Golar LNG Limited: Interim results for the period ended 31 March 2021
May 20, 2021 at 07:18 AM EDT
NFE transactions closed, strong shipping rates despite seasonality, and gas prices supportive of upstream activities
The first quarter and subsequent months have been positive and eventful for Golar. With the announcement of the sale of Golar LNG Partners LP (“GMLP”) and Hygo Energy Transition Ltd. (“Hygo”) to New Fortress Energy (“NFE”) on January 13, and closing of the transactions on April 15, Golar has made significant progress simplifying its business, crystalizing the value of its asset portfolio, and strengthening its balance sheet.
We are encouraged by the strength of shipping rates during what is normally a seasonally weak period, with TFDE1 spot rates currently around $70,000 per day. The negative impact of potential EEXI regulations on the viability of up to 254 steam turbine carriers relative to a global on-the-water fleet of 597 vessels and a 130 vessel orderbook means that Golar’s longer term view of the shipping business has also materially improved. The few shipyards capable of building LNG carriers are filling with container newbuild orders and we do not see potential for significant new LNG carrier orders before 2024. Over the same timeframe LNG trade is expected to continue to grow by a 4% CAGR. This should allow for improved earnings from our carrier portfolio and create a supportive backdrop for this as a stand-alone business.
Current and forward energy prices are also strengthening, increasing the attractiveness of LNG upstream investments and our FLNG technology. We continue to pursue FLNG growth projects including both tolling arrangements and opportunities to develop hydrocarbon exposure through ownership of gas molecules suitable for production by our FLNG technology.
Finally, we are pleased to have appointed Mr. Karl Fredrik Staubo as CEO and Mr. Eduardo Maranhao as CFO. With their GMLP and Hygo backgrounds both have been intimately involved with the business for some time and will be familiar faces to Golar stakeholders, allowing for a seamless transition.
Q1 highlights and recent events
Based on fixtures to date and inclusive of an upward adjustment for loss of hire revenue expected in respect of an ongoing claim for one of the vessels, Golar currently expects a Q2 TFDE1 TCE1 of around $50,500 per day. The market outlook for shipping is improving on firming underlying LNG demand and higher prices. Ton miles are increasing, the likelihood of any summer 2021 cargo cancellations has been reduced, charterers seeking spot tonnage are facing competition from those looking for term charters, all of which are improving the rate outlook. Tighter emissions regulations expected from 2023 may also require slower steaming for a substantial portion of the existing fleet. The market strength can be illustrated by our recent fixture of a 1-year time charter at a level of return not seen in the LNG market since 2010/2011.
Golar will pursue opportunities to use its FLNG technology and unrivalled operational experience to increase its upstream exposure. Focus will be on investments into stranded gas assets or partnering with companies that have associated gas that can be liquefied using existing FLNG assets or a quick delivering, smaller and lower cost alternative. The target will be to enter into LNG off-take agreements sufficient to support financing requirements and retain remaining production for merchant sales. We will continue to pursue pure tolling projects with oil majors where the return is attractive. Our FLNG solutions out-compete almost all onshore facilities in terms of cost per ton, schedule, and carbon footprint.
On Hilli, dialogue with Perenco and SNH to increase throughput continues. Although drilling has not yet commenced, current plans to bring on incremental production from Q1 2022 remain likely. Golar has an economic interest in around 87% of any incremental earnings from increased throughput of train 3. In addition to the train 3 discussions, Hilli is expected to generate Brent Oil linked cash flows, in which Golar has an 89% economic interest, from Q2 2021. The contractual Brent Oil linked component of Hilli's currently contracted production generates incremental cashflows equivalent to approximately $3.0 million per annum for every dollar the Brent Oil price is above $60/barrel, up to an agreed but undisclosed ceiling.
Our FLNG segment has a contract earnings backlog1 of $3.4 billion (Golar's share), an unparalleled operational record and attractive growth prospects. In order to capture hidden value in this segment and to potentially accelerate FLNG growth projects we will consider partnerships at either a project, asset or business level.
Closing the sales of Hygo and GMLP to NFE represent significant steps toward simplifying the group structure, crystallizing value, and strengthening the balance sheet. With $149.9 million of unrestricted cash on hand as at March 31, 2021 and $130.8 million of cash proceeds subsequently received from the sales of Hygo and GMLP on April 15, Golar's balance sheet has been materially strengthened. Golar is now well positioned to meet its existing capital expenditure commitments and to fund attractive investment propositions, including continuation of its share buyback program.
The 18.6 million NFE shares valued at $780 million based on the closing price on May 19 create additional optionality. We see significant potential for the NFE business case driven by their strong growth, track record, and the solid platform NFE has built and acquired through the Hygo and GMLP acquisitions. Subject to the relative share prices of NFE and Golar, near-term growth initiatives, and the absolute share price of Golar, we intend to use the NFE shares for a combination of:
In terms of financial reporting, a gain on disposal1 of our equity investments in GMLP and Hygo will be recognized on April 15, 2021. The estimated book profit on the disposals is expected to be in excess of $650 million as of this date. Earnings from these two affiliates, previously impacted by BRL/USD FX changes, will cease to be recognized in the statement of operations from April 15, and our investments in them, classified as ‘held for sale’ on March 31, 2021, will be removed from the balance sheet. Thereafter, while NFE shares continue to be held and dividends declared, dividend income will be recorded in the statement of operations, as will mark-to-market changes in the value of the NFE shares held.
(1) The line item "Realized and unrealized gain /(loss) on oil derivative instrument" in the Condensed Consolidated Statements of Income/(Loss) relating to income from the Hilli Liquefaction Tolling Agreement is split into, "Realized gains on oil derivative instrument" and "Unrealized gain/(loss) on oil derivative instrument". The unrealized component represents a mark-to-market gain of $10.6 million (December 31, 2020: $5.7 million loss and March 31, 2020: $27.8 million loss) on the oil embedded derivative, which represents the estimate of expected receipts under the remainder of the Brent oil linked clause of the Hilli Liquefaction Tolling Agreement. The realized component amounts to $nil (December 31, 2020: $nil and March 31, 2020: $2.5 million gain) and represents the income in relation to the Hilli Liquefaction Tolling Agreement receivable in cash.
Golar reports today Q1 Adjusted EBITDA of $77.6 million compared to $78.0 million in Q4.
Total operating revenues increased from $118.7 million in Q4 to $125.8 million in Q1, partially mitigated by an increase in voyage, charter hire and commission expenses, from $5.8 million in Q4 to $7.5 million in Q1. Of the $7.1 million increase in total operating revenues, $12.1 million was attributable to an improved shipping performance. Partially offsetting this is reduced revenue from FLNG. Revenue from Hilli reverted to normalized levels in Q1 following the billing of 2019-2020 overproduction in Q4.
Revenue from shipping, net of voyage, charterhire and commission expenses was $55.5 million and increased by $10.6 million from $44.9 million in Q4. The quarter began with quoted TFDE1 carrier headline spot rates at around $160,000 per day and ended with rates at around $33,000 per day, in line with seasonal patterns. Full fleet TCE1 earnings increased from $48,800 in Q4 2020 to $61,700 in Q1 2021, in line with both prior guidance and Q1 2020.
Operating revenues from the Hilli, including base tolling fees and amortization of pre-acceptance amounts recognized, decreased from $62.5 million in Q4 to $54.4 million in Q1 as expected given the billing of 2019 and 2020 overproduction of $8.0 million in Q4. Any potential overproduction for 2021 will be billed in January 2022 and recognized in Q4, 2021.
A full quarter's costs in respect of the FSRU LNG Croatia, for which Golar receives management fee compensation, together with unscheduled repairs of the FSRU Golar Tundra contributed to a $4.5 million increase in vessel operating expenses from $26.2 million in Q4 to $30.7 million in Q1. Administrative and project development expenses decreased $0.2 million and $1.2 million to $8.4 million and $1.6 million respectively.
The mark-to-market fair value of the Hilli Brent oil link derivative asset increased by $10.6 million during the quarter, with a corresponding unrealized gain of the same amount recognized in the income statement. The fair value increase was driven by an upward movement in the expected future market price for Brent Oil. The spot price for Brent Oil increased from $51.80 per barrel on December 31, 2020 to $63.54 on March 31, 2021.
Depreciation and amortization, at $26.5 million was in line with the prior quarter.
Net Income Summary:
In Q1 the group generated $25.4 million of net income, compared to Q4 net income of $8.1 million. Key items contributing to this are:
Net losses attributable to non-controlling interests relate to the Hilli, the Gimi and the finance lease lessor VIEs.
Financing and Liquidity:
Our cash position as at March 31, 2021 was $298.9 million. This was made up of $149.9 million of unrestricted cash and $149.0 million of restricted cash. Restricted cash includes $54.1 million relating to lessor-owned VIEs and $75.9 million relating to the Hilli Letter of Credit, of which $15.2 million has been classified as short-term and is expected to be released to free cash in June.
After closing the sale of Hygo to NFE in April, our interest in NFE, valued at $780 million as of market close on May 19, replaces our interest in Hygo as security for the $100 million revolving credit facility.
Golar has agreed to make certain amendments to its sale and leaseback arrangements for four of its LNG carriers, the Golar Ice, Golar Kelvin, Golar Glacier and Golar Snow. These amendments include a prepayment of $60.0 million in July 2021, evenly split, across the four sale and leaseback facilities, increased daily debt service and a resulting accelerated lease profile on the Golar Ice and Golar Kelvin, and an obligation to repurchase the Golar Glacier and Golar Snow in April 2023. As a result of these changes we have agreed with the lease counterpart a net saving to Golar of a total of $42 million in combination of reduced remaining debt principal and remaining charter hire due under the remaining sale leaseback period.
Notable cash movements expected in Q2 2021 are summarized as follows:
Inclusive of $10.5 million of capitalized interest, $44.6 million was invested in FLNG Gimi during the quarter, taking the total Gimi asset under development balance as at March 31, 2021 to $702.8 million. Of this, $345.0 million had been drawn against the $700 million debt facility. Both the investment and debt drawn to date are reported on a 100% basis. Based on cash spent as at March 31, 2021, Golar's expected share of contributions to remaining conversion costs up to the point that commissioning hire becomes receivable in 2023 is approximately $164 million.
Included within the $1,354.9 million current portion of long-term debt and short-term debt as at March 31, is the December 2021 maturing $100.0 million credit facility, $387.7 million in respect of the February 2022 maturing convertible bond, and $851.9 million relating to lessor-owned VIE subsidiaries that Golar is required to consolidate in connection with nine sale and leaseback financed vessels, including the Hilli.
Corporate and Other Matters:
As at March 31, 2021, there were 110.1 million shares outstanding. There were also 1.7 million outstanding stock options with an average price of $23.33 and 0.7 million unvested restricted stock units awarded. Subsequent to the quarter end, 1.2 million shares were repurchased at a cost of $13.7 million. Of the initial $50 million approved share buyback scheme, $36.3 million remains available for further repurchases, which are considered attractive at current price levels.
On April 12, 2021 Iain Ross resigned from his position as Chief Executive Officer. Karl Fredrik Staubo has been appointed to replace Iain and assumed his role as CEO on May 13, 2021. Eduardo Maranhao, formerly CFO of Hygo, has been appointed to replace Karl as CFO.
Golar has also published its ESG report. Containing industry leading levels of disclosure, this report includes audited emissions data and long-term measurable reporting targets that will further aid Golar in fulfilling its commitment to be at the forefront of delivering LNG as an alternative to more emission-intensive fossil fuels.
In addition to disclosing financial results in accordance with U.S. generally accepted accounting principles (US GAAP), this earnings release and the associated investor presentation contains references to the non-GAAP financial measures which are included in the table below. We believe these non-GAAP financial measures provide investors with useful supplemental information about the financial performance of our business, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating our business and measuring our performance.
These non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP. Non-GAAP measures are not uniformly defined by all companies, and may not be comparable with similarly titled measures and disclosures used by other companies. The reconciliations from these results should be carefully evaluated.
Reconciliations - Performance Measures (Average Daily TCE Rate)
(1) The adjusted average daily TCE and adjusted fleet utilization for the period from October 1 to December 31, 2020, had we included the $2.7 million loss of hire insurance claim from Golar Ice, which is presented within Other operating income in the condensed consolidated statements of income/(loss), would have been $51,800 and 82% respectively.
Reconciliations - Liquidity Measures (Contractual Net Debt)
Reconciliations - Liquidity Measures (Contractual Debt)
Please see Appendix A for a capital repayment profile for Golar’s contractual debt.
In January 2021, following the board of directors' approvals of the GMLP and Hygo mergers with NFE, we determined that our share of the net earnings/(losses) in Golar Partners and Hygo and the respective carrying values of our investments have to be presented as profit/(loss) from discontinued operations and assets held for sale, respectively. Consequently, for the three months ended March 31, 2021, we ceased to consider Power as a reportable segment. Management has therefore concluded that we provide and operate three distinct reportable segments as follows:
Non-US GAAP Measures Used in Forecasting
Earnings Backlog: Earnings backlog represents the share of contracted fee income for executed contracts less forecasted operating expenses for these contracts. In calculating forecasted operating expenditure, management has assumed that where there is an Operating Services Agreement the amount receivable under the services agreement will cover the associated operating costs, therefore revenue from operating services agreements are excluded. For contracts, which do not have a separate Operating Services Agreement management has made an assumption about operating costs based on the current run rate. The only material application of this methodology was to the Hilli Earnings backlog where we assumed operating costs of approximately $144kpd.
Illustrative gain on disposals: Illustrative gains on disposals represents the accounting gain on the sale of the Partnership and Hygo to NFE. In calculating the illustrative gain on disposals, management had used NFE share price as of April 15, 2021 less the estimated carrying value of our investment in affiliates as of April 15, 2021 for the Partnership and Hygo. The carrying value of our equity investments is subject to change based on the underlying performance of these entities from January 1, 2021 to April 15, 2021.
Forward Looking Statements
As a result, you are cautioned not to rely on any forward-looking statements. Actual results may differ materially from those expressed or implied by such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise unless required by law.
May 20, 2021