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Golar LNG Ltd
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Good day and welcome to the Golar LNG Limited 2Q 2018 conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Iain Ross. Please go ahead, sir.
Thank you. Good afternoon. Good morning. Welcome to the Golar LNG second quarter 2018 results call. My name is Iain Ross and I'm joined today by the GLNG CFO Graham Robjohns, and our Head of Investor Relations, Stuart Buchanan. And we also have Tor Olav Trøim on the line from Oslo.
I think this call is notable, in that after four long years we finally have the Hilli Episeyo up and running. We have all our current project commitments financed. The shipping market, despite a weaker second quarter, is poised for a fairly strong period of sustained growth that will deliver cash into the business.
Our next big project being Sergipe should start generating cash in about 16 months and we’re now focused on the next wave of project investments.
So, we are in a more stable position as a company than we have been for many years and ready for that next phase of development. And on the basis of this stability and firmer markets ahead, today the GLNG board is pleased to announce an increase of the dividend to 12.5% per share.
Let me hand over to Graham to go through the numbers and we can come back to the business review and outlook. So, over to you, Graham.
Thank you, Iain. And good day to everybody. We’ll start the financial part of the presentation on slide three. As anticipated and communicated in last quarter’s earnings release, revenues from vessel operations, which are predominantly from the Cool Pool, decreased significantly in the quarter as a result of a seasonal softening in the shipping market.
Our fleet utilization fell from 77% in Q1 to 62% in Q2. Rates also dropped during the quarter; and collectively, this resulted in a $16,400 a day reduction in daily time charter equivalent earnings; from $36,000 in Q1 to $19,600 in Q2. However, we expect this to reverse in Q3 with an expected more than doubling of Q2 TCE.
Offsetting the decrease in shipping revenue was the contribution from the FLNG Hilli Episeyo, of course. She was accepted with effect from May 31 and earnings under the contract have started to be recognized in the income statement from this point.
Our total operating revenues net of voyage, charter hire and commission expenses therefore increased from $41.7 million in Q1 to $42.9 million in Q2. And of the total Q2 amount, $24.8 million is derived from vessel and other operations and $18.1 million from FLNG operations.
Vessel operating expenses increased by $2.1 million to $20.5 million in Q2. FLNG operating costs for the Hilli’s first month in operation amounted to $3.6 million, which is roughly in line with expectations. And operating costs for the rest of the fleet fell by $1.5 million, offsetting some of this increase.
As a significant part of our G&A costs, we have split out project development expenses from admin expenses this quarter. These costs include costs associated with the pursuit of specific potential projects and contracts, an increase of $3.3 million in Q1 to $7.9 million in Q2.
The FLNG project development expenses of $6.8 million are predominantly represented by fee expenses incurred in respective FLNG conversion project for the BP-Kosmos Tortue projects and most of the $1.1 million vessel and other operating-related project costs are re-charged to affiliates Golar Power and Golar LNG Partners.
The Brent-linked component of Hilli FSO’s invoice fees generates additional operating cash flows of approximately $3 million for every dollar increase in Brent crude prices between $60 per barrel and the contractual ceiling.
Monthly billing of this component is based on a three-month lookback at average Brent crude prices. This higher component for June amounted to $3 million and was being paid in July.
The fair value of the derivative asset, i.e. the value as at June of the potential future cash flow from the oil-linked high component increased by $94.7 million during the quarter, with a corresponding unrealized gain of the same amount.
The fair value increase was driven by changes in the market expectations of future oil prices and, of course, Brent spot prices increased from around $67 at the beginning of the quarter to $77 per barrel at the end.
Together with the realized movement of $3 million, this results in $97.7 million realized and unrealized gain on FLNG delivered derivative instruments.
Depreciation and amortization increased as a result of the Hilli Episeyo becoming a depreciating asset. For the rest of the fleet, it was pretty much in line with the previous quarter.
Interest expenses increased by $10 million to $24 million, mainly due to the interest on borrowing costs in respect of the Hilli no longer being capitalized post acceptance and a general increase in rates and an increase in the amortization of deferred debt-related expenses.
Other financial items reported a Q2 gain of $1.8 million, which predominantly represents non-cash derivative valuation movements in connection with our equity TRS interest rate swaps and Golar Partners earn-out units derivative.
As a result of the above, net income for the quarter was $36.3 million.
Moving over to slide four and the balance sheet, there are few movements this quarter. The most important of which relates to the drawdown in additional Hilli debt and the resulting cash increase. Our total short-term cash position as at June 30 was approximately $650 million, of which $375 million was unrestricted.
The increase from $172 million free cash as at March 31 is as a result of our having drawn down the post-acceptance $960 million lease financing facility for Hilli Episeyo and having repaid the $640 million construction financing facility.
It should be noted that, during Q3 2018, we expect to pay approximately $130 million out to settle final Hilli capital commitments as well as amounts due to minority shareholders, Keppel and Black and Veatch.
As a result of the commencement of operations of Hilli, the asset has moved from assets under development to vessels and equipment. And we also have the movement between short-term and long-term debt and a net increase in debt as a result of the drawdown of the new facility.
Moving over to slide five, we now are in a pretty strong financial position with the acceptance of Hilli and the drawdown of the new long-term lease facility, the closing of the Sergipe financing earlier in the quarter and the commitments Golar Power has received for the Nanook FSRU. All of our and our affiliates’ capital commitments are fully funded, and we have $375 million worth of free cash as at June 30. We are also well progressed with work on financing our new, as yet uncommitted projects.
The table on the bottom left shows an analysis of our short-term debt which has reduced significantly this quarter as a result of the new long-term Hilli financing. We still have $538 million of debt related to bank leasing subsidiaries that, under US GAAP, we are required to consolidate. So called variable interest entities. However, the vast majority of this debt is not short term, but GAAP requires us to disclose it as such.
We also have two sale and leaseback facilities, the Tundra and Seal, that are both long term, but have requirements for term employment by a specific date. If term employment is not in place by these dates, then the bank has an option to require repayment.
We have previously extended these facilities. And now, the Seal has a December 31, 2018 employment deadline; and the Tundra, June 2019. We are now in discussions again with the banks with regards to a further extension of the Seal. Of course, the rising shipping market significantly increases our options with regards to financing these vessels.
And, finally, on the bottom right of this slide, we’ve shown an analysis of our debt between security class and our net debt position.
So, thank you. And with that, I will hand back to Iain to carry on with the rest of the presentation.
Thanks, Graham. I’ll now go through our business lines of FLNG carriers and power, starting with FLNG on page six.
So, Hilli, fully accepted by our charter on the 2 June, with the effective date the end of May. All four trains have been commissioned and tested to above nameplate capacity.
Hilli has and continues to operate with 100% commercial availability. We’re very pleased with the way that we’re progressing with the vessel. The crew has is becoming comfortable with the facility, learning as we go. And, of course, that experience becomes invaluable for the next project.
We’ve successfully offloaded five cargoes to date and, as we speak, are currently offloading the sixth.
We’ll continue to focus on production uptime and optimization, demonstrating we are ready to receive more gas from our charterer, Perenco, when they feel it's the right time to increase production and utilize the third and potentially fourth trains.
Moving on to the BP Mauritania Senegal project, and just as a reminder, this project is for an FLNG unit similar to Hilli on a tolling arrangement for 20 years. The FEED update is being progressed at pace. We’ve got a couple of months to go on that. And there continues to be strong appetite from the lenders interested in financing the project, and that aspect is moving along nicely.
BP is indicating to shareholders that production is targeted to commence before the end of 2021. So, we are gearing ourselves up for an FID decision whenever BP is ready to go, remembering that the overall Tortue project is not just an FLNG vessel, but also includes an upstream subsea development, an FPSO and a large breakwater.
So, we're continuing to work closely with BP to do all we can to assist them in taking FID for the overall project.
If we at the FLNG pipeline on slide seven, in the last three months, we’ve taken control of the LNG portfolio that was held within OneLNG and we’ve built a small team around the technical and the commercial development of these potential opportunities.
We are seeing Hilli’s proof of concept triggering new interest and adding momentum to existing discussions. I think that people are really starting to take notice not only of the cost and schedule achievements of Hilli, but also the uptime we’ve achieved from startup. This is clearly evidenced through the number of cargoes delivered to date.
We think this is a truly disruptive solution in an industry sector that’s not known for its disruptive solutions. So, Golar can create viable, early production systems and monetize stranded gas in a way that's now proven and derisked compared to just a few months ago.
The pipeline of opportunities is being developed. We’ve had teams in West Africa, in particular, having various discussions to move projects along. And it's clear that that Hilli performance is giving some project sponsors more confidence in our solution.
We have two or three strong prospects that we hope to be able to take to the next stage in due course. We also remain committed to obtaining access to gas reserves as part of the strategy at a time when we still believe that this will bring enhanced value.
Building on experience in the last few years, we’re currently evaluating alternative shipyards that offer more attractive payment terms and long-term financing packages, particularly on the back of the Mark II design, which lends itself to modular construction. It has higher LNG capacity. It can deal with more complex well streams and can operate in harsher mid-ocean conditions.
And on the Fortuna project, to say something about that, Fortuna continues to be worked. We certainly have not given up on it. But, really, we can't provide any further information at this stage other than to say that we've made some progress on financing and there are several interested parties actively considering a position in the project.
So, FLNG is, obviously, longer-term play that requires project investment to be successful, but we really like the segment as it brings in stable long-term cash over a very long period. It’s difficult to do, but right now we are leading the market and the Hilli deployment remains a clear differentiator that we will try and maintain for as long as possible.
Moving on to more short-term cash inflows in the shipping market, we retain and maintain our view that the LNG carrier business is poised for rates growth over the coming quarters. And as such, we’ll hopefully bring a long period of earnings drag on the Golar business to close.
Put simply, a forecast 23% in LNG production over the next two years is expected to require some 100-plus vessels to be able to transport that LNG. Only 66 vessels are currently scheduled to deliver. And therefore, it’s no longer possible to go out today and order a vessel for delivery before 2021. And there seems just to be a structural change in the sector that will have an outcome of driving demand for carriers up; therefore, increasing utilization and, ultimately, moving the carrier rates up.
In terms of how this has played out, as Graham mentioned in the last quarter, we did see a softening of the market, in which he forecast and that led to the halving of the TCE earnings from the first quarter, but then we saw rates pick up again late May and early June, which we’ll see in our third quarter earnings, and so we expect the TCE for Q3 to be at least the same value as Q1, if not higher.
Couple of other indicators that support that, we’re seeing some charters keen to look in rates before they go too much higher. And as a result, they’re approaching the market for multi-month and multiyear charters. And in addition, unsolicited offers have also been received for the purchase – or potential purchase of individual steam and TFDE carriers.
So, we’re seeing similar dynamics to those that played out in the second half of 2010 being repeated today.
Based on these supply/demand dynamics, Golar expects to generate significant EBITDA and free cash flow from its carrier fleet over the next two, three years.
You can see from the graph in the bottom left-hand side on slide eight what the impact of the TCE rates has on the EBITDA contributions from the ships.
Moving over to the FSRU and power sector, the Sergipe power station project in Brazil continues to make very good progress and remains on track for January 2020 startup.
We currently have over 2,000 workers on-site installing the main GE supply turbine modules, the pylons and other transmission infrastructure that you can see in the photos in slide nine.
The FSRU Nanook is due out of the yard in Korea in the next couple of months and will be ready for commissioning in Q1 2019. That project is fully funded, equities paid in, the FX exposure has substantially been hedged. The FSRU financing commitment has been received and the documentation is in its final stages.
From that finance, we expect to release a further $70 million of cash back to Golar Power on completion of drawdown of that facility, which you see that joint venture self-funding their near-term development.
Our share of expected EBITDA is around $100 million for 25 years, and that’s a similar proposition to the LNG business. It makes a steady income, cash flow for a long period of time after the project build phase.
Golar Power is also concluding its options and strategy for participation in the upcoming power options in Brazil. And we’ve got two options planned between now and the end of the year.
Just moving to FSRUs, we have previously aired our views on the challenging nature of the standalone FSRU market. And whilst there are plenty of opportunities to chase, we haven't seen so many actually coming to the market over the last two years.
This does seem to be changing with more tenders coming out, and this will, hopefully, take some of the excess FSRU capacity off the market. We’re looking at opportunities in Europe, Latin America, Middle East and Southeast Asia. And we’ll participate selectively in these tenders, and especially where we feel there’s potential to become involved in downstream infrastructure which include terminals, pipelines and, of course, power stations in addition to providing that FSRU.
Additionally, we see significant potential for gas to displace diesel in many applications in the very near future. This is driven by both economic and environmental concerns.
On one hand, we have the IMO 2020 regulations that will impact shipping, but we also have more remote communities that are paying huge costs for their diesel-powered electricity.
These things are all demand for gas and we’d be looking at our options to monetize spare FSRU capacity and become more involved in LNG distribution side of things, such as LNG fuel trucking, switching nearby mines and industry to LNG power, supplying LNG directly to the grid and supporting additional power stations. Our FSRUs are the strategic assets that enable these smaller scale activities to happen.
We think this business is a shorter capital cycle time that fits in nicely to generate cash for us between now and when the next wave of FLNG and power station projects are complete.
So, summarizing and turning to our outlook, with Hilli Episeyo in full and stable commercial production and the rising LNG carrier market, we expect stronger cash flow from operations in the short term.
And with Sergipe due to come on stream beginning in 2020, the potential to fix one or more FSRUs on longer-term contracts and the interesting small-scale LNG and LNG distribution market, we expect to see stronger cash flows in the medium term.
And with our proven low cost and fast LNG concept leading to one or more project FIDs over the next 12 months plus further development of our power business, we expect to see an increase in longer-term cash flows.
Supported by these solid fundamentals, our fully financed balance sheet and the self-funding Golar Power, the board has decided to increase the quarterly dividend from $0.05 per share to $0.125 per share.
Further dividend growth should be expected as the shipping market improves and cash flows from long-term contracts in Golar Power.
So, thank you. And before we hand back to the operator for questions, I'd now like to introduce our Chairman, Tor Olav Trøim, who’s kindly joined us on today's call to say a few words.
Thank you to Graham and Iain for the presentation. As the Chairman in Golar, I have been asked to have three, four minutes before the Q&A.
It was commented after the last call that – from several of the large shareholders that I as chairman and big promoter of the Schlumberger venture should have been there on the call to take heat from the Schlumberger divorce.
The divorce from Schlumberger was sad. And I really believed in the concept of working together with a great upstream partner.
However, in a partnership, you also need a partner willing to commit to necessary resources to the partnership.
After Schlumberger in January committed not to do any further material investment in the SPM area, this partnership was clearly not working.
That had nothing to do with their belief in Fortuna project. It had all to do with their appetite for SPM investments. It was more about Schlumberger’s commitment to their shareholders to focus on existing business than an evaluation of what they were doing together with us.
As stated by Iain, the termination of the Schlumberger agreement has opened new doors. And in many ways, improved the outlook for this and other prospects.
The Fortunate project is a project which showed the great return with LNG prices at around $4 and these, obviously, are showing significant better return with LNG price at $8.
A 100% uptime and deliveries significantly under budget is in addition a great testimony to the Golar staff in commencement with the Hilli operation. It’s probably the best advertising for FLNG solutions to monetize stranded gas.
Perenco’s return on the first LNG transaction done on a speculative basis is nothing else than spectacular.
I've been involved in Golar for 19 years. I've all the time been a firm believer in LNG solutions. Today, I will accept that we started far too early, but at the same time know it’s happening.
The parity to oil is broken. The first liner company have placed their LNG newbuilding orders. China is delivering as many LNG trucks as Tesla delivering cars and the big trains from Australia and America is commencing.
LNG is today both cheaper and cleaner than alternative fuel uses.
As stated in our Capital Markets Day, there is today a $500 billion yearly arbitrage, substituting expensive oil products with cheaper and cleaner gas. The Chinese clearly see this, looking to a 50% growth in import this year.
This and the opportunity pipeline we today have in Golar makes me excited. We in Golar generally believe that stranded gas today is one of the most undervalued assets in the energy chain and thereby also one of the biggest value creation to monetize.
Golar is, with its technology, uniquely positioned to capitalize this opportunity. I'm pleased to report that the board of Golar in connection with the quarterly meeting revisited our dividend strategy.
We are, obviously, today nearing completion of a $4 billion investment phase and moving to a cash flow phase including Hilli, the improved shipping market and the Sergipe and Nanook commencement.
We are fully financed for all the existing activities. And we had, as of June 30, the cash position including restricted and unrestricted cash in excess of $650 million.
In view of this, the board agreed to increase the dividend 150% from $0.05 a quarter to $0.125 a quarter, or $0.50 on an annual basis.
The board has at the same time, in the Q3 report, given a strong commitment to shareholders that the target is to increase the dividend further in the period to come as the cash flow continues to increase.
This is supported by the already contracted deals that’s realized a strong improvement with today’s [indiscernible] shipping market.
Golar is today a fully integrated company with pieces of the puzzles which comes from all the way from producing LNG to producing power. It’s a very different company than when we started 20 years ago or even 10 years ago.
I accept that it is a complicated structure and it’s particularly complicated because of the now unwinded OneLNG and Golar Power, but I hope we, over time, can make it more transparent and easier to understand.
However, the most important thing for me as chairman of this company and beneficial owner of more than 5.5 million shares, including shares I bought also this year, is that we’re coming to the start of the cash flow period. This includes unique projects like the Sergipe and Nanook projects which will start next year, generating cash flow of more than $1 million a day for the next 25 years.
Golar’s LNG shares of that cash flow is more than $100 million on a year basis. And the EBITDA, backlog based on this project isolated is actually larger than the market capitalization of Golar LNG.
I hope my participation in this call confirms to everyone who complained about my no-show in the last call that, as chairman and large shareholder, I stand truly behind and very confident of the developments in our company.
We have a super competent management which executes extremely well in what is, from time to time, a very frustrating and bureaucratic business.
I'm, as chairman, however, very excited. I'm confident about the prospect of LNG as cheap and clean energy source and the opportunity this will create for Golar to deliver some return to our shareholders in the years to come, a very good return.
In many ways, in all my business life, which include 19 years working in the Fredriksen Group, I've never been more excited and convinced that we are in the right growth commodity business.
I want to leave it at that and hope this gives some evidence that kind of the whole team of Golar are super-excited about what’s coming on. It is frustrating from time to time the time it takes to do deals, but when you can do deals with fixed return cash flow of $1 million per day in 25 years, I think it’s all understood by everybody and it takes a little bit of time.
Thank you. And I hope of some of the confidence Iain, Graham and I trying to give you today also gets reflected by the investors in the period to come. Thank you.
Thanks, Tor Olav. And with that, I would like to hand back to the operator to start the Q&A.
Thank you. [Operator Instructions]. We will take our first question from Jon Chappell from Evercore. Please go ahead. Your line is now open.
Thank you. Good afternoon, guys. Graham, first one for you, kind of technical, but hopefully important. Can you just help us understand how this Brent-linked part works? $94 million addition to the derivative in one quarter seems pretty significant. And I know Brent was significantly above $60, but still is this kind of your forecast over the eight-year term of the contract? Is this over a one-year period. How do you get to this $94 million? And I guess, most importantly, when does that then translate to real cash on Golar’s dollars financial statements as opposed just this mark-to-market?
Jon, so the real cash comes in the form of the ratio that we gave that for every dollar that Brent oil is above $60, we earn $3 million a year in cash flow. So, Brent at $61, we earn $3 million, etc., etc. And that will come in over the eight-year term on a monthly basis.
The derivative movement is because, on the US GAAP, that element of the contract is deemed to be what’s called an embedded derivative. And the valuation is arrived at by looking at the forward oil curve out for the whole contract period and effectively discounting all the expected future cash flow back to today. So, it’s an NPD movement of the total potential value of that element of the contract over the whole contract period.
Okay. And are you using an oil curve or is that an internal estimate?
It’s an oil curve, yeah.
Okay. All right, I understand. Thanks, Graham. And then, second one for you, Iain. Can you just provide a bit of an update on train three? It seems if all four trains from Hilli have been up and running above nameplate capacity, the gases there, no incremental investment, seems to be a slam-dunk. Any update as to the timing of this or what the holdup may be?
Well, I think you are summarized it quite well, Jon. We remain engaged with Perenco and we remain ready to accept additional gas. They've got some issues to work through on their side. I guess, the important thing from our point of view is there’s no further CapEx required for us and we are ready to roll with train three. And you've got to think that it’s a strong economic prospect for Perenco. Other than that, I can't say any more than that until we’ve got something firmer to discuss.
But just to be clear, they have enough gas also until train three, right? I was always under the impression that if you were to fill train 4, you may have to tap into an adjacent field, but based on the current field, as it sits through trains 1 and 2, that could also fill train 3, so maybe it’s an offtake issue, not an investment decision on Perenco’s part?
I think it’s quite a complicated story because they've got other uses of the gas and perhaps other commitments. There is probably trying to work through sources and uses of gas rather than sources and uses of of money that we normally talk about on this call. So, I think it's something they're still working through. And I remain hopeful and confident that we’ll get train 3 occupied and earning cash for us in due course. Unfortunately, we just can’t put a timeline on it right now.
Okay, I understand. Thanks, Iain. Thanks, Graham.
We will now take your next question from Michael Webber from Wells Fargo. Please go ahead. Your line is open.
Hey, good morning, guys. How are you?
Hey, Mike.
Hey, so wanted to touch on, I guess, one macro question and then Golar Power. At a high-level, we’ve been hearing a lot this earnings cycle around the impact of Chinese tariffs on the LNG story broadly. And there’s certainly a case to be made that more expensive US gas on a relative basis should make global projects that much more competitive. I'm curious now – it’s a good question for Tor – but are you feeling that yet in your discussions with customers and counterparties, maybe a heightened sense of urgency from them around the idea that, hey, the windows open a bit more now or some of these projects are more competitive globally, while the US is dealing with tariffs? I'm just curious, you guys are positioned – you guys are in an interesting position, being a US listed company that’s levered the global projects that those are being levered to kind of the US tariff muck. So, I'm just curious whether you guys are feeling that now? And if not, how you would expect that to trend over the next 6 to 9 months?
I’ll take that. So, it’s hard to see how the tariffs will bite. But if there is a negative impact of the US Gulf Coast export projects, then we would feel that that’s a positive for us for our West African FLNG opportunities. We don’t think that the tariffs will necessarily impact the demand-side. So, the LNG has got to come from somewhere. And if there’s no negative impact of the US Gulf Coast, then it’s a still a positive for us as we believe we’ve got the cheapest LNG solution. So, at worst, it’s neutral mutual. At best, it’s a positive for us.
Okay. That’s helpful. Around Golar Power, at the investor day, you guys talked to some late August kind of a Key Energy auction that was going on around this time. I'm just curious whether – if you can maybe speak to a bit more detail around the progress or likelihood of both kind of an additional FSRU in Brazil as well as the potential extension of your Golar Power project in Sergipe.
So, what I can say is that there are two auction coming up. One is later this month, end of next week, I think. And then there's another one in November. And we're looking at our options and tactics around both of those. It's quite a complicated scenario. And we remain committed to engage in those auctions and try and get our best outcome. So, we’ll have to just wait and see. I just can't tell you any more than that over this line. Obviously, how we choose to play and plan to participate is our tactical positioning and we can’t share any more than that with you at this time.
Forgive me, just to jump back to Jon’s question and I’ll hop off, around train 3, your export license – or Perenco’s export license in the country is volume based over eight years. Is it fair to assume that to greenlight a train 3, we would need to see documentation go to the Cameroonian energy ministry to up that license? And is that kind of a fair way to look at the progress there?
I imagine so. I think that, as part of the journey, they probably have to do that, yeah.
Okay. And do you know if that process has started yet or no?
I don't know because it would be going from Perenco. So, we’re not privy to that level of interaction between Perenco and the government.
Right. You’re already ready to go. Okay. All right. I appreciate the time, guys. Thank you very much.
We will now take our next question from Ken Hoexter from Merrill Lynch. Please go ahead. Your line is open.
Hey, good afternoon. Or good morning. Just wanted to follow-up on your comment earlier – I think it was either Graham or Iain – on the BP financial commitments. You said the banks were very willing to move forward on the BP line. And just wondering what happened that is different there versus the Ophir move to get financing? It seemed like that that was dragged on by just a financing question. So, is there a difference in project commitments from the start or just wondering why the difference where they seem to be getting the financing approval from your comments earlier at an earlier stage?
Maybe I’ll start, and Graham may choose to add something. There's a fundamental difference between the two projects. One is a project that was supported by Schlumberger and, obviously, we’re in the process of replacing them, but it’s in a country with probably a lot more perceived political country risk in EG than anywhere else. And in the other project, you've got BP substantially standing behind the financing package, which makes it, obviously, better country risk and a more appealing security package for the lenders. Graham?
Yeah. No, I think that’s right. And also, I think that we’ve seen generally improving confidence in the financing of FLNG following the startup and successful operations to date of the Hilli. I think that’s helped a bit as well.
Great. And then, just following up on the cash side, is there still restricted cash tied up to the Hilli? Now that it’s turned live, is the whole large amount of kind of stairstep function of releasing of the restricted cash, has it all been released at this point?
No. No, it hasn't. On the balance sheet, the long-term restricted cash of $175 million relates to that Hilli LC security. And that will, as you said, will drip out over time, but not – some of that will come out in about a year’s time and then a big amount comes out in a couple of years after that.
So, it’s more time focused than kind of third, fourth train ramping up?
No, it’s purely time, yeah.
Okay. All right, great. Thank you.
We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Your line is now open.
Yes. Hello and thank you. Iain, I want to ask about your press release. You mentioned that you’re in the process of evaluating alternative shipyards that they can offer more attractive payment and financing terms. I'm wondering if you are implying Chinese shipyards, if you think that you could build FLNGs in China and these shipyards, they can provide debt financing. And what would that mean for the expansion of your pipeline and the potential projects that you could realize if you have the backing of Chinese, Inc. both on the construction and also on the financing side?
It’s a good question, Fotis. It’s exactly what we’re talking about as one possible scenario. And I referenced the Mark II design which is a modular construction. It’s easier to build and lends itself to a variety of different yards that could compete for it. And, obviously, if a solution linked Chinese construction, Chinese financing and potentially Chinese offtake, then that makes for a nice little circle to help some of these opportunities that we’re looking at going forward. So, yeah, that's why we are considering a broader sweep of bills, if you like. And I’d just reinforce it, it’s the Mark II design if we were going to move to do something different. So, hopefully, that answers your question.
Yes. Is there a timing when you think you should have a good confidence that the Chinese, they can build this FLNG and provide financing?
We already have confidence that a Chinese solution for FLNG is viable. We've already done that work and bidded the yards.
Thank you, Iain. One more question about the shipping market. The rate environment is significantly better than it was a quarter ago and the market seems to keep improving. I know that, in the past, there were some discussions about spinning off the shipping fleet or even merging with another one of your peers. Is this something that you’re still considering? How such an event could happen and when would you position the timing?
So, we continue to consider everything that will add value to the shipping fleet, including a combination of all sorts of structures. What I would say it's easier to get real about these things when the rates are actually up rather than when we think they might be going to go up. So, it's something under consideration of what we do with the ships. We’re certainly looking forward to them producing more EBITDA in the short term. That’s for sure.
Thank you very much, Iain.
We will now take our next question from Greg Lewis from BTIG. Please go ahead. Your line is now open.
Yes, thank you. And good afternoon.
Hi.
Iain, in your prepared remarks, you mentioned Brazil as a ripe opportunity set for Golar Power. I'm just wondering – I think the last time we spoke, you mentioned the potential opportunity in Barcarena. Can you provide any update or color around the potential for this project as we look forward over the next 12, 18 months?
So, Barcarena is one of several locations that we’re looking at potential sites for, obviously, FSRU combined with power station. And if you recall the previous question around the auctions, that’s how we get into those. So, we’ve got to go through a fairly elaborate process of becoming qualified for any of the power auctions and determining where we can, if you like, bid that supply from. And Barcarena is one of them. And we are currently juggling a number of those opportunities. And, obviously, with the auctions coming up, it's not appropriate that I give any more detail on that just now. Barcarena remains a very attractive project for us amongst several others. So, we’ll just have to see how those auctions play out.
It is quite complicated. It’s all driven by the requested demand on the auction site and that depends what we bid in at the time of the auction and where we bid it in from and the terms in which we are prepared to bid it in from. So, it’s quite a complex moving feast of opportunities. But Barcarena is an attractive project for us. And I'm sure we’ll get in there over time, whether it’s this auction or one further down the road.
Okay, great. And then, not on the can I wrote realizing on Fortuna, realizing you can't comment much about it, but I think at one point it was talked about moving the Gandria and starting the conversion process. Has that process actually been started or is that sort of on – is that on hold at this point?
So, the Gandria is currently in the Keppel Shipyard in Singapore. And all we've really done is ship surveying and preparatory work. We've kind of put things of pause a little bit with Schlumberger’s exit suit, until we can find a new, I guess, cosponsor for the project. So, the survey work has been done and the ship is sitting there, but we’re not currently pushing ahead with any physical activity on the ship pending resolution of how we take the project forward.
Okay. And just to follow up on that, as I think about that unit there, is there the potential for it to actually leave the yard? In other words, how easy would it be for you to move the Gandria to another facility?
It would be very easy.
Okay, perfect. Thank you very much.
We will now take our next question from Herman Hildan from Clarksons. Please go ahead. Your line is now open.
Hello, guys. Thank you very much for taking my question. So, the first question, obviously, up until this point, I guess, the big discussion point with your counterparties has been obviously the liability with technology and everything. And now that you've proven that that works, is financing kind of the main obstacle these days to execute the FLNG project? Is that fair to say?
It depends which project you’re speaking about, Herman. If you look at BP, I think it’s just time. We’ve got to work through a series of FEED update issues, conclude the financing, conclude our contractual deals both up and down that supply chain. So, I don't think there’s a particular barrier there other than BP’s desire to take that project forward.
And I think we’ve talked about Fortuna that financing has been a barrier in the past. What I can say we feel we’ve made progress in the last three months on financing and we’re continuing to get interest from different project participants to move into the – that Schlumberger had. In other opportunities that we’re looking at, it's too early to say whether finance will be an issue. But what we do know is that, as time goes on, we’re relatively confident that – if you ever thought – let me go back a bit. If you look at the FPSO market and the financing appetite for FPSOs, when they were first introduced, there wasn't much appetite and some of the constraints around financing were fairly significant. And now, it’s very easy to get FPSO financing. We think FLNG will go the same way with confidence. It just so happens that we've, for the last two or three years, chosen a particularly difficult project in Fortuna to get going from a financing point of view. I don't know that that's necessarily representative of the whole suite of opportunities.
If you look at those 23 projects that you just – kind of the FLNG opportunity side, first of all, like what’s the timespan on expected FIDs on those 23 projects? And the other one, as a follow-up question on that, obviously, now there’s been quite a lot of – there’s been 30 – some 30 LNG ships ordered. I think now we’re looking at 2021 delivery if you're doing a newbuilding. So, kind of the LNG market, that’s flipped upside down both from the commodity point of view and your capacity and the delivery schedule and with the rates strong even before we go into the printer. So, I’m just kind of curious, obviously, you’re assuming a position to cherry pick the projects that you want to pursue, I guess, and that’s kind of how is your feel on your position in relation to all these different projects?
So, I would hope that, in the next 12 months, we get one or more FID approvals for FLNG projects. We’re not, in the short or medium term, contemplating doing anything other than working on projects where we codevelop the opportunity. So, we’re not bidding anything. We are doing it on a – it’s either a single source tolling basis or we’re codeveloping the project. And to that extent, we are choosing or cherry picking the opportunities that we want to take forward.
The key here is, if you look at that slide, there’s all these dots on it. We could employ 150 people doing endless studies for everyone that’s interested in FLNG at the moment, and we don't want to do that. We don't want to waste money. And we want to try and get close to project proponents that are serious about taking LNG as their solution or floating LNG as a solution. And we work with them to kind of codevelop how we move that forward.
In relation to the shipping market, the shipping market will just be a boost for us as we go along providing additional [indiscernible] company over the next few years and help us with what we want to do on the project side.
Very final question, also target return on capital for new growth. Could you give some guidance on what we should expect there? [indiscernible] more integrated. I know it’s a very wide answer to that, but let’s say from a pure tolling solution to a more integrated solution, what kind of range are you looking at in terms of return on capital to get you interested?
For FLNG projects, which I assume you’re referring to, we’re looking at the mid-teens plus, plus-plus depending on the exact structure of the deal, whether it straight tolling or there is something more complicated. I think that’s – we’ve talked before a little bit about where we think we should be deploying our capital. It comes – F LNG, number one; FSRU, number two; and shipping, number three. And for the reasons that the returns on FLNG are much higher, obviously.
Okay, thank you very much. And congratulations on Hilli.
Thank you.
We will now take our next question from Randy Giveans from Jefferies. Please go ahead. Your line is now open.
Hey, thanks. Good morning, gentlemen. So, a few quick questions here. For the Hilli, trains 1 and 2, obviously, the first 50% were dropped. What is the timeline for the remaining 50% drop to GMLP?
Well, as we refer to in the earnings release both in GLNG’s and GMLP’s, we have restarted discussions, if you like, post acceptance and proof of concept, et cetera. And those discussions are ongoing. I don’t think we can give you a precise timeline on it.
Could that be at 2018 event?
Well, everything is possible.
Okay. That’s fair. Looking at the dividend, what drove that position the kind of increase that? I know it’s basically a payout from $20 million to $50 million on an annual basis. So, not a huge change, but is that kind of a sign of confidence in your available liquidity, balance sheet strength? And then, I know Tor mentioned that possible further increases our possibility. So, would that require additional projects coming online or could we see that in the coming quarters?
Well, I think just kind of reiterating what Tor Olav said, trying to sort of summarize that very simply, we come from a situation where we’ve had negative cash flow to positive cash flow. We see that cash flow increasing significantly in the short term but, obviously, the ramping up of full quarter’s cash flow from the Hilli next quarter and the shipping market rapidly improving. And we see that improvement being sustained over the next couple of years. And, of course, we’ve got Nanook and Sergipe cash flow coming in the sort of short, medium term. And yet coming from a very financially secure position. Everything is fully financed and being broadcast on the balance sheet. So, that’s really what’s driving our decision. And as we build the business out, I think shareholders should rightly expect that distribution to increase over time.
Okay. And then, one quick question. So, you mentioned your fleet utilization was above 60% in 2Q 2018. What has it been this summer?
It has been – I think we referred to the fact that we were expecting the time charter equivalent rates to probably more than double in Q3 versus Q2. That is a function of headline rate and it’s also a function of utilization. I can’t give you a precise utilization number, but it’s going to be higher than the second quarter.
All right. That’s fair. That’s it for me. Thank you.
We will now take our next question from Jason Gabelman from Cowen. Please go ahead. Your line is now open.
Hey, guys. How is it going? Just a couple of questions. Firstly, on Hilli train 3, is it fair to say that, if you contract train 3, it will also be able to run for eight years with the given resource available from Perenco or would it potentially require an additional investment from Perenco to fill full capacity over eight years?
I think we've already covered that and it’s largely Perenco’s business. So, we’ll see how that plays out.
All right. Then if I could just turn to Tortue for a second, what is the probability of a second FLNG being announced for the Tortue project in the next year or soon after the first one takes FID? And do you see EBITDA generation from those ships being similar to what Hilli could produce EBITDA-wise at full capacity?
So, first part of your question, we’re focused 100% on getting the first FLNG FID away.’ We’re not considering the second one, whilst that's clearly an option that BP has.
Secondly, we’re not in a position yet to declare what our financial position is likely to be because we haven't concluded the FEED work, which means we haven't concluded our commercial positioning [indiscernible]. Obviously, that links into the finance as well.
So, until all of that work is done, we won’t finalize our deal, if you like. And therefore, until that’s done, we can’t tell a bit more detail.
What you can take away is the comment Graham made a few moments ago about our target returns from FLNG. That’s not a bad starting point.
All right, great. If I could just ask one quick final question, GMLP’s value has, obviously, been impacted recently. How important is GMLP for you as a source of cash to sustain the balance sheet? And as you explore the drop-down of the second 50% of Hilli, are you exploring it at a multiple different from the first drop down to kind of improve the proposition for GMLP? Thanks.
I think in relation to the first part of the question, we still very much believe in GMLP as the capital-creating vehicle, if you like, for GLNG and we own 32% of it. So, it’s very important to us.
In terms of the multiple, I don’t think we can really comment on that. We’re kind of in discussions and that will come out in due course.
All right. Thanks for the time.
We will now take our next question from Wayne Cooperman from Cobalt Capital. Please go ahead. Your line is now open.
You got some of them already. So, great. Thank you.
Okay, thanks.
Thank you.
It appears there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks.
Bear with me for one moment please. Apologies. I see that we have one more question from Chris Wetherbee from Citi. Please go ahead. Your line is now open.
Hi, guys. James [ph] on for Chris. I had a question just about preference to get access to cash reserves as well as statements around trapped gas. I want to know if you actually had any particular plans on actually owning gas producing assets as opposed to, the liquefaction, transportation and gasification opportunities.
Chris, I didn’t quite hear your question, but I think you are asking if we still had plans to own gas or participate in the ownership of gas-producing assets. Is that correct?
Correct.
So, the answer is yes. The Fortuna project is a classic example of that, that our participation in that would've seen us owning a percentage of that field and then translating that through FLNG. It remains the company's ambition to participate in the upstream side of the business. Obviously, we will do that in partnership on a field by field basis with other parties that have subsurface competence. But it's our whole business model to participate at that end of the gas supply chain, take it right away through liquefaction through the carrier fleet into FSRU and, ultimately, into power and obviously we were talking more about the small-scale distributions. So, we want to participate where we can along that whole gas chain where it will add money to our business and our shareholders. And the upstream part of that remains firmly part of that strategy.
Got it. Thank you.
It appears there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks.
Thanks, operator. So, just in closing, thank you all again for listening, tuning in and for your questions. The message this time has really been the shift of Golar from where we've been to confidence in our short, medium and long-term cash flows through a combination of what we have in place and producing, what we have immediately around the corner in terms of coming onstream and the potential pipeline that we’ve got for the projects and for the developments. So, thanks for your interest and continued confidence in us. And we’ve leave it there and talk to you next quarter. Thanks again. Bye-bye.
This concludes today’s call. Thank you for your participation. You may now disconnect.