Golar LNG Ltd

NASDAQ:GLNG

Earnings Call Transcript 2023-Q2

[Operator]

Welcome to the Golar LNG Limited Q2 2023 Results Presentation. After the slide presentation by the CEO, Karl Staubo; and the CFO, Eduardo Maranhao, there will be a question-and-answer session. Information on how to ask a question will be provided then. [Operator Instructions].

I will now pass you over to Karl Staubo. Karl, please go ahead.

[Karl Staubo, CEO]

Hi, everyone, and welcome to Golar LNG's Q2 2023 Earnings Results Presentation. My name is Karl Staubo, CEO of Golar LNG, and I'm accompanied today by our CFO, Eduardo. Before we get into the presentation, please note the forward-looking statements on Slide 2.

On Slide 3, we present our company overview. We are a focused FLNG player with 2 FLNGs; Hilli operating in Cameroon and Gimi about to deliver and start a 20-year contract for BP. The key changes to our asset portfolio in the quarter was high grading of our FLNG conversion candidate, selling the LNG carrier Gandria and acquiring the LNG carrier Fuji. Fuji has significantly more storage capacity, younger age and lower boil-off and is therefore more suitable for our intended Mark II 3.5 MTPA FLNG conversion. Snam of Italy has an option to convert the Golar Arctic into an FSRU. This option lapsed in July, and we are now reviewing alternatives for her, including long-term charter or asset sale.

Our investments include Avenir LNG, a small-scale LNG carrier business and Macaw Energies, a company founded with Golar as sponsor, targeting small-scale land-based liquefaction and gas monetization through proprietary technology currently under construction. Golar is the world's only independent proven FLNG company.

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

The current contract was entered into when our FLNG technology was unproven and Hilli is positioned as the earliest available FLNG globally, continues to increase customer interest in the vessel beyond the current contract.

Our second FLNG Gimi is about to deliver from Seatrium in Singapore to start a 20-year contract for BP. Gimi's shift from CapEx to earnings will significantly strengthen our free cash flow generation, and we also see significant potential in optimizing the debt facility on Gimi once she is delivered.

Our contemplated third FLNG would be a Mark II 3.5 MTPA vessels. If ordered within 2023, the vessel will deliver late '26 and be ready for operations from early '27. Mark II will increase our total liquefaction capacity from about 5.5 million tons per annum to 9 million tons or about a 70% increase. Hence, we see 3 cash flow triggers for the company, delivery and start-up of Gimi during second half of this year, shifting the vessel cash flow from CapEx to earnings; number two, recontracting of Hilli at increased capacity utilization and operational margin; and number three, ordering and chartering of a Mark II FLNG.

As you can see on the bottom part of the table, illustratively, we will have up to 322 MMBtu available for charter from early 2027 onwards. Tariffs in line with the current competitive U.S. export market suggest earnings of about $1 billion from this available capacity. However, our FLNG technology enable monetization of stranded gas reserves that would otherwise remain undeveloped. Hence, we believe significantly higher liquefaction margins should be obtainable.

We are currently in discussion with more than 6 different gas resource owners at various geographical locations focused around West Africa for potential FLNG deployment, all of which with significantly better economic terms than current charters.

Turning to Slide 5 and highlights for the quarter. Hilli continued its 100% economic off time, and we now have offloaded our 97th cargo. We're pleased to confirm that we have finalized the improved terms for the Hilli financing, reducing the debt margin and extending amortization profile and facility duration.

Gimi is now 97% technically complete, and we expect sail away during September this year. On business development, we have further expanded the MOU we entered into with NNPC in April to now be further developed through heads of terms setting out a contractual framework for joint development of specific gas fields towards potential FLNG deployment.

Development of commercial opportunities also continues outside of Nigeria, including commercial term negotiations with gas resource owners and government interaction in potential countries of operation. It should be highlighted that the complexity of offshore gas development drives the time line for potential announcements of any binding terms for incremental FLNG work.

Other corporate and other, Eduardo will cover most of that later in the presentation. But as per our guiding in first quarter, we have declared a quarterly dividend of $0.25 also for Q2. During the quarter, we've also spent about $30 million of our $150 million buyback program announced in May, and we have acquired and canceled about 1.4 million shares.

We remain committed to enhancing shareholder returns as our earnings continue to grow.

We will now turn to business update starting with Gimi on Slide 7. As already mentioned, the vessel is now 97% complete, and we expect sail-away from the shipyard during September. System handover is underway and final testing ongoing. The arbitration process regarding certain precommissioning contractual cash flows continue, but is not expected to have a wider impact on the 20-year contract with BP.

Moving to Slide 8. And with the delivery of Gimi, we are now transitioning cash outflows to earnings for the vessel. The construction of Gimi commenced in 2019 and has been delayed due to COVID effects at the shipyard and for some suppliers. Given that Golar is a company with 2 key assets we have currently had around half of the balance sheet, not generating cash flow. With Gimi going from CapEx to cash flow and the increase in commodity earnings from Hilli, we see continued earnings growth in the coming years. This is all before a potential FID of a Mark II, which would further boost earnings in the years to come.

Turning to Slide 9. We have expanded our working relationship with NNPC to include heads of terms signed in Abuja on August 1. The heads of terms set out a commercial framework for development of identified gas resources in Nigeria. In addition to the discussions with NNPC, we're also progressing potential FLNG deployment with 4 independent gas resource owners in Nigeria.

In addition to the developments in Nigeria, we see similar developments of more than 5 potential FLNG deployment opportunities in other West African countries, where we are currently having commercial negotiations with gas resource owners and government interaction in potential countries of operation.

Our priority remains to first recharter Hilli before FID and Mark II FLNG and then secure the charter for search vessel.

Moving to Slide 10 and the development we've done on a Mark II in the quarter. As announced and earlier mentioned on the call, we have high graded our FLNG conversion candidate, acquiring Fuji and disposing of the LNG carrier, Gandria. We've made significant progress with Chinese financing houses for a debt facility of up to $1.5 billion, not contingent on a charter.

We will continue to work with the shipyard to further derisk construction time line and pricing. We have increased our pre-FID commitments to about $400 million through a combination of long lead items, engineering work and the mentioned acquisition of Fuji. And as alluded to, if we FID that project this year, we will deliver within .

Turning to Slide 11. We see robust long-term fundamentals in support of LNG prices. From a macro perspective, the normalization of gas prices has not stopped the strong interest in securing future position. Asian importers are active in entering into long-term SPAs. And as you can see from the left-hand graph, 2023 is lining up to become close to 2022 in terms of total volume contracted. And in '22, we saw the highest level on record. The consequence of this continued buying interest is a rising price environment and what we show in the middle graph, is the Brent-linked pricing of long-term deals, which is currently ranging between 12.5% to 13.5% of Brent.

However, there have been shorter-term deals reportedly done between 16% and 20% of Brent parity. Hence, we share the view of major players such as Shell and BP that LNG demand will remain robust in the long term as it is offering a solution to the energy trilemma the world is currently facing. Balancing energy security, access to affordable energy and doing so in a sustainable manner. That's part of what we are trying to capture on land through Macaw Energies, which we'll elaborate on, on Slide 12.

Macaw is progressing according to plan, targeting first operations in 2024. Commercial and technical development is ongoing alongside building commercial momentum with clients in the U.S. and South America. Additionally, the company is already positioning to access gas for its liquefaction technology with several discussions ongoing from gas suppliers. In order to capitalize on the market opportunity that Macaw represents, we are evaluating alternatives to facilitate growth above and beyond the commitment already provided by Golar.

I'll now hand the call over to Eduardo to take us through the Q2 results.

[Eduardo Maranhao, CFO]

Thanks, Karl, and good morning, everyone. I'm very pleased to provide an update on our group results for the second quarter of 2023. So turning over to Slide #14. I wanted to show some of the financial highlights of this quarter. We had total operating revenues of $78 million, up 5% versus Q1 '23. As a result of softer Brent and TTF prices in Q2, we had total FLNG tariffs of $99 million, down 10% compared to the previous quarter. FLNG tariff is a key non-GAAP metric comprised of total revenues from liquefaction services, including realized gains on oil and gas derivatives. We expect to see a positive reversal of this item this quarter on the back of higher Brent and TTF prices.

We also recorded an adjusted EBITDA of $83 million, pretty much in line with Q1, despite lower contribution from commodity-linked fees, as I mentioned before. However, reduced costs associated with the Tundra Development Agreement, which has been concluded in May, contributed to improvement in corporate and other adjusted EBITDA. This quarter, we had net income of $7 million, a significant improvement compared to Q1. This figure is included of a total of $72 million noncash items such as $77 million unrealized losses from oil and gas derivatives, $10 million unrealized gains in our interest rate swaps as well as a $5 million impairment upon the sale of Gandria.

Our liquidity position remains strong with close to $1 billion of liquidity. That includes cash on hand and other receivables from the unwinding of our TTF hedges earlier this year. Our total contractor debt stood at just shy of $1.2 billion, leaving us with a net debt position of $190 million.

Turning over to Slide 15. We would like to provide a recap from our historical earnings from Hilli. This graph shows our net share of Hilli's adjusted EBITDA. And as you can see, the tariff can be broken down into 3 main components: a fixed totaling tariff of $34 million, which has been in line with the previous quarter, a Brent-linked fee of $15 million this quarter, down from 18% in Q1 and also a TTF-linked fee of $30 million, which is also down from $37 million last quarter. As I mentioned before, we expect that higher oil and gas prices should support increased tariffs for the rest of 2023.

Turning over to Slide 16. We can see that we remain exposed to TTF prices for the remainder of '23 between August and till December. So to give an idea of how this can improve our earnings for every dollar per million BTU change in TTF prices we expect to make an additional $1.4 million in 2023. From 2024 until '26, this will increase to $3.2 million for every dollar of TTF prices. So just for example, if TTF prices averaged $15 per million BTU next year, we should make around $48 million just from this tariff alone.

In addition to that, when it comes to Brent, the incremental contribution is $2.7 million for every dollar per barrel change above $60 per barrel.

As discussed on our last call in May, we managed to negotiate and complete the amendment of the Hilli debt facility with improved terms, including a margin reduction and extension of tenor and amortization profile. These changes are expected to release additional free cash flow of approximately $75 million until the end of the current contract in mid-2026. Those new terms are already in place and have become effective since the end of June.

Now turning over to Slide 17. Our balance sheet remains strong, and we have a great level of flexibility to allow for progressive shareholder returns and at the same time to fund our FLNG growth program. Current liquidity, including cash receivable from TTF hedges amount to close to $1 billion and fully support the development and equity requirements for the construction of the Mark II FLNG.

In addition to that, we have several alternatives that could further enhance liquidity in order to fund further growth, including potentially refinancing of existing debt facilities for both Hilli and Gimi that could unlock significant amount of equity should we be required to do so.

As discussed on the previous slide, Hilli's free cash flow generation of more than $200 million per year fully supports the current dividend and buyback program. This will increase even further upon Gimi's startup creating room for increasing shareholder returns in the future. This quarter, we have declared a dividend of $0.25 a share with a record date of August 21 and payment on or about August 29.

Following the announcement of our $150 million buyback program in May, we have spent $30 million, repurchasing 1.4 million shares at an average price of around $21. After that, we had at the end of June, 160 million shares outstanding.

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

[Karl Staubo, CEO]

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

Turning to bottom left, we have an attractive pricing on EV over 1 million tons of annual liquefaction capacity currently standing at around $680 million per ton, which is around half of what current shore-based liquefaction projects would cost to develop in the U.S.

Turning to top right, we have a balance sheet that enables us to continue to grow the company. Current cash sits at around $1 billion. Total net debt at just shy of $200 million. We have initiated shareholder returns through quarterly dividends and $150 million buyback program, of which $30 million has been spent in -- during Q2.

We plan on distributing an increasing amount of the free cash flow to equity to our shareholders while using our balance sheet capacity for FLNG growth projects, namely through Mark II FLNG with 3.5 MTPA of capacity.

On the bottom right, we have an illustrative CapEx to EBITDA multiple, subject to margin per MMBtu on the x-axis versus what the CapEx to EBITDA multiple would be if we deploy at various different rates. We believe with more than 300 MMBtu available of liquefaction capacity from 2027 onwards, that we're well positioned to capture monetization of stranded gas reserves, in particular, in West Africa, but also in other geographical areas in discussion. This concludes our Q2 earnings presentation.

Thank you for listening in, and we'll now hand the call over to the operator for any questions.

[Operator]

[Operator Instructions]. The first question is from Ben Nolan from Stifel.

[Benjamin Nolan, Stifel, Nicolaus & Company]

I had to -- hopefully that's okay, the first is when you move the -- or the transition on the -- with Nigeria moving from a memorandum of understanding heads of terms, trying to understand how big of a change that is and how close to a final contract, do you think a heads of terms is? Is it -- are we moving meaningfully closer to a definitive agreement in your opinion? Or is it just, I don't know, maybe frame that in for me.

[Karl Staubo, CEO]

Nolan, thanks for the question. So, there is no recipe on how to fix an FLNG. The only independent provider of FLNG in the world is Golar and we have done two contracts, one with Perenco and one with BP and they were different in nature. However, the way it works on the ongoing discussions with NNPC is first, you sign an MOU to unlock resources in particular on the NNPC side. Following the unlocking of these resources in late April and over a series of meetings in London and in Nigeria, we have together developed a framework -- commercial framework for how to develop named resources. We have then agreed that commercial framework, and that's what's been signed up to through the heads of terms.

By signing the heads of terms, we unlock another set of work, in particular, then for NNPC to allocate further resources to further develop these projects. Given that the all of these FLNG projects are different in nature, it's difficult to guide on exactly when or how or how material, but it's certainly developing in the right direction.

[Benjamin Nolan, Stifel, Nicolaus & Company]

Okay. That's helpful. And then for my second question, you talk about the Mark II if you're able to secure a contract on that asset before the end of the year, it would be available in 2027. In the same -- at the same time, you talked about the Hilli sort of being first on mind. I'm just curious if you think it is reasonable to think that you could get a Mark II contract before the end of the year and stay on that sort of 2027 time frame.

[Karl Staubo, CEO]

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

[Benjamin Nolan, Stifel, Nicolaus & Company]

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

[Karl Staubo, CEO]

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

[Operator]

[Operator Instructions]. And the next question is from Chris Robertson from Deutsche Bank.

[Christopher Robertson, Deutsche Bank]

Karl, just my question is a follow up to Ben's. Just looking at the scope of work that might be done with NNPC, is there potential to deploy Hilli as well as the Mark II asset with NNPC.

[Karl Staubo, CEO]

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

[Christopher Robertson, Deutsche Bank]

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

[Karl Staubo, CEO]

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

[Operator]

And the next question is from Chris Tsung from Webber Research & Advisory.

[Chris Tsung, Webber Research & Advisory]

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

[Karl Staubo, CEO]

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

In terms of -- it depends on project to project. Most of them, Golar remains the owner of the FLNG. The NOC remains the owner of the upstream and gas treatment. We both work to have as slim economics on that side as possible. And then we share in the gas offtake pricing, and then you basically achieve the same. In some of them, it's being discussed to have shared economics across the value chain as well. If that is to be the case, the resource certainly needs to be big enough to charter the vessel for remaining life, whether it's Hilli or Mark II.

[Chris Tsung, Webber Research & Advisory]

Okay. Great. And taken from the contract, would BP for Gimi starts up in Q1 next year when the vessel arise on site? Or is it contingent on producing first on your commissioning, probably just keen what's going on from like BP and Kosmos' earning calls?

[Karl Staubo, CEO]

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

[Operator]

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

[Karl Staubo, CEO]

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

[Operator]

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