Interim Results for the Period Ended June 30, 2021
August 09, 2021 at 07:58 AM EDT
Golar reports Q2 Net income of $471.4 million, secured increased capacity utilization for Hilli and added further shipping earnings backlog1
Golar is pleased to announce the company's best ever quarterly net income of $471.4 million, inclusive of a gain on disposal of Hygo Energy Transition Limited and Golar LNG Partners LP to New Fortress Energy Inc (“NFE"), where we have recorded our NFE shareholding at $35.37/share. The gain on disposal proves that Golar is building shareholder value in our asset portfolio significantly in excess of book values. Golar will seek to continue to simplify its group structure to crystalize value.
On July 20, 2021 we concluded an agreement to increase capacity utilization for the FLNG Hilli Episeyo ("Hilli"), unlocking embedded value by utilizing more of Hilli’s 2.4 million tons of liquefaction capacity. Adding to our Brent oil exposure, the innovative TTF1 linked tolling fee for the incremental volumes delivers on our announced strategy to increase our upstream gas exposure. Based on TTF1 forward prices at the time of announcement and assuming Perenco exercise their option for an incremental 0.4 million tons/year from 2023-2026, the increase in capacity utilization will add around $113 million of incremental earnings backlog1 for Hilli on TTF1 forward curves, or $373 million if the August 6, 2021 spot TTF1 price is assumed to prevail over the same timeframe. The incremental capacity utilization will require no capital expenditure from Golar and minimal adjustments to operating costs, hence almost all cash generated from the increased utilization will be free cash flow1, of which Golar has an 86.9% economic interest. The increase in oil prices has also increased Golar’s earnings from Hilli through the Brent oil related tariff. Hilli is generating an incremental $3.0 million of Adjusted EBITDA for every US dollar the Brent oil price is above $60/ barrel, of which Golar has an 89.1% economic interest.
Further progress has been made on Golar’s announced initiative to increase its gas price exposure by using our FLNG technology to increase our presence upstream in the LNG value chain. We have expanded our upstream team and are currently exploring several fields already producing associated gas, as well as stranded gas opportunities.
On the tolling side of our FLNG business we continue to work with existing and prospective clients on attractive growth projects. These are significant infrastructure investments for our clients that require, amongst other prerequisites, regulatory approvals and supporting infrastructure. These, rather than construction of the FLNG itself, are often the key drivers of a project timeline. The increasing focus on ESG, where gas is seen as a cleaner energy source, together with current and forward commodity prices are however helping speed up upstream developments. Specific commercial and technical discussions have taken place with an existing client for use of a five million ton Golar Mark III new building design.
The shipping business also benefits from higher gas prices and regional price differences. Longer-term employment opportunities at attractive rates are now available. Golar recently fixed one of its vessels for five years. Having completed the sale of Hygo Energy Transition Limited ("Hygo") and Golar LNG Partners LP ("Golar Partners"), separating the shipping and FLNG businesses represents the final step in Golar’s group simplification process. The announced $102 million reduction in debt in return for an upfront payment of $60 million in respect of four ships, increasing LNG asset values, stronger rates, few publicly listed LNG shipping pure plays, increasing spot freight exposure, and longer-term structural factors increasingly support the attractiveness of shipping as a standalone business.
Golar expects a material improvement in cash generation over the next two years based on the strong trend seen in the LNG shipping market, the increased utilization of Hilli, the higher oil and gas price environment and the commencement of the Gimi contract in 2023. We see great opportunities to use Golar’s unique FLNG technology and operational track record to create significant shareholder value in the years to come. We believe that this momentum, which is underpinned by higher LNG prices, is fundamentally supported by LNGs role as a transition fuel, with its substantial environmental benefits in reducing CO2, SOX and NOX emissions versus coal and oil.
Q2 highlights and recent events
Financial and corporate:
The contractual Brent Oil linked component of Hilli's first 1.2 million tons of annual production generates incremental cashflows of approximately $3.0 million per annum for every dollar the Brent oil price is above $60/barrel, up to an agreed ceiling. This would generate an additional $34 million of annual realized gain on oil derivative instruments assuming the Brent oil price on August 6, 2021 is sustained. Together with the last 12-months of Adjusted EBITDA from FLNG Hilli tolling services and inclusive of the expected Adjusted EBITDA from the increased capacity utilization in 2022, FLNG Hilli’s consolidated 2022 earnings would be around $225 million, assuming current oil and gas prices and no changes to existing accounting treatment. Further upside to Hilli's earnings from 2023 can be expected should Perenco’s 2021 drilling campaign prove successful.
Golar's pro-rata earnings backlog1 from FLNG remains unchanged at $3.4 billion despite quarterly amortization. This does not include potential additional backlog associated with Perenco/SNH exercising their option to increase Hilli production from 2023.
We expect to make significant progress on new tolling arrangement FLNG projects as well as integrated gas projects over the next 6-12 months. The most promising integrated gas projects currently under review are in West Africa and would utilize a Mark I FLNG solution. For integrated projects we target a combination of fixed price off-take and merchant sales. Fixed price off-take will be used to secure attractive financing and reduce the break-even of remaining open capacity. The open capacity will then be sold on a merchant basis to take advantage of LNG commodity price volatility.
Based on fixtures to date Golar currently expects a Q3 TFDE1 TCE1 of around $47,000 per day. Seasonally strong LNG prices continue to be sustained by supply disruptions, a demand recovery in Asia, and strong demand in Europe where inventories remain historically low. As with LNG prices, vessel spot rates also remain counter-seasonally strong and one-year time charter rates remain above spot rates, signaling higher rates ahead. The term market is also expected to remain active however the lack of available ships in 2021 means that the focus has shifted to 2022. Most of the order book is now committed and charterers are increasingly focused on securing access to high quality vessels already on the water. Both rates and tenor are increasing. Golar expects to benefit as its exposure to this improved market increases. Most of the current contracts were fixed in 2020 when the market was softer than the current market and what we expect for 2022.
Compliance with recently approved environmental regulations from 2023 will mainly impact steam carriers that account for 254 of the 607 LNG carriers on the water. The most viable compliance option for those carriers is to slow down, however some may not be viable to trade at all. The current order book therefore looks increasingly inadequate. Shipyards are busy with significant ordering activity in other shipping classes and steel prices have also increased. Newbuild prices are rising as a result. Shipyards are reported to be quoting above $210 million for LNG newbuilds, up from $185-$190 million in recent years. Rising asset values should benefit Golar's TFDE fleet. Of the limited number of speculative carriers ordered in 2021, most originate from owners exercising pre-existing options at attractive prices before they expire. Shipping has in recent years contributed negatively to Golar’s results. Supported by recent long-term fixtures and the strong improvement in the underlying market, the Company now expects materially positive contributions to the Groups results from shipping over the years ahead.
With $1.0 billion of unrestricted cash and public securities on hand, Golar is well positioned to refinance its convertible bond, targeted during 2H 2021, and to fund FLNG growth ambitions. We have received and are currently evaluating attractive term sheets from key relationship banks totaling in excess of $500 million that can release at least $250 million of incremental liquidity. We will also remain sensitive to the absolute and relative share prices of Golar and NFE when considering refinancing alternatives and funding of growth projects. The carrying value of our NFE investment as of June 30, 2021 is equivalent to $35.37 per NFE share. Quarterly changes in the fair value of shares held will be recognized in net income under Other non-operating income/(losses).
Golar is, following the Hygo transaction, a 8.9% shareholder in NFE, and the lock-up on Golar’s shareholding in NFE expired on July 15. We are disappointed with the share price performance of NFE since we announced the Hygo and GMLP transactions on January 13. However, we expect to see strong earnings growth for NFE as their strategically important terminals ramp up LNG volumes, and their jack-up FLNG technology delivers. We continue to work constructively with NFE in our combined efforts to industrialize the FLNG concept.
Favorable market fundamentals across our business segments support the next step of the Golar group simplification process and we have re-engaged initiatives to separate our shipping and FLNG divisions.
(1) The line item "Realized and unrealized gain /(loss) on oil derivative instrument" in the Condensed Consolidated Statements of Operations 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 $70.6 million (March 31, 2021: $10.6 million gain and June 30, 2020: $11.8 million loss) on the embedded oil 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 $3.0 million (March 31, 2021: $nil and June 30, 2020: $nil) and represents the income in relation to the Hilli Liquefaction Tolling Agreement receivable in cash.
Golar reports today Q2 Adjusted EBITDA of $67.0 million compared to $77.6 million in Q1.
Total operating revenues decreased from $125.8 million in Q1 to $104.3 million in Q2, partially mitigated by a decrease in voyage, charter hire and commission expenses, from $7.5 million in Q1 to $2.2 million in Q2. Of the $21.5 million decrease in total operating revenues, $21.1 million was attributable to a seasonally weaker shipping performance.
Revenue from shipping, net of voyage, charterhire and commission expenses was $39.8 million and decreased by $15.7 million from $55.5 million in Q1. The quarter began with quoted TFDE1 carrier headline spot rates at around $33,000 per day and ended with rates at around $68,000 per day. Although commercial terms defied typical seasonal patterns by steadily improving as the quarter progressed, average spot rates were still lower than the seasonally stronger Q1 when they reached a record high. As a result, revenue from Golar’s spot and index-linked charters was lower than Q1. Full fleet TCE1 earnings excluding loss of hire revenue receivable decreased from $61,700 in Q1 to $43,700 in Q2 2021, in line with Q2 2020.
As a result of overproduction during the quarter, operating revenues from the Hilli, including base tolling fees and amortization of pre-acceptance amounts recognized, increased from $54.4 million in Q1 to $55.7 million in Q2.
Rising freight and logistics costs for supplies and crew contributed to a $0.7 million increase in vessel operating expenses from $30.7 million in Q1 to $31.4 million in Q2. Administrative expenses increased by $1.7 million to $10.1 million primarily as a result of one-off redundancy costs from an overhead streamlining exercise. Netting off previously incurred project costs associated with closing the Hygo and Golar Partners sales against the gain on their disposal resulted in $0.7 million of project development income in Q2.
The Brent Oil linked component of Hilli's fees generates additional annual operating cash flows of approximately $3.0 million for every dollar increase in Brent Crude prices between $60.00 per barrel and the contractual ceiling. Billing of this component is based on a three-month look-back at average Brent Crude prices. As a result of rising prices, a $3.0 million realized gain on the oil derivative instrument was recorded in Q2.
An ongoing loss of hire claim in respect of a previous mechanical failure on board one of the carriers accounts for the $2.8 million of shipping related Other operating income in Q2.
Net Income Summary:
In Q2 Golar generated $471.4 million of net income, compared to Q1 net income of $25.4 million.
Depreciation and amortization, at $26.5 million was in line with the prior quarter.
The mark-to-market fair value of the Hilli Brent oil linked derivative asset increased by $70.6 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 $63.54 per barrel on March 31, 2021 to $75.13 on June 30, 2021.
After netting off project costs associated with closing the sales of Hygo and Golar Partners to NFE and discounting for the effects of a six-month holding period restriction, net income from discontinued operations of $574.4 million was recognized on April 15. A decline in the NFE share price between April 15 and June 30 resulted in the subsequent recognition of an unrealized $86.7 million loss reflecting fair value adjustments, included in Other non-operating losses.
Golar has booked a provision of $73.3 million in Q2 through Other non-operating losses following progress in continuing discussions with UK tax authorities (“HMRC”) to move towards the settlement of a long-running tax dispute, as previously reported.
Both interest income and interest expense were in line with the prior quarter. A decrease in swap rates connected with the Gimi facility contributed to a $6.9 million loss on derivative instruments in Q2, compared to a $23.4 million gain in Q1.
Equity in net income of affiliates of $0.8 million is derived from Golar's 23% investment in small-scale services provider Avenir LNG, and 50% stake in Egyptian affiliate, ECGS.
On May 7 NFE declared a dividend of $0.10 per Class A Common Share with a record date of June 1. Dividend income of $1.9 million was therefore recognized in Q2 (included within Other non-operating losses), with the cash being received in early Q3.
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 June 30, 2021 was $338.5 million. This was made up of $207.3 million of unrestricted cash and $131.3 million of restricted cash. Restricted cash includes $51.2 million relating to lessor-owned VIEs and $60.7 million relating to the Hilli Letter of Credit ("LC"). Having operated with 100% commercial uptime since acceptance three years ago, Golar will now seek to secure the release of more of the $60.7 million LC ahead of schedule.
Prior to closing the NFE transactions Golar agreed to make certain amendments to the sale and leaseback arrangements for four of its LNG carriers, including a one off $60 million prepayment in July, evenly spread across those four vessels. In return for the prepayment, an increased daily debt service and a resulting accelerated lease profile on two of the vessels, and an obligation to repurchase the other two a year earlier in April 2023, the lease counterparty agreed a $42 million net saving to Golar resulting in a total reduction to Golar's remaining LNG carrier related debt principal of $102 million.
The $107.6 million Golar Tundra facility put option has been extended to January 2022 if the convertible bonds are not refinanced by that date, otherwise the put option matures in June 2022. Golar has also received indicative terms for an alternative refinancing of the Golar Tundra facility.
Inclusive of $9.8 million of capitalized interest, $128.9 million was invested in FLNG Gimi during the quarter, taking the total Gimi Asset under development balance as at June 30, 2021 to $831.5 million. Of this, $410.0 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 June 30, 2021, Golar's expected share of contributions to remaining conversion costs up to the point that commissioning hire becomes receivable in 2023 is approximately $125 million.
Included within the $1,323.1 million current portion of long-term debt and short-term debt as at June 30, 2021, is the December 2021 maturing $100.0 million credit facility, $391.8 million in respect of the February 2022 maturing convertible bond, and $815.1 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 June 30, 2021, there were 110.2 million shares outstanding inclusive of 1.9 million shares repurchased at a cost of $23.9 million. There were also 2.4 million outstanding stock options with an average price of $19.52 and 0.6 million unvested restricted stock units awarded. Subsequent to the quarter end, a further 0.1 million shares were repurchased at a cost of $0.6 million. The 2.0 million repurchased shares have since been repurposed, and the outstanding share count as of August 8, 2021 is 108.2 million. Of the initial $50 million approved share buyback scheme, $25.5 million remains available for further repurchases, which are considered particularly attractive at current price levels.
Golar’s Annual General Meeting will be held on August 10, 2021 in Bermuda. The record date for voting was June 16, 2021.
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 for our entire fleet and our TFDE fleet for the period from April 1 to June 30, 2021, 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 $46,700 and $48,500, 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 six months ended June 30, 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 is 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.
Free cash flow: Represents operating cash outflows remaining after funding maintenance and conversion of our vessels. In the case of Hilli T3, this is forecast by deducting incremental costs from incremental revenues as a result of producing an additional 200,000 tons of LNG in 2022 and 400,000 tons of LNG per annum between 2023 and the end of the current contract in 2026. Incremental revenues and costs assume that the charterer exercises their option to increase 2023-2026 production. The costs are primarily operating in nature whilst revenues are calculated with reference to the TTF forward prices as set out in the press release on July 20, 2021.
Forward Looking Statements
This press release contains forward-looking statements (as defined in Section 21E of the Securities Exchange Act of 1934, as amended) which reflects management’s current expectations, estimates and projections about its operations. All statements, other than statements of historical facts, that address activities and events that will, should, could or may occur in the future are forward-looking statements. Words such as “believe,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “plan,” “potential,” “will,” “may,” “should,” “expect,” “may,” “could,” “would,” “predict,” “propose,” “continue,” or the negative of these terms and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Unless legally required, Golar undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are:
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.
August 9, 2021
Stuart Buchanan - Head of Investor Relations