Golar LNG Ltd

NASDAQ:GLNG

Earnings Call Transcript 2022-Q4

[Operator]

Welcome to the Golar LNG Limited Q4 2022 Results Presentation. After the slide presentation by CEO, Karl Fredrik Staubo; and CFO, Eduardo Maranhão, there will be a question-and-answer session. [Operator Instructions] At this time all participants are in listen-only mode.

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

[Karl Fredrik Staubo, CEO]

Thank you operator. And welcome to Golar LNGs Q4 earnings result presentation. My name is Karl Fredrik Staubo, CEO of Golar LNG. I’m accompanied today by our CFO, Mr. Eduardo Maranhão to present this quarter’s result.

Before we get into the presentation, please note the forward-looking statements on Slide 2. Turning to Slide 3, this morning we sold our remaining shareholding in CoolCo Limited for net proceeds about $56 million. Since our last earnings call, we have also exited our shareholding in [Indiscernible] and both backed their stake in our FLNG Hilli.

Our only current shareholding is Avenir LNG with a book value of around $42 million. Our core business is owning our 2 FLNGs Hilli operating for Perenco in Cameroon. Hilli generates significant operating cash flows due to its commodity link tariff. The unit is coming off a recontacting in July 2026 and we’re very optimistic to increase utilization and improve commercial terms for the unit upon recontracting.

Gimi is expected to target 20-year contract for BP on the Tortue field outside Mauritania and Senegal later this year. We will then start to engage cash flow on the more than $1.2 million invested in the project today. We are also actively pursuing ordering of a Mark II FLNG with an annual liquefaction capacity of 3.5 million tonnes per annum. I will get back to that later in the presentation.

Turning to Slide 4 and the Q4 highlights. Golar reports a 2022 net income of $788 million and a record book value of $2.9 million equivalent to about $27 a share. Our cash position stands at approximately $1 billion or $9.3 a share.

In total, we have monetized $572 million in cash during Q4 2022 and Q1 year-to-date be exiting new [Indiscernible] and CoolCo. We also used our remaning 4.1 million shares in NFE as part settlement to acquire NFE stake in Hilli. During Q4, we repurchased 141 million or 47% of the outstanding amount of our unsecured loans.

We also utilize our remaining buyback basket to repurchase and cancel 0.2 million shares and we currently have around 107.2 million shares outstanding. The Board and management are now exploring alternatives to commence a dividend and/or a new share buyback program. We had an active quarter for Hilli. The unit generated $86 million in EBITDA. We unwound our 2023 and 2024 TTF hedges securing approximately $140 million in TTF linked earnings and increase our exposure to TTF prices.

We also agreed to acquire NFE stake in Hilli effective from January 1 this year, and we expect that transaction to close during the first quarter of this year. Gimi is now 92% complete and on schedule for sail away during first half.

As mentioned, we significantly progressed our FLNG growth ambitions by securing a donor vessel for Mark II FLNG conversion, as well as progress yard and financing discussions for that unit. We continue to favor the economics of integrated ecology projects and are actively working with upstream partners to develop attractive integrated projects.

I'll now hand the call over to Eduardo to present our Q4 results.

[Eduardo Maranhão, CFO]

Thanks, Karl. Good morning, everyone. Very pleased to provide an update on our group results for the fourth quarter of 2022. Turning over to slide number 6, I wanted to show some of the financial highlights of this quarter. 2022 was a record year for Golar. Our net income on Q4 was $71 million, leading to a record net income of $788 million for the full 2022 calendar year. This was our highest net income to date, and represented an increase of 90% when compared to 2021. We now have record total book equity of $2.9 billion with a debt free balance sheet and strong cash reserves of more than $1 billion to support further FLNG growth.

This quarter, we recorded an adjusted EBITDA of $87 million, an increase of 2% when compared to the previous quarter. On a year-on-year basis, our total adjusted EBITDA in 2022 has grown to $363 million, an increase of 16% compared to 2021. It's important to highlight that even after the disposal of our shipping business, we have continued to grow our cash generation due to strong performance from our FLNG business where we almost doubled our EBITDA to $367 million compared to $191 million in 2021. I'll provide some further details regarding these in the next few slides.

Total FLNG tariffs in Q4 were $129 million up 18% compared to the previous quarter. FLNG tariff is comprised of total revenues from liquefaction services, unrealized gains on oil and gas derivative instruments. Due to a combination of upstream technical issues in Q4, and Hilli maintenance, 2022, LNG production was 3.5% below the annual contracted volume in a non-cash accrual of $36 million liability was recognized. Because of that our stated operating revenues from FLNG were lower in Q4 when compared to the previous quarter. The issues that resulted in the reduced production was resolved last year, and Hilli has been producing to schedule since then.

We expect the dish production shortfall will be compensated through overproduction in 2023, where we expect to recognize an additional EBITDA of $36 million, offsetting the 2022 underutilisation liability with no expected net cash impact to Golar. As pointed out by Karl, we have bought back $141 million of unsecured bonds, as far as -- which brought our share of contract or debt at the end of the quarter to $844 million. Our total cash position at the end of the year stood at just shy of a billion dollars at $991 million.

So moving on to Slide 7. We continue to strengthen our balance sheet to allow the company to pursue new FLNG growth projects. Our cash position currently stands at more than $1 billion, even when considering the acquisition of NFEs interest in Hilli which will require $100 million cash payments as part of the total consideration and is expected to close in Q1. The acquisition of Hilli is expected to increase our run rate adjusted EBITDA by $70 million annually, and we will also add a further $323 million in debt. Despite this incremental debt, we expect to remain debt free due to cash receivables of $140 million, which were locked in with the unwinding of the TTF hedges earlier this year.

As you can see, on the right hand side of the slide, we have significantly delevered our balance sheet from approximately $2 billion of net debt just two years ago, at the end of 2020, to a debt free position we have today. Moreover, we almost doubled our EBITDA to $363 million, which we saw in 2022. We expect this to continue to increase post acquisition of the remaining interest in Hilli and once FLNG Gimi commences operation.

Moving on to slide 8, I would like to provide some further insight into earnings from Hilli. So the Hilli tariff is comprised of three main components; the fixed tolling tariff, a Brent-linked fee, and a TTF-linked fee that started on first of January of last year. We have managed to hedge our TTF-linked fees at very attractive levels. And as a result of that, we saw a very strong increase in Hilli’s EBITDA, generating $86 million net to us in the last quarter, which is almost three times greater than what we saw in the same quarter of 2021.

Moving on to slide number 9, I wanted to provide some further details regarding the deal we did within a fee to increase our exposure on Hilli. So on February 6, we agreed to acquire NFEs fee interest in the FLNG Hilli by paying $100 million in cash, plus our remaining 4.1 million NFE shares, and also we assumed $323 million of contracts or debt. The deal is expected to close in Q1, and after that, we will control 94.6% of common units that receives tolling fees from trains 1 and 2 plus 5% of the TTF fees.

We will also on 89.1% of Series A and B units which benefit from further upside with high Brent and TTF prices. The deal brings immediate cash flow to Golar contributing an additional $70 million of EBITDA per year, until the end of the current liquefaction agreement in July 2026. We believe on significant earnings upside potential with higher utilization and improved commercial terms upon re contracting at the end of the current contract. Further upside could be achieved in the next month with a potential refinancing of the existing debt.

Moving on to slide 10. Let's take a closer look on the expected earnings from Hilli. So on the back of our increased shareholding of 94.6% of Hilli common units, the base tolling fees are expected to double in 2023 to around $138 million. Following the unwinding of our TTF swaps, we remain open for the period between March to December of this year, and we remain 100% open between 2024 until the end of the contract in 2026. We also remain exposed to Brent prices and for every dollar increase in oil prices that would result in an incremental EBITDA of $2.7 million net to us.

Based on forward TTF and Brent curves, this will bring our expected EBITDA from Hilli in 2023 alone of upto $335 million and around $283 million in 2024. Our share of debt service is expected at around $190 million this year, resulting in free cash flow to equity of close to $216 million just from Hilli.

I'll now hand over the call to Karl, who can talk a bit more about some business updates.

[Karl Fredrik Staubo, CEO]

Thank you, Eduardo. Turning to slide 12 and FLNG Gimi construction update. Gimi is now 92% complete and on track for sail-away during first half of 2023. All heavy lifts are onboard and commissioning are underway. We currently have an average daily workforce of 4300 workers with 24/7 activities and more than 30 million man hours worked to date. We expect the unit to sail-away towards the end of Q2 and arrive on site ready for start-up during Q3.

Turning to slide 13, we have now secured a vessel for Mark II conversion. The vessel is a Japanese built 2004 Vintage Moss-type designed carrier with a storage capacity of 148,000. We have agreed to pay $5 million in a reservation fee that will be deducted from the total acquisition price of $77.5 million once the acquisition option is declared. We continue to order long lead equipment and are currently committed $320 million of long lead items and have more than 200 engineers between the shipyard topside provider and Golar actively working on the project.

We’ve made significant progress during the quarter with the conversion shipyard and confirmed delivery within 2025 based on the current schedule. We believe that securing an attractive delivery for this unit increases our ability to drive value with prospective FLNG clients. We have also been to China and received strong interest from lending banks for construction and long-term financing for Mark II units. We’re actively working on several tarping [ph] opportunities for the project including an attractive integrated opportunity together with an upstream partner.

Turning to slide 14, following the acquisition of NFE stake in Hilli, Golar now controls a total liquefaction capacity of about 4.1 million pounds per annum. With no net debt our market cap and enterprise value is currently essentially the same number, Dividing our EV over our liquefaction capacity implies that Golar trades at $590 per tonne of liquefaction capacity. The latest public contractions of liquefaction capacity, including ENI acquisition of Exmar’s Tango and Kinder Morgan’s sale of part of it Elba facility suggest market pricing for liquefaction in excess of a billion dollars per tonne. Fuel [Indiscernible] per tonne of liquefaction capacity to Golar, that would equate to around $38 a share. That is also for the best performing FLNG technology in the world with the lowest carbon footprint out of what's currently available in the marketplace.

Turning to Slide 15. Slide 15 is well known throughout our latest earnings report that sets out the business model for FLNG. Subject to the area of operation, we can feed gas into an FLNG at between $1 and $3 per MMBtu. And to that OpEx and fuel cost of around $0.60 cents per MMBtu and we can deliver FOB gas of between $2 and $4, or we can ship to end users in Europe or Asia for another dollar and 40 cents per MMBtu.

Hence, FLNV technology enables monetization of stranded or associated gas, landed into Europe or Asia at between $3 to $5 per MMBtu. This compares to the forward market between $10 and $15 per MMBtu between now and 2030. Hence the total margin for an FLNG project is between $5 and $10 per MMBtu and the key discrepancy when comparing FLNG project is how that margin is divided between the resource owner, the upstream company and the FLNG provider.

A typical tolling fee project charges a tariff anywhere between $2 and $3.5 per MMBtu giving the chance of the FLNG unit the vast majority of the upside in the project. And in most cases, the FLNG technology is what makes the project monetizable. This is why we mainly focus on integrated projects where we together with an upstream partner enable the monetization of stranded or associated gas reserves and take out the full spread between the cash breakeven of the liquefaction project and prevailing market prices. Based on current gas prices, integrated projects have a payback in less than two years, including both the FLNG and upstream CapEx.

Turning to summary on slide 17. This further builds on the slide that Eduardo showed on Hilli, but adding into effect the sort of operation of Gimi with full read run rate from 2024. Hence we expect to see continued earnings and free cash flow to equity growth on the back of increased ownership in Hilli, increased commodity linked earnings and the start-up of Gimi for its 20-year contract with BP. We see further upside in increased capacity utilization of Hilli upon contract renewal in July 26, and through incremental Mark II FLNG that we can be funded by the existing balance sheet flexibility.

We also see potential to improve free cash flow to equity by optimizing the debt facilities on our existing assets Gimi Hilli. The board and management are therefore exploring alternatives to start to return value to shareholders through dividends or stock repurchases.

To summarize today’s call, we will turn to slide 18. Golar reports 2022 annual net income of $788 million and a record book value of $2.9 billion. We have a cash balance overall a billion dollars, low leverage and operating cash flow growth that allow for both FLNG expansion and the engagement of shareholder returns. With these strong clients interaction with focus on integrated contract opportunities for the reasons that we have explained, and the full project payback in less than two years in current gas price environments. We believe Golar is very attractively priced both on customer multiples, and dollar per tonne over liquefaction capacity, especially in light of recent transactions.

This concludes our Q4 earnings presentation. Thank you for listening in. And we’ll now hand over to the operator for any questions.

[Operator]

Thank you. [Operator Instructions] our first question comes from the line of Ben Nolan from Stifel. Please go ahead. Your line is open.

[Ben Nolan, Stifel]

Thank you. Good morning, Karl and Eduardo, afternoon guys. I’d say how am I going to do my two questions, we’ll start with the potential for a return of capital to shareholders, either through dividends or share repurchases. As I recall, there was some covenant issues that prevented you guys from being able to do that as part of your credit facilities. Could you maybe talk through what those are if they’ve been resolved if there is anything in the way of potentially that direction for capital allocation?

[Karl Fredrik Staubo, CEO]

Hi Ben. So the only restriction we currently have is under the unsecured bonds, where we are currently not allowed to start a dividend until March, April 2024. At which point we can start. So the question is, if it's anyways, we could make that earlier.

[Ben Nolan, Stifel]

Right. And I suppose the answer is you’re working on it is that – that’s the read through there?

[Karl Fredrik Staubo, CEO]

Yes.

[Ben Nolan, Stifel]

Okay. All right. I suppose we’ll stay tuned. For my next question, I’m curious, there was some updates about the potential expansion of the Tortue field, where the Gimi is going. It looks as though that project is going a to a different design, just curious where you guys stand on that. And if it is not sort of replicating the, your design, your FLNG design, what, how you approach that particular opportunity?

[Karl Fredrik Staubo, CEO]

There’s a first and foremost be involved. We’re obviously involved in the project through phase one and the startup of Gimi. We obviously know that BP and Kosmos was out yesterday with a pre field study for a potential gravity based solution. And we note that this is a pre field study that would take some time to develop. It will be a less proven technology for the area. We also note that they were considering to use electrical drive liquefaction technology, which would be a mobile application in a region without abundant renewable energy sourcing.

So you could source the electricity from land, but inland is still fueled by gas or oil. So we don’t really see the benefit of doing that shore based. At the end of the day, it’s up to the charters to decide what direction they want to take. But we, as we’ve tried to highlight a few times during this call would rather focus our efforts on integrated project, as opposed to expanding further fixed tolling based contracts for majors, especially in the recessionary environment, because it’s less interesting to spend very big CapEx in the next three years on construction, only to be repaired on a fixed tariffs for 20 years thereafter.

[Ben Nolan, Stifel]

Okay. All right. Well, I have more but I’ll respect the two limit. And if there’s time at the end, I’ll jump back, and I appreciate it. Thank you.

[Karl Fredrik Staubo, CEO]

Thanks Nolan.

[Operator]

Thank you. We’ll now move on to our next question. Please stand by. Our next question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead. Your line is open.

[Christopher Robertson, Deutsche Bank]

Hi, this is Chris Robertson on for Amit. Thanks for taking our questions.

[Karl Fredrik Staubo, CEO]

Hi, Chris.

[Christopher Robertson, Deutsche Bank]

Hi, just to kind of piggyback off of a Ben’s questions regarding the dividend versus share repurchase. I mean, you kind of laid out a scenario for a much higher share price earlier in the presentation. Do you think is the current thinking maybe around share repurchases, given where the shares trade at today? And then with regards to a dividend, I know it’s pretty early to maybe think about this, given that you’re having some on-going discussions there. But can you talk about a policy? You’re thinking about, is that going in the direction of a steady state dividend policy? Or how should we think about that?

[Karl Fredrik Staubo, CEO]

Well Chris, you broke up a bit, but I think I captured most of what you referred to. So a repurchase and a dividend would follow the same restriction in the current unsecured bonds. So in the event that we’re to engage, we wouldn’t currently able to do until March April of 24th. When it comes to the balance between dividend and repurchase, this is still under exploration between the board and management and all firm decisions have been made either way, but we’re working at alternatives to identify. I think if you’d highlight we believe that both compared to book value of equity, cash flow multiples, and dollar per tonne, comparisons to recent transactions, we see significant value in the stocks [ph] today.

[Christopher Robertson, Deutsche Bank]

Got it. And then we can you talk about the potential for future projects as it relates to kind of holding some cash back on the balance sheet going forward to present -- not just the mark, that you’ve kind of laid out here, but further projects.

[Eduardo Maranhão, CFO]

I think as Eduardo it is, the free cash flow to equity, just from operations, from Hilli and Gimi would be sufficient to pay or just start returning very healthy amounts of cash flow to shareholders. And you can do all of that, even without touching a million dollars of cash. And the billion dollars of cash is more than sufficient to fund a mark to growth project. So we have plenty of capacity to both grow and return cash flow to equity, and they’re not mutually exclusive.

[Christopher Robertson, Deutsche Bank]

Yes, got it. Yes, it’s certainly a lot of liquidity here. All right. Thank you for taking the questions.

[Eduardo Maranhão, CFO]

Thanks, Chris.

[Operator]

Thank you. We’ll now move on to our next question. Please standby. Our next question comes from the line of Chris Tsung from Webber Research. Please go ahead. Your line is open.

[Chris Tsung, Webber Research]

Hey, good afternoon, Karl and Eduardo how are you?

[Karl Fredrik Staubo, CEO]

Oh, good. Yes.

[Chris Tsung, Webber Research]

Thank you. Just looking at your presentation, it looks like the cost for Mark II increased around 77% like, I think you guys said 300 million last quarter. So just wanted to ask is that higher price from like a higher cost environment or is it just ordering more equipment and just lumping in, a second part of this is, does that change your guidance on what the dollar per ton costs for FLNG?

[Karl Fredrik Staubo, CEO]

I assume you’re referring to slide 15. And the balance of what we use for illustrative purposes, which slide 15 is meant to be, is that we use the dollar per tonne that you derive out on slide 14. So we just set up you buy Golar today at 590. You use 590 at the same basis. What would that equate to? An implied liquefaction earnings or cost versus EBITDA. We do believe that we can create the Mark II somewhat cheaper than that.

[Chris Tsung, Webber Research]

Okay, yes, cause I think in the prior earnings. You guys got it to around like 500 to 600 at a tonne.

[Karl Fredrik Staubo, CEO]

Maintained that planning.

[Chris Tsung, Webber Research]

Okay, you maintained that?

[Karl Fredrik Staubo, CEO]

Yes.

[Chris Tsung, Webber Research]

Okay, great. Thanks. And my second question, I think you’ve touched on this before as well, just how much liquidity could you unlock if you refinance Gimi and Hilli?

[Karl Fredrik Staubo, CEO]

Eduardo, you want to tackle that one?

[Eduardo Maranhão, CFO]

Yes, sure. So I think we discussed that on the previous call. We have assessed a different number of alternatives to potentially extract further value from Hilli and Gimi. Depending on which one we would pursue, we could see the potential to unlock just on Gimi alone values of in excess of $1.2 billion to $1.3 billion. That would require a further refinancing of the existing facility. And we could be doing that either in the capital markets or pursuing a new commercial bank facility. We still believe that we would be better off eliminating completely the construction risk. So we don’t expect to take any sort of refinancing activities before the commencement of operations of Gimi. I think, with the current cash position that we have, and as discussed and pointed out by Karl as well, further enhanced by the cash flow generation from Hilli, we have more than enough to sustain both further growth on FLNG, but also to commence payments in the near future. So I think we will try to be optimistic when it comes to refinancing.

[Chris Tsung, Webber Research]

Great, that’s it for me. Thank you guys. Thank you.

[Eduardo Maranhão, CFO]

Thank you.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Liam Burke from B. Riley Financial. Please go ahead. Your line is open.

[Liam Burke, B. Riley Financial]

Thank you. Hi, Karl, how are you?

[Karl Fredrik Staubo, CEO]

Good.

[Liam Burke, B. Riley Financial]

Karl, are you seeing any competing FLNG players in the market looking for potential projects that you would think would be more in line with Golar?

[Karl Fredrik Staubo, CEO]

I think the biggest competitor as such as major stuff control fields, building the assets for own balance sheets, or like what VPN Kosmos is planning on the expansion of Tortue.

[Liam Burke, B. Riley Financial]

Okay, but you don’t see any players like NFE stepping in and competing for that for your business.

[Karl Fredrik Staubo, CEO]

As we’ve said on numerous occasions when it comes to NFE we think that the first [ph] LNG technology that they are pursuing is complementary to that Golar. They are mainly targeting smaller resources in shallower waters and seem to focus mainly on U.S. Gulf of Mexico. And we think that’s complementary to those projects that we are pursuing and we like their technology and think that they have, again, complementary technology to ours and don’t see them as a direct competitors for any of the projects we are currently developing.

[Liam Burke, B. Riley Financial]

Okay, great. Thanks Karl.

[Karl Fredrik Staubo, CEO]

Thank you.

[Operator]

Thank you. We’ll now move on to our next question. Our next question comes from the line of Ben Nolan from Stifel. Please go ahead. Your line is open.

[Ben Nolan, Stifel]

Hi, I told you I’d be back. I wanted to just cover a little bit more on the Mark II. In the presentation, you said that you’re confirmed, you have a shipyard slot confirmed for 2025 delivery. I’m curious when you would need to have the vessel in the yard in the first place or when you would actually start spinning other than for the acquisition of the ship and log me tonight is the actual construction of that. And could you remind us what you’re thinking in terms of what the total CapEx cost for Mark II would be?

[Karl Fredrik Staubo, CEO]

Sure. So, okay, Mark II is slightly different in sort of concepts than that of Mark I. So if you go for example, on slide 13, you can see that the liquefaction plant itself is planned to be built from scratch on a new ships midsection. Then you bring the ship in, you basically chopped the ship in the middle and you weld on the ship to either side of the liquefaction plant.

Hence, to keep that schedule, we will start to construct the mid-section where the vast majority of the [Indiscernible] is intended for. And then we would need the ship to be in the shipyards to start preparation work on the ship itself this time next year. So for us, it’s more important to get going on the midsection than to get shipped into the shipyard, this side or during this year. So that’s how this unit is built, which means that it’s less stick building into an existing unit. You basically put the liquefaction plant in the middle and then add the storage.

In terms of CapEx, it’s slightly dependent on what mooring system that we will end up using, because we believe around somewhere between 1.8 and on 2 billions should be feasible.

[Ben Nolan, Stifel]

Okay, perfect. That is good color. And I suppose that in the interim period, after you take delivery of the ship, and before it goes in the shipyard you would just trade it in the spot market or something. Is that a fair assumption?

[Karl Fredrik Staubo, CEO]

No, I think the way we’ve tried to structure the whole Mark II project is that we commit and secure the timeframes, but we try to limit the cash drag until we actually need the equipment. So when it comes to the ship itself, that’s why also why we structured it as an option, where we pay 5 million to reserve the ship, we then need to pay somewhat more money but not the full amount upon the duration of the option. And then the final installment is paid upon delivery, which is likely to be around this time next year in Q1.

[Ben Nolan, Stifel]

Okay. All right. Very clear. Appreciate it. Thank you.

[Karl Fredrik Staubo, CEO]

Thank you, Ben.

[Operator]

Thank you. There are no further questions at this time. So I’ll hand the call back to Karl for closing remarks.

[Karl Fredrik Staubo, CEO]

Thank you all for listening into our quarterly presentation. We’re very excited about the development of the project during 2022 and both hope and plan to keep the same pace of progress during 2023. And thank you for your continued interest and support in the company. We wish you all a good day and bye bye.

[Operator]

This concludes today’s conference call. Thank you for participating. You may now disconnect.