can disclose ahead of the spin off or not?

[Iain Ross, CEO]

I don't think we did ever disclose that that a minor detail for the shipping contracts.

[Operator]

The next question is from the line of Michael Webber from Wells Fargo. Please go ahead.

[Michael Webber, Wells Fargo]

I wanted to touch on Golar Power. There are handful of new slides in the deck and you guys clearly made a point to run through the different options you have in terms of finding ways to deploy that excess Nanook capacity. I'm just curious, I guess, one, is your confidence in small scale in Brazil, is that stemming from just the overall market opportunity or is this related to the contracts that are awarded and or in bid? And then, as you look at the different things you kind of lay out on slide 16, how should we think about you guys cobbling together a book of business to absorb that excess capacity, in terms of just a broad sense of scale for both industrial, kind of municipal and service station outlets and timeline?

[Iain Ross, CEO]

So, the reason for the confidence in the small scale is, when we went through the view -- we held at New York, a couple of weeks ago, we went through the review of the work that has been done and the detailed work that has been done and analyzing the potential customers of the small scale. It was very thorough and very impressive. What that means is that we’ve gone to the level of having discussions with municipalities and end consumers. We’ve got letters of support and letter of intent and interest in taking LNG from us to the point where we’ve built up fairly detail models of what those transactions could look like. What we have to do next is go to that next level of examination of the specific switching costs, so we know how to get the LNG as Tor Olav said in his remarks, we can break both on Sergipe, we can take one of the avenue of ships and come around the corner, we know how much it costs for an overall isotainer or a larger tank.

But then, the trick is to take that into the consumer and make it easy for them to take advantage of that low cost environmental benefit. So, we're working on that. And that will spread out between the various forms and sources, and on slide 16. So, the two areas that are of most interest to us, one is of course trucking as we detailed on slide 17, whereby we can provide that fuel, we get some of that saving; and then the other one of course is where you got diesel fired generation in remote communities, deep into the heart of Brazil and displacing that diesel with LNG. And many of those power generation facilities are dual fuel anyway. So, the switching costs are quite reduced.

[Michael Webber, Wells Fargo]

Okay. And there lots of ways I guess to kind of carve that up. I guess, maybe the best angle to ask about it would be, I guess, over the next couple of years, if you’re talking about the Jan ‘20 start-up for the project in general and then from there on you are looking to place the excess capacity, what would the potential volume is going look like one or two years out, I guess what are you targeting?

[Iain Ross, CEO]

I think, what we're looking at is a ramp-up. So, I think part of the - once we reconvene towards the second half of the year, I would expect that if we have all our ducks in a row, we will be pressing the button and pushing ahead with the first elements, if you like of this type of distribution, learning from that and then slowly ramping or quickly ramping up as fast as we can into the rest of the community. And I don’t think we know yet just how much of that volume we can actually put through in this way. And also, we do have capacity, for example of Sergipe for an extension to the Sergipe power station, make it a power station number two. So, there will be a ramp up of some degree over the next couple of years to maximize the utilization of the power station. And I think during that time, we will then be looking at what can we do towards perhaps one of the other locations to do that in advance of a power station award.

[Michael Webber, Wells Fargo]

Got you. Okay. And then, my second question is actually around Delfin, which I think you touched on with Jon a bit earlier. Just you mentioned an ownership structure there, is the best way to think about this that you're looking at something at the corporate level or is it best way to look on an asset by asset basis because that project could span multiple assets theoretically? Is it something where we're talking about a broader agreement or we're taking it a step at a time on an asset by asset level?

[Iain Ross, CEO]

I think, we could end up with a broader agreement. But right now, we're absolutely taking it a step at a time because we've got to establish this off-take and supply duopoly, if you like, to make sure that can underpin the financing of the project. And we can spend all day looking at different structures. But if we don't have an off-take that supports the project and the financing of the project, then there’s not much point.

[Operator]

Thank you. The next question is from the line of Randy Giveans from Jeffries. Please go ahead.

[Randy Giveans, Jeffries]

Hey. Few questions for me. So, you mentioned, Hilli trains 3 and 4, on slide 19. So, is 4Q still the expected timeframe for Perenco to announce FID on train 3, and any updated maybe expectations for training 4, and maybe specifically some hurdles, milestones that need to be achieved in the coming months for these trains to take FID?

[Iain Ross, CEO]

So, as I said in the prepared remarks, we're right in the middle of a fairly detailed discussion with Perenco and how we can both extend the volume and potentially the duration of that overall contract. And we will have that concluded, I would expect well before the end of the year. And maybe just let us have those discussions without obviously disclosing what we're saying and doing in the middle of those discussions. And certainly, when we've concluded them, we’ll put out an announcement.

[Randy Giveans, Jeffries]

Sure, okay. Just seeing if there is any update on the timing. And then, obviously you’re mentioning that the Board has approved the LNG carrier spin-off. In your kind of guesstimation, what are the kind of chances it actually happens, and whether it’d be closer in the coming months, or is that kind of a let's wait till rates really rally in 4Q ‘19, 1Q ‘20? And then, with that, what is the exit process from The Cool Pool?

[Iain Ross, CEO]

So, first of all, our belief -- my belief is that the rates have had a turning point and will continue to improve as we go forward. And on the basis if that's correct, we've got a full backing of the Board to go ahead with this spin-off of the ships. So, I would expect that that would take place in months rather than a particularly longer timeframe. And we're working through the process right now of the detailed transition, should that go ahead in the way we think it's going to go ahead, and we’ll advice details of that a little bit closer to the time when we look like we’re going to be pushing ahead with the arrangement.

[Iain Ross, CEO]

Okay, all right. Sounds good. Well, to quote Tor Olav, good luck making Golar great again. Thanks.

[Operator]

Thank you. The next question is from the line of Chris Snyder from Deutsche Bank. Please go ahead.

[Chris Snyder, Deutsche Bank]

Hey. Good afternoon, guys. So, first question is on the spin-off of the shipping fleet. I guess, my question is, how sensitive are you guys to the sale price, just given that you'll likely retain ownership in the spinco and the transaction could drive a pretty significant valuation uplift for the existing Golar entity?

[Tor Olav Trøim, Chairman]

I think, the Golar strategy is of course, we’re going to remain the major shareholder in this company going forward when it’s public. So, I think we're not that sensitive. At the same time, we want to do it in a positive momentum. That's why we want to do it pretty quickly and use the next two years to get the share price around. We're not talking about raising significant external capital, I think, we’re talking to two parties as disclosed in the documents. I think, this is a deal which probably we should be able to do at a reasonable good price without too much kind of need for capital from third parties.

[Chris Snyder, Deutsche Bank]

Okay, fair enough. And then, you also mentioned that term inquiries are picking up and the term rate seem pretty good. Are you planning to maybe lock up some of these vessels on for long term contracts prior to the spin, as maybe this could increase interest, and/or impact the price you get for the fleet?

[Iain Ross, CEO]

No. I mean, possibly, but the more realistic scenario is that towards the end of this year, we'll see term business with fixed rates probably coming back into the freight. The distance for us is a bit too far at the moment, which is why we're interested in these linked rate structures. So, depending on when we do the spin off, you could see some. But, I think it’s more likely that they would happen, post spinoff.

[Tor Olav Trøim, Chairman]

I think what we're seeing right now is, we're seeing spot rates of course have crossed 50. So, if your index rate linked, you’re close to that. And then, I think the last term rate which was now announced in the market is something about 18 for 12 months. So, we probably are pretty optimistic here for to come this winter and nobody saw for the next winter. So, as you said, I think we'll hold back for the time being, we'll be looking back to that situation in 2011 when the oil companies really became desperate, cost on rate was peaking up and with it on the charters.

[Chris Snyder, Deutsche Bank]

Okay, fair enough. And then, just lastly, I mean, I think almost everybody on the call today agrees that the stock is worth more than where it's trading at. And Tor Olav did a good job of kind of laying out this disconnect in his prepared remarks. So, just in that context, how do you think about share buybacks?

[Tor Olav Trøim, Chairman]

I think, we have of course we have $0.15 in dividend that’s $60 million, we have considered that, should it be dividend and should it be buyback. We have of course 3 million TRS. And what's important for us now is to get the financing in place for the BP team. The team there has done a great job getting this $700 million and the limited capital debt to $300 million. And I think it's a question of course as BP 2 is coming on the whole capital structure, it’s also depending on what kind of financial structure do they ultimately end up with the shipping company, but I mean, clearly, if we are talking -- walking the walk, we should buy back shares if we have excess capacity when think the stock is clearly undervalued.

[Operator]

Thank you. The next question is from the line of Craig Shere from Tuohy Brothers. Please go ahead.

[Craig Shere, Tuohy Brothers]

I have two kind of broad financing questions, one about project lending the other about funding the ships, the FLNG. So on the project lending, I was a little disappointed with the initial Gimi financing duration and amortization schedule, considering the strong credit and length of cash flows that are contracted behind it. What do you think it really takes to secure more project lender confidence and getting better matched loan payments with contracted cash flows? And kind of as a corollary to that if you're successful with these Perenco discussions before year-end this year for an expanded and elongated full utilization, would that be up an immediate project debt refinancing opportunity?

[Graham Robjohns, CFO]

Yes. Hi. It's Graham. So, I'll take your second question first, because that's fairly easy one. Absolutely, yes, if we get a significant extended term, then I think that’s absolutely an opportunity to refinancing the Hilli. On the Gimi financing, point taken, and I think Tor Olav kind of alluded to the challenges of financing FLNG project, which is why we're looking at different structures going forward in terms of developing them. But bear in mind that the term was seven years post COD, so it’s an 11-year financing, which given sort of Basel regulations now is long for a bank financing. It's absolutely the case, but as we get near COD, we would expect to both increase the level of debt and flatten the amortization profile and lengthen the term.

[Tor Olav Trøim, Chairman]

If you look at the FPSO business, which is kind of similar business, it's a little bit more developed, you would typically see that they leverage 6 times EBITDA to good counterparties a long-term contract. I think, we can do something similar here when we are at COD. And that being said, you take also liquidity and leverage $1,200 million, $1,300 million against these assets, that should be doable. But, I think we're under strong pressure to provide financing to take FID with BP. And I think we just said, okay, let's get this thing done and then we can optimize financing as we go over the next couple of years.

[Iain Ross, CEO]

No doubt as the industry becomes familiar and more comfortable with the concept of FLNG, the ability to finance will accordingly become more straight forward.

[Craig Shere, Tuohy Brothers]

And my last question about funding the ships or the shipyards. Iain, you commented on efforts to get more flexible equity funding terms. And two thoughts come to my mind about possible drivers for that. One could be using alternative shipyards, maybe in China, but another could be just economies of scale. If somehow you're able to string together, 2, 3, 4 FLNG conversions kind of concurrently one after the other, that that could be a much better overall contract terms and also be a major sea change for the future of the Company. Can you kind of opine on what the drivers are for potentially better equity funding terms, and if any of the things I mentioned are on the table?

[Iain Ross, CEO]

So, I think you're right, Craig. And it is not to be China, it could be Korea, it could be Singapore, if the Singaporeans come to the table. I mean, this is about creating something that's repeatable. If it’s repeatable, it’s treated more like a complex ship, maybe more like a drill ship, for example, where if the design is such that it doesn't need to be changed, then we can get the terms that are more akin to shipping terms. So, instead of paying as we go, as we have to within the Singaporean conversions at the moment, we can maybe get 20-80 or some payment terms like that. That really allow us to take the benefit of export financing, and therefore minimize our upfront CapEx. And when these project take three plus years to complete, we can do a lot with that time. And so it’s a combination of all other things you said and we're looking at number of variants to try to optimize it, which is why we're not saying one thing, we're looking at lot, because I think maybe best combination wins.

[Craig Shere, Tuohy Brothers]

Understood. If you could find a magic ball, I think to unleash both the upstream and downstream financing opportunities, you guys have tremendous upside.

[Iain Ross, CEO]

Yes. Thanks.

[Operator]

The next question is from the line of Chris Wetherbee from Citi. Please go ahead.

[Unidentified Analyst]

Hi. This is Liam on for Chris. Thank you for taking my question. So, I just want to circle back to the spin-off situation here for the LNG carrier, the carrier vessels. What is your plan for the Goal Arctic after the spin-off. Will you guys look to continue to own it and operate it or you’ll look to sell?

[Iain Ross, CEO]

For the time being, we would look to own and operate. We have some success with the Cool Pool on the TFDE. I guess it’s possible to set up a Cool Pool for same ships. But it would also be a potential conversion that’s I guess further down the line as well, or to operate as in FSRU.

[Tor Olav Trøim, Chairman]

I think, our management has done great job maximizing the value, of course with the investment growing into Croatia, which we have essentially got a lot more for than got in the secondary market. So, that’s adjusted value enhancement and utilizing investments in different fashion. I think, when people saying that what is steam ship [indiscernible] you have to remember that in 200 steamships out of a fleet of 550, is a bit immaterial part of the fleet is dependent, so if ships that come off charters over the next 5 to 10 years to that extent there were 28 deals done in the beginning of the 20s, at the beginning of 2000. So, I think we see the danger in being left with. So, I think we are working on to find solutions for them. Some of them, they have on charter right now. And I think we are working as ground projects, trying to maximize the face value of these assets.

[Unidentified Analyst]

Okay. Thank you. And also I just want to circle back on the Gandria. I know you guys haven’t really talked about it too much but I know, it’s listed as FLNG conversion candidate. I know it’s hard to put a timeline around potential conversation. But I was just wondering if you could touch on the potential for such a conversion, and when you think something like that could happen and how much EBITDA you would be able to generate from post conversion.

[Iain Ross, CEO]

The way to think about Gandria, well, it’s in layout right now. But if you look at the BP contract and the EBITDA that we can generate from that, I think we would be -- if we could get a contract that gave us a similar return, then we would go ahead with it. So, she is just there as the next potential conversion candidate ready to go.

[Unidentified Analyst]

Got it. I guess, on that front, I know you guys don’t really want to put like a time line around it. But if you were to kind of give a sense how long do you think it would take from when you got that initial level of interest into when post conversion, can you give us some sort of sense of on like the number of how long that would take?

[Iain Ross, CEO]

It’s almost impossible to say. I think we have been talking to BP actively for 2 years between real serious decision and review and actually signing up contract signing a contract. But what I would say is the level of interest that we’ve had from large companies of the same size and scale as BP really taking an interest in both our mark two mark three designs and a mark one conversion, that's really ramped up, continues to ramp up every quarter. And we're finding different groups of people coming in and getting more and more comfortable with the technology. So, it's almost like you have to go through these phases of does FLNG work, and I think Hilli proves that. Is it something that is acceptable for a larger publicly owned company, for whatever reason, I think BP is ticking the boxes to satisfy that. And as a result of that, we're getting more interest. So you would hope that the next FLNG contract would be faster than two years. But, I certainly don’t want to create expectations now having one just around the corner, these things are hard to get going.

[Graham Robjohns, CFO]

Other thing, it's important to add that what we’ve seen, every time we do an FLNG, you have three, four years of pretty heavy capital commitments, which goes out and you have no earnings. I think what we compensate in is that let's just focus on things which actually can bring earnings in 2020 and 2021, or 2022, long-term before we get any earnings from FLNG. And that's earning which is effectively based on the assets we have already had invested in. So, it doesn't need a lot of CapEx. So, it's a very different process. So, I think let's go after that first, try to build the confidence back in the stuff that people asking, even making serious money. And then, we can talk about doing a lot more an FLNGs.

[Operator]

Thank you. The next question is from the line of Greg Lewis from BTIG. Please go ahead.

[Greg Lewis, BTIG]

Yes. Thank you, and good afternoon. And actually thanks for squeezing me in at this point. Ian, it's interesting and maybe a little inspiring to see you guys try to move into the downstream business in Brazil, with the -- on the back of the Sergipe project. That being said, there probably are going to be some challenges, it's kind of a step out of your business. Is this something where we're going to be looking to hire a team to kind of spearhead this, is there potential local partners you can partner with? I'm just trying to understand, what Golar has to do over the next, I mean, I guess, the 12 to 18 months to get this in a position where it can actually be successful.

[Iain Ross, CEO]

So, it's a good question. I wish you was sitting on our Board meeting. We've already hired our leader and a team, in fact, the chap that we've got leading the team has done this role before; he’s probably the only person who's done it before. And we’re really impressed with the work that we've done. So, we're very advanced in terms of this isn't just an idea. It was an idea when we started talking about this at least 12 months ago on the quarterly calls when we said we're looking at using the downstream capacity or small scale downstream capacity of the Nanook. There's a lot of work that's been done to prove this up. We think it's real, we're going to move ahead of it. And hopefully, if not, on the next quarter’s call, certainly the quarter after that we'll have some significant updates to give in terms of detail around it and how we're moving forward.

[Greg Lewis, BTIG]

Okay. And then, just a also in the prepared remarks you mentioned, some of the problems that are facing the build out of FLNG has been -- has been financing, financing of projects. Is it more a function of the terms that are being offered or maybe an overall sense of lack of terms -- of any terms being offered? Is it about pricing or really just the availability of capital to do these projects?

[Graham Robjohns, CFO]

Yes. It's Graham. I think, primarily, it's -- I mean, we kind of touched it on the question earlier, where we're looking at the $700 million facility for the Gimi, which is 50% LTV. So, it's the amount of financing during that construction period. That's the challenge. I mean the pricing on the Gimi financing is not that high. It's the amount of debt. But as we said before, I think as this market develops, that will slowly change. But rather than sitting around and waiting for that, again, as we’ve said, we're looking to have better arrangements with the yard, so that we have better payment terms and therefore the financing is not so much of an issue.

[Greg Lewis, BTIG]

Okay. And then, just as -- I mean, just thinking about what you did at Golar Power by bringing in an outside third-party investment partner, is that something that we could potentially see with on the LNG side or at this point, there's really no discussions around that type of event?

[Iain Ross, CEO]

I mean, it’s feasible, we talk to people all the time who want to perhaps participate. And then, if we can get somebody coming into the FLNG business, the value is -- is what they are, which downstream LNG infrastructure facilities and they want to invest with us what we think they are worth with us maybe 10 to 12 times EBITDA, then we’re all full at that type of conversation. So, we'll see how it plays out but we’ve got nothing imminent on that story.

[Greg Lewis, BTIG]

Okay, guys. Thank you very much for the time.

[Iain Ross, CEO]

Thanks.

[Operator]

Thank you. Next question is from the line of Jason Gabelman from Cowen. Please go ahead.

[Jason Gabelman, Cowen]

Yes. Hey, thanks for taking the call. I'll just keep it to one. I was wondering how you envision GMLP fitting into kind of a new structure that you see emerging over the next six months? Clearly, the valuation of the MLP seems a bit discounted, do you see a potential to roll that up and kind of move the ships into this new vehicle that you're looking to spin out or do you see a potential to do something else with the MLP to kind of realize more of the value that's stuck there right now? Thanks.

[Iain Ross, CEO]

So, we're not planning to roll the ships from MLP into the new spin up company, at all. No, I don't think there's anything more that I can comment on the on the MLP. That’s something you can maybe ask Brian if you can on the next call.

[Tor Olav Trøim, Chairman]

I think, we are large shareholder in the MLP. So from that point of view, we have the same problem as all the other shareholders in the MLP that the valuation is low and the yield high. But, I think we -- the real focus is [indiscernible] in the FSRU market, that’s certainly something we have always been looking for. And I think it's also a question about getting the contract extended. Of course, if it is extended, that’s a major step forward for GMLP. I think if you can get spirit outer layer unutilized that’s also a nice step forward. So, I think we're working in order to do commercial sensibly to increase the cash and keep the dividend or grow the dividend but that’s a new vehicle to acquire things when you are using 13% of derivatives than impossible to use it.

[Graham Robjohns, CFO]

Because the irony is for some time we've had short-term contracts in the GLNG, and the way we're moving forward now, we're going to have a significant number of long-term contracts that would fit very nicely with the MLP.

[Operator]

The next question is from the line is Michael Webber from Wells Fargo. Please go ahead.

[Michael Webber, Wells Fargo]

You talked about building out another FLNG project in U.S. Gulf and developing downstream in Brazil. I mean, there's no shortage of stuff for you guys to look at. And the dividend at the parent level has just always seemed a bit incongruent with the stage of the business. You mentioned earlier buybacks. In terms of the use of that cash, is that something you guys are thinking about allocating towards an operational purpose sometime over the next handful of quarters, especially with financing all these projects, one of the consistent hurdles?

[Graham Robjohns, CFO]

I think dividend they have there is costing $60 million, I think we can discuss if that’s sustainable or not. It's certainly sustainable today, because we know have in the system. But of course we have a lot of CapEx. But do also remember what Graham Robjohns defined as top two. Stock is [indiscernible] pay back in dividend, dividend is important, it covers a lot of fronts. I'm not saying dividend is at the level where it should be for return. But I think you know the history of this group, the comfort, system or dividend has always been part of the team. And I think to pay something back to shareholders every year, even if you claim that it's inefficient, if you have to raise capital. We have been very limited in raising capital over the last year. And I think we have tried to protect shareholders. It is a discussion to be had. We have been listening to all the shareholders. I am a shareholder myself as well. But I think no decision has been made. I think if we could pay last year, we can certainly pay this year and we can certainly pay even more next year.

[Operator]

And there are no further questions. So, I'll hand back to the speakers.

[Iain Ross, CEO]

Thanks, operator. So, just in closing, we've taken on your comments to try and simplify the Golar business. And on that basis, -- the basis of the shipping market recovers, we expect to proceed with the spinoff of the TFDE fleet. And that's where we at Golar focus on growth in the FLNG business, which is a strong pipeline of prospects. And importantly in Golar Power, which is a unique opportunity to use the Nanook as a catalyst to accelerate the displacement of more expensive and more polluting fuels with LNG. It’s our intention to continue to build long-term contract earnings backlog, and we believe this will in turn create long-term value for shareholders, and we intend to do that with as much capital discipline as we can. Thank you for your interest in Golar. And we look forward to catching up again next quarter.

[Operator]

Thank you. That does conclude the conference for today. Thank you for participating and you may now disconnect.