Golar LNG - Q3 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Golar LNG Limited Third Quarter 2024 Presentation. After the Slide presentation by CEO Karl Fredrik Staubo and 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 listen-only mode. I will pass you over to Karl Fredrik Staubo. Karl, please go ahead.

Karl Fredrik Staubo (CEO)

Thank you. Hello and good morning, and welcome to Golar LNG's Q3 2024 earnings results presentation. My name is Karl Fredrik Staubo, the CEO of Golar LNG, and I'm accompanied today by our CFO, Mr. Eduardo Maranhão, to present this quarter's results. Before we get into the presentation, please note the forward-looking statements on Slide 2. We start on Slide 3, and an overview of Golar. During Q3, we ordered our third FLNG, a Mark II FLNG with an annual liquefaction capacity of 3.5 million tons per annum. This represents a 70% increase to Golar's own liquefaction capacity, and the Mark II FLNG will deliver within 2027. This will be the first available FLNG for a charter globally. We will provide further information on the value proposition of the Mark II FLNG later in the presentation. We've also seen positive progress for our two existing FLNGs on the water.

Hilli continued her market-leading operational performance during the quarter, and positive progress has been made on the conditions precedent for her redeployment under a new 20-year charter in Argentina following the expiry of her existing contract in Cameroon ending in July 2026. During the quarter, we agreed a commercial reset of pre-COD contractual arrangements for the FLNG Gimi under her 20-year contract with BP. An accelerated commissioning has now started, and based on the latest schedule from BP, we anticipate the commercial operations date starting the full cash flow from the 20-year contract to occur in Q2 next year. We maintain two LNG carriers in the fleet. One is the Golar Arctic, which is our legacy asset that we consider for long-term charter or sale.

The second carrier, the Fuji, is currently on charter until Q1 2025, and following that charter, she will enter CIMC Raffles shipyard in China for conversion to the Mark II FLNG. Our financial investments include a 23.5% shareholding in Avenir LNG and Macaw Energies, which is a fully-owned Golar-founded startup focused on onshore flare-to-LNG liquefaction. Our key figures as of Q3 include a market cap of just around $4 billion, a cash position of just over $800 million, net debt of around $650 million, and an EBITDA backlog of approximately $11 billion, inclusive of the Pan American Energy contract in Argentina and excluding commodity exposures that we have in built in the Hilli contracts. Turning to Slide 4 and the key milestone of the quarter, the ordering of the Mark II. The Mark II represents the next phase of Golar's growth now as a pure-play FLNG company.

The Mark II will increase our own liquefaction capacity by 70%, with the potential to double our EBITDA generation at the project cost, which is approximately 50% of our current EV. So at the 50% increase, we can increase liquefaction capacity by 70% and EBITDA generation by 100%, so by definition, accretive. Total project cost for the FLNG conversion and delivery to her operational site will be approximately $2.2 billion, which equates to a market-leading cost of just over $600 million per ton of liquefaction capacity. Delivery of the vessel is expected in Q4 2027, and she will thereby be the first available FLNG capacity globally, delivering at least two to three years before any competitive FLNG deliveries could be available. The Mark II FLNG is an evolution of the same liquefaction technology as we have deployed on the Hilli and the Gimi.

The combination of the unit being the earliest available FLNG capacity in the world, our market-leading construction cost per ton, and building upon the technology that has delivered market-leading operational performance since we started FLNG operations in 2018, we believe these three factors will drive value to Golar in the contracting of the Mark II. We are currently in discussions with several potential FLNG opportunities for the vessel deployment and target to charter the vessel within 2025. As part of the yard agreements, we have secured an option for a second Mark II FLNG with delivery within 2028. Slide 5 provides an overview of the global FLNG fleet. Golar retains its position as the market leader for FLNGs, at par with ENI and Petronas in number of assets and market-leading by liquefaction capacity.

The most important takeaway from this overview is Golar's position as the only proven provider of FLNG as a service. The other existing FLNG players are focused on utilizing their floating liquefaction units for gasfield control or where they target to be the off-taker of the gas for their downstream LNG portfolio. Another important takeaway is that the FLNG market is growing. We now have four units under construction versus eight units on the water. The FLNG technology pioneered by Golar is now gaining acceptance in the market as the most economical technology to monetize stranded and associated gas reserves globally. Furthermore, the only open capacity of the total FLNG fleet is our recently ordered Mark II FLNG. As explained, this provides potential charters with gas monetization two to three years ahead versus ordering an alternative FLNG solution today.

This was made possible by our significant commitment to the engineering and placing long lead items in anticipation of this FID of approximately $300 million, which started more than 18 months ago. That's what enables the delivery within 27. Turning to Slide 6, we have laid out our growth ambitions based on our existing asset base and secured yard slots. We expect to see strong cash flow growth from organic growth through increased capacity utilization of our existing FLNGs on the water and through our Mark II growth units. The organic growth includes the startup of Gimi, expected to, well, she's already started accelerated commissioning now, but we expect first gas from the FPSO late Q4 and full operations in Q2 of next year.

The second phase of the organic growth is the increased capacity utilization of the Hilli when redeploying from her existing charter in Cameroon ending in July 2026 to the announced 20-year charter in Argentina with an estimated startup within 2027. Once on their 20-year charters, these two existing assets are estimated to generate an aggregate annual EBITDA of approximately $515 million before commodity exposure. Through the Mark II on order for delivery within 2027 and another option for a Mark II FLNG to potentially deliver within 2028, we see the potential to more than double our liquefaction capacity to more than 12 million tons per annum and triple our potential EBITDA generation.

Assuming that the Mark II FLNG is chartered on terms similar to the definitive agreements under the Pan American contract in Argentina entered into in July, each Mark II FLNG could generate approximately $500 million in EBITDA per year before commodity exposure. Hence, with Hilli and Gimi on their respective 20-year contracts and a Mark II on charter at similar terms, Golar could generate $1 billion of run rate EBITDA from 2028. If you add to that a second Mark II, we could see a run rate of $1.5 billion of run rate EBITDA by 2030. Turning to the business update and Slide 8. Hilli continued her market-leading operational track record and is currently offloading her cargo number 122 with more than eight million tons of LNG exported since contract startup in 2018.

As explained, Pan American Energy served as a reservation notice in October to utilize the FLNG Hilli for the 20-year definitive agreements with startup in 2027. We continue to make strong progress to fulfill the conditions precedent within these definitive agreements and expect all subjects to be lifted within Q1 of next year. A key milestone for the quarter was to conclude the commercial reset with BP, resolving all contract disagreements and aligning economic compensation for Gimi's arrival in country on January 10, 2024, until COD. This commercial reset also unlocks our target to refinance Gimi at improved terms versus the existing facility and to provide the liquidity release that we intend to utilize for our FLNG growth projects. On the back of the commercial reset, BP and Kosmos have secured an LNG cargo that enables accelerated commissioning while we wait to receive gas from the BP-owned FPSO.

Gas was introduced from the accelerated commissioning cargo to Gimi in October, starting the accelerated commissioning. As alluded to, the major milestone for the quarter was the ordering of the Mark II FLNG to be converted at CIMC Raffles Shipyard in China. We also secured an option for a second Mark II delivering in 2028 as long as we order within 2025. We see continued strong development of our FLNG growth pipeline led by activities in South America and West Africa. We expect to conclude a charter for the recently ordered Mark II FLNG within 2025. Q3 financial highlights include Adjusted EBITDA for the quarter of $59 million, unsecured bond issue of $300 million, and a cash position of over $800 million. Eduardo will provide further insight into this quarter's financial performance later on in the presentation.

Macaw Energies has now produced and sold its first ISO containers produced from flare gas in Texas, US, to industrial clients. We continue to fine-tune operations to adjust for the gas quality variability from associated US shale gas production. Turning to Slide 9 and the highlights of the Pan American Energy Charter in Argentina. In July, we entered into agreements for a 20-year LNG export project. In October, we received a reservation notice reserving the Hilli as the FLNG to be utilized under the 20-year definitive agreements. The annual Adjusted EBITDA based on the Hilli will be $300 million before commodity exposure. The project will utilize gas from the Vaca Muerta field onshore Argentina. The Vaca Muerta is the second largest shale gas discovery in the world with an estimated resource of around 300 TCF of gas.

The target startup is within 2027, which enables us to upgrade and hook up of the Hilli in between charters ending in July 2026 and startup in 2027. As part of the transaction, Golar will become a 10% shareholder in Southern Energy. Southern Energy will be the off-taker and gas marketing arm of the structure, and this will provide further commodity exposure in addition to the commodity element of the FLNG tariff. As explained, the charter is subject to customary closing conditions, including regulatory and environmental approvals. We continue to make strong progress in meeting these conditions, and we expect deal completion within the first quarter of next year. We're also, together with Pan American, in advanced discussions to bring additional local and international partners into the project to further enable potential expansion. The Hilli will initially utilize spare capacity in Argentina's existing pipeline network.

Work to construct a dedicated pipeline connecting the FLNG terminal directly to the Vaca Muerta shale formation has also been pursued. This could support a multi-FLNG vessel project in Argentina, including opportunities for the Mark II on order. Turning to Slide 10 and an operational overview of our two existing assets. Starting with Hilli, she continued her market-leading operational track record and is in the process of offloading cargo number 122. The existing contract with Perenco Offshore Cameroon runs until July 26, and the vessel will thereafter transit to the Pan American contract in Argentina with increased capacity utilization following a planned maintenance to enable 20-year continuous operations on site in Argentina. Gimi is on site and has started commissioning activities through an accelerated commissioning plan, and gas was now introduced in October. All of the ongoing commissioning activities are according to plan and design specifications.

Based on the latest guidance from BP, first gas from the BP-owned FPSO is now expected in Q4 this year and full COD in Q2 next year. COD, which is commencement of operations date, will be the start of the 20-year contract duration, starting Golar's share of the $3 billion of EBITDA backlog. Turning to Slide 11, we see strong positive progress for new FLNG opportunities. We continue to progress these opportunities, including commercial and technical work, mainly in the Americas, West Africa, Middle East, and Southeast Asia. As explained earlier in the presentation, we see the most active areas being South America and West Africa at the moment. Increasing project development is driven by Golar's position as the only proven provider of FLNG as a service, our market-leading operational performance, our competitive construction cost advantage, and the fact that we have the first available FLNG globally.

We remain encouraged by the relative attractiveness of these FLNG growth projects compared to alternative monetization solutions for gas resource owners and the cost competitiveness of these projects versus other LNG export projects out there, and again, we are targeting to fix the Mark II FLNG within 2025. I'll now hand the call over to Eduardo to present our Q3 results.

Eduardo Maranhão (CFO)

Thank you, Karl, and good morning, everyone. I'm pleased to provide an overview of Golar's financial performance for the third quarter of 2024. Moving to Slide 13, I would like to walk you through some of the key financial highlights for the quarter. We achieved total operating revenues of $65 million, with FLNG tariffs reaching $89 million, a slight increase from $88 million in Q2. This growth reflects higher realized variable earnings linked to Brent and TTF prices.

We consider FLNG tariffs to be the most accurate measure of all realized liquefaction revenues, including gains from our oil and gas linked fees from Hilli operations. Total adjusted EBITDA reached $59 million, remaining largely consistent with last quarter, despite the recognition of some pre-operational expenses associated with commissioning activities of Gimi as we progress towards COD. This quarter, we report a net loss of $35 million, primarily due to non-cash adjustments in the value of embedded TTF and Brent derivatives within the Hilli contract, reflecting lower oil and gas prices compared to Q2. These movements accounted for approximately $90 million. Additionally, mark-to-market changes in our interest rate swap portfolio impacted results by about $16 million. While these factors affected our quarterly results, we remain strategically well-positioned to benefit from future market improvements and continue to focus on building our strong long-term earnings backlog.

Following the issuance of our $300 million bonds in September, our share of contractual gross debt reached just under $1.5 billion at quarter end. Despite substantial commitments to the Mark II project, which has been fully equity funded until today, with around $400 million invested so far, our liquidity position remains robust, with approximately $807 million of cash on hand. Based on that, our net debt position at the end of the quarter stood at $646 million. This gives us significant flexibility to advance our growth initiatives and drive future value creation. Lastly, we're pleased to declare a dividend of $0.25 per share this quarter, with a record date of November 25 and payment scheduled for on or around December the 2nd. Turning to Slide 14, Hilli continued its exceptional performance, achieving 100% economic uptime and reinforcing its market-leading operational track record.

Here, we show the evolution of Hilli's EBITDA contribution over the last quarters. Q3 was an excellent quarter for Hilli, delivering a total EBITDA of just over $68 million, which includes $33 million from base tolling fees and approximately $35 million from variable realized Brent and TTF linked fees. I wanted to highlight that we remain positively exposed to Brent and TTF prices. So if these prices continue to improve in the coming quarters, we can expect increased distributions from Hilli through the duration of its current contract. Moving on to Slide 15, Hilli's operational track record has been outstanding. Since 2018, we have successfully produced over 8 million tons of LNG, delivering just over 122 cargoes as of today. On the right-hand side of the slide, we can see how commodity prices can impact our earnings from Hilli.

Based on forward Brent and TTF prices, Hilli is expected to generate an Adjusted EBITDA net to us of approximately $273 million this year and a total free cash flow of $185 million. Going forward, 2025's debt service, including principal amortization, is expected to come down to $80 million, resulting in a total free cash flow net to us of approximately $126 million from Hilli alone. Turning to Slide 16, this quarter we reached a significant milestone in our Gimi contract with the execution of the commercial reset with BP. This contract amendment settled all existing disputes and greatly simplified the contractual cash flows during the commissioning phase. We now expect to receive approximately $220 million in pre-COD compensation, inclusive of milestone bonuses, of which approximately $130 million will be invoiced in 2024. Of this amount, $78 million has been received in 2024 until today.

Thanks to this commercial reset, we're also able to advance the refinancing of the existing Gimi debt facility, potentially unlocking up to $500 million in liquidity to us, which I'll discuss further on the next slide. Our balance sheet remains strong, with ample flexibility to support our growth initiatives. After the $300 million bond issuance in September, we're well-positioned to manage our upcoming bond maturity next year, with no significant debt repayments expected beyond our asset-level debt until 2029. The significant existing backlog of $4.3 billion from Gimi supports further debt optimization beyond our current $700 million facility. We're actively engaged in advanced discussions with potential lenders and are making solid progress towards securing credit approvals and finalizing contract negotiations. Similarly, with Hilli's backlog approaching $7 billion, we see a strong potential to unlock significant liquidity from it.

Currently, the asset-level debt stands at approximately $570 million, providing us with also ample room for optimization. When we look at the Mark II project, we have fully equity funded approximately $400 million today. We have also received indicative financing terms for around $1.2 billion of asset-level debt for the Mark II. However, we believe that once a charter is secured, we're confident in our ability to raise a significantly larger amount at even improved terms, potentially targeting a financing amount equal to four to six times its contracted EBITDA. So in summary, our strong backlog of over $11 billion from Gimi and Hilli, combined with the potential for significant liquidity release based on ongoing discussions for additional debt financing, gives us significant financial flexibility. This positions ourselves very well to optimize our capital structure and continue to support our growth initiatives moving forward.

With that, I'll hand the call over to Karl for his closing remarks.

Karl Fredrik Staubo (CEO)

Thanks, Eduardo. Turning to Slide 19 and some of the key milestones for 2024 and our focus for 2025. So this year has seen some major milestones in the development of Golar. We delivered our second FLNG unit to BP Offshore Mauritania and Senegal in January this year. As the project was not ready to start sending us gas at that time, we entered into negotiations with BP to agree on a commercial reset of pre-COD contractual arrangements. We're pleased to say that that reset was met in August with the benefits that Eduardo just explained. In July, we reached another key milestone for the company in signing definitive agreements for a 20-year charter with Pan American Energy in Argentina.

In light of the recently received reservation notice, this will utilize Hilli with an Adjusted EBITDA backlog of $6 billion before commodity exposure. In September, we issued a $300 million unsecured bond, and just after, we FID'd our third FLNG, the Mark II FLNG with a 3.5 MTPA capacity. Our action list or focus for 2025 is to refinance the Gimi, as just explained by Eduardo, to conclude the conditions precedent under the 20-year contract with Pan American, to secure a charter for the Mark II FLNG, and thereafter secure asset-level financing for the vessel. Once that is locked in, we are planning to execute on our option for a second Mark II to provide further FLNG growth, turning to Slide 20, the last slide of the presentation, and to explain what this could mean in numbers.

Based on our target to secure a charter for the Mark II on order, Golar could double our FLNG earnings and EBITDA backlog within the next year. Based on the 20-year contract in place for Gimi for BP and Hilli for Pan American, we have an EBITDA backlog standing at approximately $11 billion before commodity exposure today. If we assume a Mark II contract at similar terms to the Hilli contract entered into in July, we could see the EBITDA backlog increase to over $20 billion before commodity exposure. Again, we're targeting to secure such a contract within 2025. Due to the strong balance sheet and financial flexibility, this cash flow and backlog growth is feasible while maintaining shareholder returns that we already have in place and continue to increase them as we de-risk the backlog and continue to get units on stream.

There's further upside to the backlog from commodity-linked earnings, and that will then be an add-on to the overall earnings we see. Each Mark II unit has a potential to add around $500 million of annual Adjusted EBITDA based on contracts at same terms as the recently entered into Argentina contract. We have secured an option for a second Mark II with delivery in 2028, which then would more than double our capacity to 12 MTPA run rate. That concludes the prepared remarks for our Q3 presentation. I'll now hand the call over to the operator for any questions. Thank you.

Operator (participant)

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for a name to be announced. To withdraw a question, please press star one, one again.

To ensure everyone has the opportunity to ask a question today, please limit yourself just to two questions. Please stand by while we'll compile the Q&A roster. This will take a few moments. Now we're going to take the first question. It comes from the line of Ben Nolan from Stifel. Your line, is it open? Please ask a question.

Ben Nolan (Managing Director and Senior Equity Research Analyst)

Great. Thanks. I appreciate you guys having me. I wanted to, for my first question, I wanted to just dig in a little bit on what's happening in Argentina, if you could. Specifically, it sounds like the Hilli is definitively going, and there's not really an option to move it elsewhere, just to clarify that. But then also, there's been a lot of movement between Pan American and YPF and various projects.

Can you maybe just sort of level set how you see the Argentina LNG development playing out from your perspective?

Karl Fredrik Staubo (CEO)

Yeah, hi Ben. So as we explained, the Vaca Muerta is the second largest shale discovery in the world with 300 TCF. Local consumption in Argentina is around one TCF a year. So there's plenty of capacity to provide for export, and the 300 TCF are currently hostage to the Argentine domestic market. In light of the new government in place, there's now a strong drive to enable LNG exports. You're right that there's a lot of different talks in terms of how big, who should lead it, and so forth. What seems to be clear to everybody is that the Pan American contract utilizing Hilli will be the first outlet for Argentine LNG exports.

As explained earlier in the presentation, both Pan American and Golar would welcome other Vaca Muerta gas resource owners to partake in the project to give further gas supplies, but also to provide for FLNG growth. We also think that if we were to source the Mark II on order, that would be the second fastest available liquefaction capacity to Argentina, only beaten by Hilli. So if they are true to the ramp-up of their ambitions of export, both of those assets could see a home in Argentina. But first and foremost, Hilli is now locked in through the reservation notice received in October.

Ben Nolan (Managing Director and Senior Equity Research Analyst)

Okay. And there's no option for that to move somewhere else, correct?

Karl Fredrik Staubo (CEO)

That's correct. The reservation notice has been given.

Ben Nolan (Managing Director and Senior Equity Research Analyst)

My second question maybe is for Eduardo.

You are talking about, well, first of all, continuing to progress on the refinancing of the Gimi that would bring cash out. And then you're talking about potentially after getting a contract on the Mark II, being able to finance more than you're paying for it, really. Maybe could you talk to your capital allocation thinking? If you are able to do those, then you're going to have a whole lot more cash coming in than is going out. How are you thinking about sort of what's the right thing to do with that capital? How do you see it playing out?

Eduardo Maranhão (CFO)

Yeah. Hi Ben. So I think just starting with the first point here. So when you look at the Gimi refinancing, you're right. We're making further progress on the proposed refinancing that we have been discussing for the last quarter.

Right now, we are targeting at $1.4 billion of total financing, and we are in advanced discussions with potential lenders. When we look at the Mark II financing, and I think the statement we made on the presentation of between four to six times the contracted EBITDA, I think this is largely driven by the reference or the data points that we have on the current Gimi financing. So if we're targeting $1.4 billion based on a $215 million EBITDA, I think that falls within that range. And we believe that once we have a charter in place for the Mark II, we could be in a position to reach such amounts. We also have received, as we also stated on the presentation, indicative terms for a proposed $1.2 billion asset-level financing for the Mark II. However, this financing would be based on the situation as is.

So, basically, on a situation without a contract. So, we believe that once we secure a charter, we could be in a position to also significantly improve the commercial terms of that facility. And, I think, the last point with regards to capital allocation. I think Karl touched on that one during the presentation as well. We have plans to maintain our dividend policy as we have today, and we expect to further increase the dividend payments as soon as we de-risk our existing projects. So, we are progressing with the commissioning of Gimi, and as soon as we reach COD or around that time, we could be in a position to further increase our dividend payments. And, I think, our ambition is to further grow our FLNG portfolio.

Karl Fredrik Staubo (CEO)

So we have an option to further develop a second Mark II, which I think provided that we have visibility on earnings of that contract and we continue to execute on our commercial strategy, we would have the financial ability to take on that project.

Ben Nolan (Managing Director and Senior Equity Research Analyst)

All right. I appreciate it. Thank you.

Operator (participant)

Thank you. Now we're going to take our next question. And the question comes from call from Chris Robertson from Deutsche Bank. Your line is open. Please ask your question.

Chris Robertson (Equity Research Analyst)

Thank you, operator. And good morning and good afternoon, Karl and Eduardo.

Karl Fredrik Staubo (CEO)

Hi, Chris.

Chris Robertson (Equity Research Analyst)

Hi, guys. I was wondering if you could speak a little bit more on the option you have for a second Mark II at the CIMC Raffles yard.

I think at one point you had communicated that the option had an expiry at the end of the first quarter, but it now sounds like you have some greater flexibility there, which is good. So I guess, could you talk around when that particular option expires? Is it just throughout the full year of 2025 and a little bit more around what exactly you would need in place to move ahead with a conversion of a second Mark II asset?

Karl Fredrik Staubo (CEO)

Yeah. Hi, Chris. So you're right. I understand what you're referencing when you say Q1. So what we did say at that point in time is that in order to meet the '28 delivery, the critical item is some of the long lead items.

Similar to what we saw we do on the first Mark I is that we started committing to some long lead items before FIDing the project. This is just for us a little bit of cautiousness in terms of securing an attractive delivery slot without taking on the full risk of the EPC before we've secured a charter on the first Mark II. There is more flexibility in terms of the EPC contract with the shipyard than Q1, but you do want to see some commitment on long lead items starting within Q1. That's really the gating item.

Obviously, when you're a repeat buyer of the same equipment because we're building two units or could be building two units in relative parallel, there are some advantages with the equipment suppliers as well in terms of lead times versus what we received when we did the first Mark I. So obviously, always easier to be a repeat customer than a new customer. But within Q1, we should make some long lead commitments. And I think in terms of the EPC contract itself, we have more flexibility than the Q1.

Chris Robertson (Equity Research Analyst)

Okay. Great. That's helpful. And then my second question, just turning to the Tortue II project for a moment. I believe BP and Kosmos were evaluating other types of LNG technology beyond FLNG for the phase two development.

Just given the recent commercial reset and the possibility that a second Mark II asset could be available by 2028 and could potentially fit into that phase two ambition, are you guys in discussions at all with the Tor II partners around potentially taking an FLNG asset as opposed to some of the other technologies that they were considering at one point?

Karl Fredrik Staubo (CEO)

We normally don't comment on specific projects like that other than when we've signed contracts that have been made public. The only thing I'd say is that for the first phase, Kosmos and BP found FLNG to be the most economical and best viable way of monetizing that unit. Since then, I think the FLNG market has proven to become even more of an industry standard, and more people like BP and Kosmos have found FLNG to be the best way of monetizing gas reserves.

Certainly, many of the neighboring countries in West Africa are utilizing FLNG technology. So I would think it's very natural that FLNG is at least one of the options they consider, and there are benefits in utilizing the same operator, of course. And there's many synergies, both in terms of offloading, crewing, spare parts, and so forth. But in terms of SPA discussions, we're not disclosing anything unless our counterparts do.

Chris Robertson (Equity Research Analyst)

Sure. I appreciate that, and I appreciate the commentary. I'll turn it over.

Karl Fredrik Staubo (CEO)

Thanks, Chris.

Operator (participant)

Thank you. Now we're going to take our next question. And the next question comes from the line of Kristoffer Barth Skeie from Arctic Securities. Your line, is it open? Please ask your question.

Kristoffer Barth Skeie (Equity Research Analyst)

Hello, Karl. Thank you for taking my question. Can you comment, please comment a bit on the 10% stake in Southern Energy?

What should we expect in terms of CapEx here going forward and if the CapEx element, if that's a thing, proportionate with the ownership stake? And additionally, what is a fair CapEx assumption for Hilli between the existing parental contract and the contract with Pan American Energy? I assume there's a cost element associated with upgrades and movement there. Thanks.

Karl Fredrik Staubo (CEO)

Yeah. Hi, Kris. So I'll take the first part, and then you can add on the second leg. But the cost element on redeployment, what we're saying is that you need to disconnect in Cameroon. You then need to physically travel to a shipyard that needs to do overhaul work to provide for 20-year continuous operation and then sail to Argentina to connect. So what we currently estimate is $200-$300 million for the total voyage. That includes bunkering, crew, tug, and FLNG upgrading work.

So that's the all-in cost of moving is $200-$300 million. On the South American logistics, Eduardo, do you want to cover that one?

Eduardo Maranhão (CFO)

Yeah, sure. So when it comes to Southern Energy, based on our 10% stake, we have entered as part of the definitive agreements into the final forms of the joint venture agreements with Pan American Energy, which stated an indicative budget for the project. That budget is still subject to further review. But as of today, we estimate an amount between $50-$100 million of CapEx commitments, which would be attributable to us.

Kristoffer Barth Skeie (Equity Research Analyst)

Okay. Thanks a lot.

Operator (participant)

Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Alexander Bidwell from Webber Research & Advisory. Alexander, your line, is it open? Please ask your question. Excuse me. Alexander, your line, is it open?

Please ask your question.

Alexander Bidwell (Associate Analyst)

Good afternoon. Thanks for the time. So taking a look at Mark III, where do plans sit for that new build unit? And is there a particular driver that would lead you to select a Mark III over a Mark II?

Yeah. Hi, Alexander. So when it comes to the Mark III, that's a 5 million tons per annum unit. And as you correctly point out, it's a new build from scratch and not a vessel conversion. Hence, it has a longer construction time, a higher CapEx per ton, and it's obviously a very large capacity. Hence, we are unlikely to order a Mark III on speculation. We would only do that against a firm contract.

There are currently no immediate plans to FID such a unit for the reasons just mentioned that it's expensive, takes longer, and based on the yard capacity of the shipyard we would utilize, would likely deliver at the very end of the 2020s, so late 2029, early 2030, if ordered today. We see a better value proposition in going for the Mark II. The thing that would change that is if we do a back-to-back contract for the Mark III that we deem to be attractive.

All right. Thank you for the additional color there. For my second question, looking at Macaw, back in Q1, you mentioned you guys would evaluate a separate listing sometime towards the end of 2024. Where do plans with Macaw stand right now, and is a listing in the cards for 2025?

Karl Fredrik Staubo (CEO)

Yes, you're right.

But as these things go, there's always some tweaking to the design when you go from the design phase to live hydrocarbon testing. As we explained in the presentation, the unit has now sold its first ISO containers from Flare Gas production, but we are tweaking the unit to better deal with the significant intraday changes in gas quality flows from U.S. shale gas. And once we feel that that's in a more stable territory, we will revisit the thoughts of a separate listing or a business separation of that unit. And that is now a 2025 event, but we have had industrial interests that have been on site to inspect the unit and the technology and express an interest in continuing to or to gain exposure to the technology and Macaw as a business. So that's an alternative to a separate listing.

Alexander Bidwell (Associate Analyst)

All right. Thank you. I'll turn it back over.

Karl Fredrik Staubo (CEO)

Thank you.

Operator (participant)

Thank you. Dear participants, as a reminder, if you wish to ask a question today, please press star 11 on your telephone keypad. And now we're going to take our next question. And the question comes from Liam Burke from B. Riley Financial. Liam, is it open? Please ask your question.

Liam Burke (Managing Director)

Yeah. Thank you. Hi, Karl. Hi, Eduardo. How are you? Well, thanks. How are you? I'm good. Thank you. You've got the second Mark II slated for 2028. What does the backlog of potential credible inquiries look like? And to give you a sense as to what the cadence would be as you roll out further FLNGs?

Karl Fredrik Staubo (CEO)

There's plenty of stranded gas reserves in the world, and I think several of the projects we're in discussions for is for more than one unit, including the discussions we've been having in Argentina.

Some of these reserves, it's just a matter of getting to first gas, and once you do, you can see expansion. That's true for BP's plans on the Tortue field, whether it's an FLNG or not for the expansion plans. It's true in Argentina and in several other locations that we're currently in discussions for. I think in addition to new developments, which there are plenty of, there's also expansion of existing that we see as the biggest potential. As alluded to earlier on one of the previous questions here, there are some operational synergies that have a real cost advantage to the gas resource owner if you put more than one unit in relative proximity.

When it comes to the marine, offloading, crew boats, tug boats, spare parts, and so forth, that equates to a real saving on a $1 per MMBTU basis, which makes the FLNG alternative even more competitive, so we think that the fact that there are more people now looking into FLNG and the design and operational track record are growing in acceptance is one that we find to support our growth ambitions and also the fact that we're constructing this at around half the cost of where you see incremental capacity being brought on stream in the US.

Liam Burke (Managing Director)

Okay, and just touching on an earlier question, have those inquiries been, I mean, are there enough for greater capacity than the three and a half MTPA?

Karl Fredrik Staubo (CEO)

Yes. It really depends on two things: the size of the reserve and the flow, the gas flow.

The GTA project, phase one was originally scheduled to be 10 MTPA. The Gimi is just around 2.5 of production. Then theoretically, there's plenty of capacity there. In Vaca Muerta, we're talking or YPF and LNG Argentina are talking about 15-20 MTPA. You have several fields like these not several fields like Vaca Muerta, but several fields like the GTA around the world. Sort of 25 to 30 TCF that supports easily a 10 MTPA of annual production. The answer is yes.

Liam Burke (Managing Director)

Okay. Thank you, Karl.

Operator (participant)

Thank you. Now we're going to take our last question for today. The question comes from the line of Sherif Elmaghrabi from BTIG. Your line is open. Please ask your question.

Sherif Elmaghrabi (Equity Research Analyst)

Hi. Thanks for taking my questions. First, in the summer, you signed an FLNG agreement with NNPC.

Can you just give us an update on how that conversation is going? And are you still thinking we could see a Nigerian LNG project sanctioned by year-end?

Karl Fredrik Staubo (CEO)

So you're right that we signed the development agreement with NNPC, and the target in the project development agreement was by year-end. That seems less likely to us that the Nigerian projects will move forward within this year, mainly because I don't think they have right now a project that's suitable for the FLNGs available. But there's certainly enough reserves in Nigeria and under NNPC's control that they could utilize a Mark II. But to see that happen within 2024, we see as unlikely. But they are one of the contenders when we say that we think we'll have the unit contracted within 2025.

Sherif Elmaghrabi (Equity Research Analyst)

Got it.

Then, thinking about other contenders, back to Argentina, what needs to happen to get the land-based infrastructure up to speed to handle a second FLNG unit? And more importantly, do you have a sense of how long that might take?

Karl Fredrik Staubo (CEO)

What you need is a designated pipeline because Hilli is utilizing spare capacity in the existing network, but it's not sufficient spare capacity in the existing network to go beyond Hilli. If you want to expand beyond that, there needs to be a designated pipeline from Vaca Muerta to the FLNG location. Work on such pipeline has started. We estimate, together with the local pipeline companies, a construction time of around two years. The plan would be to make the pipeline alongside an existing oil pipeline that's currently under completion.

So right of way and the actual location of the pipeline has been identified, and it's a matter of getting financing and FIDing it. It's a bit of a chicken and the egg situation because there's no pipeline without incremental FLNGs, and there's no incremental FLNGs without the pipeline. So they need to be developed in tandem, but it takes shorter time to construct a pipeline than the FLNG.

Sherif Elmaghrabi (Equity Research Analyst)

Okay. That's very helpful. Thanks for taking my questions.

Operator (participant)

Thank you. The speakers are done with the questions for today. I would now like to hand the conference over to Karl Fredrik Staubo for any conclusion. Thank you.

Karl Fredrik Staubo (CEO)

Well, thank you all for dialing in. It's been a very eventful quarter. We're very pleased with the development, and I think we have a very clear focus for the year ahead. We are working hard to execute.

Thanks for dialing in and listening to where we are, and we look forward to talking to you next quarter. Thanks again, and have a good day.

Operator (participant)

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.