Golar LNG - Q2 2023

Transcript

Operator (participant)

Welcome to the Golar LNG Limited Q2 2023 results presentation. After the slide presentation by the CEO, Karl Fredrik Staubo, and the CFO, Eduardo Maranhão, there will be a question and answer session. Information on how to ask a question will be provided then. At this time, all participants are in a listen-only mode. I will now pass you over to Karl Fredrik Staubo. Karl, please go ahead.

Karl Fredrik Staubo (CEO)

Hi, everyone, welcome to Golar LNG's Q2 2023 earnings results presentation. My name is Karl Fredrik 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 two 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 had 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 further earnings upside in recontracting of the Hilli and potentially a Mark II FLNG. Hilli continues its market-leading operational uptime with another quarter of 100% economic utilization. The vessel will operate for Perenco in Cameroon until July 2026, 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. We see significant potential for increased capacity utilization, combined with higher earnings for a recharter of Hilli. The current contract was entered into when our FLNG technology was unproven, and Hilli's position 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 vessel. If ordered within 2023, the vessel will deliver late 2026 and be ready for operations from early 2027.

A Mark II would 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 three cash flow triggers for the company: delivery and startup of Gimi during H2 of this year, shifting the vessel cash flow from CapEx to earnings. Number two, recontracting of Hilli at increased capacity utilization and operational margin. 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, margins should be obtainable. We are currently in discussion with more than six 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 uptime, 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 a heads of terms, setting out the contractual framework for a 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 timeline for potential announcements of any binding terms for incremental FLNG work. Under corporate and other, Eduardo will cover most of that later in the presentation, but as per our guiding in Q1, 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 a 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 pre-commissioning contractual cash flows continue, but is not expected to have a wider impact on the 20-year contract with BP. Moving to slide 8, 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 sub-suppliers. Given that Golar is a company with two 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 increasing 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 a heads of terms signed in Abuja on August 1st. 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 four independent gas resource owners in Nigeria. In addition to the developments in Nigeria, we see similar developments of more than five 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 FIDing a Mark II FLNG and then secure the charter for such vessel. Moving to slide 10 and the developments 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've continued to work with the shipyard to further de-risk construction timeline 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. As alluded to, if we FID that project this year, we will deliver within end 2026. 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, as you can see from the left-hand graph, 2023 is lining up to become close to 2022 in terms of total volume contracted. In 2022, 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%-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 Maranhão (CFO)

Thanks, Karl, good morning, everyone. I'm very pleased to provide an update on our group results for the Q2 of 2023. Turning over to slide number 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 2023. 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 reverse 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 contributions from commodity-linked fees, as I mentioned before. 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 inclusive of a total of $72 million non-cash 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 contractual debt stood at just shy of $1.2 billion, leaving us with a net debt position of $190 million. Turning over to slide 15, I 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 three main components: A fixed tolling 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 2023, between August until December. To give you an idea of how this can improve our earnings, for every $ per million BTU change in TTF prices, we expect to make an additional $1.4 million in 2023. From 2024 until 2026, this will increase to $3.2 million for every $ of TTF prices. Just for example, if TTF prices average $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 $ 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 receivables 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 a 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. These 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 21st, and payment on or about August 29th.

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 Fredrik Staubo (CEO)

Thank you, Eduardo. 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. 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 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 enable us to continue to grow the company.

Current cash sits at around $1 billion, total net debt at just shy of $200. We have initiated shareholder returns through quarterly dividends and a $150 million buyback program, of which $30 million has been spent 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 project, 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 (participant)

Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one, one on your telephone and wait for your name to be announced. We are now taking the first question. Please stand by. The first question from Ben Nolan from Stifel. Please go ahead.

Benjamin Nolan (Managing Director)

All right.

Operator (participant)

Your line is open.

Benjamin Nolan (Managing Director)

Hi, thank you, and hello, Eduardo and Carl. I, I have two, hopefully that's okay. The first is when you move the transition on the with Nigeria, moving from a memorandum of understanding to a heads of term, 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, you know, I, I don't know. Maybe frame that in for me.

Karl Fredrik Staubo (CEO)

Hi, Ben, and thanks for the question. 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 an 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 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 all the 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 (Managing Director)

Okay. That's, that's helpful. Then, 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. At the same time, you talk about the Hilli sort of being first in line. 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 Fredrik Staubo (CEO)

Just to clarify, if we contract or 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 (Managing Director)

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

Karl Fredrik Staubo (CEO)

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

Benjamin Nolan (Managing Director)

Yeah. Okay. All right, I appreciate it. Thank you, guys.

Chris Tsung (Research Analyst)

Thanks, Ben.

Operator (participant)

Thank you for your question. We are now taking the next question. Please stand by. The next question from Chris Robertson from Deutsche Bank. Please go ahead.

Chris Robertson (Equity Research Analyst)

Hey, good morning and good afternoon, Karl. 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 Fredrik Staubo (CEO)

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

Chris Robertson (Equity Research Analyst)

Okay. Yep, that answers my question. All right, thanks. Then looking at the, the five other countries, or entities that you're kind of in negotiation or, or conversations with now, do all of those, I guess, involve an NOC, or are there, are there any IOCs involved in the resources that are being looked at?

Karl Fredrik Staubo (CEO)

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

Chris Robertson (Equity Research Analyst)

Okay, great. Thank you very much. I'll turn it over.

Operator (participant)

Thank you for your question. We are now taking the next question. The next question is from Chris Tsung from Weber Research & Advisory. Please go ahead.

Chris Tsung (Research Analyst)

Hey, good afternoon, Karl and Eduardo. How are you? Good, thanks. Just following up on these NNPC questions and your other projects in West Africa. Will those all be tolling or integrated? Just as a follow-up to that, like, how much ownership should we expect Golar to have? Will it be, like, 100%, or could we see some NOCs or, you know, IOC partners coming on board?

Karl Fredrik Staubo (CEO)

Okay. All, none of the projects we're pursuing is a fixed tariff alike that of Gimi. They are either fully integrated or a fixed tariff with commodity exposure, more alike Hilli, but even more exposed to, 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 a better economics in the project if you have some upside and downside sharing with the IOCs, or, or 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 de-risk such pricing movements in the paper market, and that's what we're targeting. In terms of.

Chris Tsung (Research Analyst)

Okay, interesting.

Karl Fredrik Staubo (CEO)

It depends from 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, 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 economics across the value chain as well. If that is to be the case, the resource certainly need to be big enough to charter the vessel for remaining life, whether it's Hilli or a Mark II.

Chris Tsung (Research Analyst)

Okay, great. Thank you. To confirm, the contract with BP for Gimi starts up in Q1 next year when the vessel arrives on site, or is it contingent on producing first time zero commissioning cargo? Just seeing what's going on from, like, you know, BP and Kosmos earnings calls.

Karl Fredrik Staubo (CEO)

When it comes to, to that project, I, I think Golar's focus is to deliver the FLNG and to deliver it safely on site into the hub. We are not taking risk or responsibility for other parts of the infrastructure. The contract mechanisms work so that there will be cash flow to Golar once we start or 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. We are not actively part of any other parts of the project than delivering the FLNG.

Chris Tsung (Research Analyst)

Yep. No, makes sense. Thanks. Thanks for that. I'll turn it over.

Operator (participant)

Thank you for your question. There are no further question. I will hand back the conference to Mr. Staubo for closing remarks.

Karl Fredrik Staubo (CEO)

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

Operator (participant)

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