Golar LNG Ltd

NASDAQ:GLNG

Earnings Call Transcript

[Operator]

Welcome to the Golar LNG Limited 4Q 2024 Presentation. After the slide presentation by CEO, Karl Fredrik-Staubo; and CFO, Eduardo Maranhao, there will be a question-and-answer session. [Operator Instructions]

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

[Karl Staubo, executive]

Thank you, operator, and welcome to Golar LNG's Q4 Earnings Results Presentation. My name is Karl Staubo. I'm the CEO of Golar LNG, and I'm accompanied today by our CFO, Eduardo Maranhao. We're happy to be dialing in from Buenos Aires, where we've been meeting with our coming partners for the FLNG Hilli. Before we get into the presentation, please note the forward-looking statements on Slide 2. We start at Slide 3 and an overview of Golar today. During the quarter, we finalized our transition into a pure FLNG company through the sale of Avenir LNG and Golar Arctic. The sale of Arctic marks the end of Golar's 50-year presence in the LNG shipping market. Our assets now include the Hilli, which is currently under a contract for Perenco offshore Cameroon until contract expiry in July 2026. Thereafter, the vessel will be redeployed here to Argentina for a 20-year contract, establishing Argentina as an LNG exporter.

The Gimi is currently under commissioning to start a 20-year contract for BP offshore Senegal and Mauritania. The LNG carrier, Fuji was delivered to CMC Raffles Shipyard in Yantai, China during the quarter, and the conversion of the Mark II FLNG is progressing according to schedule. Inclusive of the Hilli recontract here in Argentina, our EBITDA backlog stands at $11 billion before commodity exposure. We expect our backlog to continue to increase and provide further earnings visibility once the Mark II FLNG secure a long-term charter. Turning to Slide 4. We continue to focus on capital allocation towards FLNGs and agreed to acquire all remaining minority interest in the FLNG Hilli during the quarter. On Christmas Eve, we announced that we acquired approximately 8% of the total vessel capacity from Seatrium Shipyard and Black & Beach.

We paid $90 million for the shareholding, of which $30 million in assumed debt and $60 million of equity. The equity portion matches that of the sale of our noncore investments in Avenir LNG and the Golar Arctic. Both were sold with a total cash equity proceeds of $63 million. The transactions will have several positive contributions to Golar, including immediate cash flow accretion, increased earnings visibility through the backlog, reduced volatility of earnings due to the long-term infrastructure cash flow profile of FLNG projects versus more volatile and shorter-dated cash flows of LNG shipping. This is also an important exit from LNG shipping after 50 years of operations and a concentration on strengthening our market-leading FLNG presence.

That leads us to Slide 5, where we remain the largest FLNG owner and operator, controlling a total liquefaction capacity of 8.6 million tons per annum. Golar is the only proven provider of FLNG as a service, providing charters with natural gas liquefaction without requiring any ownership to the gas reserves. The advantage of this business model to our potential charterers includes time to market, outsourcing of engineering, no capital commitments to the charterer until they receive cash flow from production and access to Golar's market-leading operational uptime. We expect to continue our market-leading position and have engaged conversations with capable shipyards for fourth FLNG unit that we will seek to order once we have secured a charter for the Mark II under construction.

Turning to business update and the highlights of the quarter on Slide 7. Hilli continued its market-leading operational track record and has now delivered 128 cargoes since start-up in 2018. CP satisfaction for Hilli's re-contracting in Argentina is going according to schedule, and we expect all CPs to be fulfilled within the second quarter of this year. In January '25, we received the gas from the accelerated commissioning was replaced by feed gas from the BP-operated FPSO, which allow full commissioning to commence of the FLNG Gimi. This milestone triggered a final upward adjustment to the commissioning rate under the commercial reset. LNG is now being produced and subject to receipt of sufficient feed gas, we expect the first LNG cargo to be exported within Q1.

We thereafter assume the full commercial operations date to be triggered during the second quarter. This will formally mark the start of the 20-year lease and operating agreement that unlocks approximately $3 billion of EBITDA backlog, Golar's share. On the back of these developments, the contemplated refinancing of the FLNG Gimi is in the final stages, and Eduardo will elaborate on that later in the call. The Mark II FLNG under construction is progressing according to schedule, as mentioned. The key financial figures for the quarter include adjusted EBITDA of $241 million for the full year of '24. Our cash position stands at around $700 million, and we declared a dividend of $0.25 for the quarter. We see very strong momentum on commercial opportunities for our FLNG service offering, and we will elaborate on this later on in the presentation.

Turning to Slide 8. We're pleased with the continued economic uptime for Hilli. The vessel generated $277 million of EBITDA during 2024. As a result of acquiring the 8% remaining minority stakes in Hilli, we see immediate cash flow accretion driven by an increase in the fixed tariff component of approximately $7 million per year, an increase to the Brent-linked tariff component, which will increase by approximately $400,000 for every dollar the Brent is above $60 and an increase in the TTF-linked tariff component, which will increase by approximately $500,000 for every dollar of TTF price measured on an MMBtu basis. In addition to these immediate cash flow accretions, our EBITDA backlog will increase by approximately $0.5 billion on the back of the 20-year redeployment contract in Argentina.

Turning to Slide 9. Since we entered into the definitive agreement for the redeployment of Hilli in July last year, we have actively worked together with Pan American Energy to attract additional Argentinian gas resource owners to the project. We're pleased to see that 3 of the leading gas producers have now joined. Kampa Energia joined with a 20% shareholding, Harbour Energy with a 15% shareholding and YPF also with a 15% shareholding. The addition of these companies further strengthened the project and increased the credit quality of Southern Energy, which is our counterpart in the project. With Argentina's vast proven gas reserves and the level of interest for the project supports the economic solidity of establishing Argentina as an LNG exporter and thereby potential further FLNG deployments by Golar in Argentina.

As mentioned, the CP fulfillment is going according to schedule and the completion is expected within the second quarter of this year. Following the end of the current Perenco contract, vessel upgrades and relocation to Argentina, we expect operations here to commence in 2027. Turning to Slide 10 and an update on the Gimi. As you can see from the picture on the top left here, you can see Gimi to the right and then an LNG carrier to your left. Accelerated commissioning activities commenced in mid-October, utilizing a cargo from that LNG carrier. That gas stream was replaced during January with first fee gas received from the GTA field. This resulted in the final upward adjustment to the commissioning day rate ahead of final COD. The first LNG commissioning cargo is expected within this quarter and the full contract startup within Q2. Again, we're in the final stages of the contemplated refinancing of the vessel.

Turning to Slide 11 and a Mark II construction update. Again, as you can see from the pictures, the conversion is well underway and tracking according to schedule. The donor vessel, Fuji entered the shipyard on February 14 after completing its service as an LNG carrier. Several long lead items are now complete and delivered to the shipyard for installation onto the Fuji. The vessel will be the earliest available FLNG globally with delivery in end '27. To date, we've spent around $600 million in CapEx on the project, fully equity funded and the total CapEx budget is around $2.2 billion fully delivered to site. We're currently in advanced discussions for deployment of the vessel and expect to secure asset level debt on the vessel after a charter has been secured. We also have an option for further Mark II FLNG at CMC shipyard with delivery within '28 if we order in '25.

Turning to Slide 12 for an update on business development. Our position as the only proven service provider of FLNG globally, our market-leading CapEx per ton and proven operational uptime, combined with having the earliest available FLNG capacity globally continues to drive interest in our FLNG solutions. We see strong progress on FLNG commercial development. We continue to focus on FLNG opportunities where we have an attractive base tariff and commodity upside participation. So, we lock in a base and we participate when offtake prices increase. We're therefore focused on identifying projects that are competitive in the international Sea. We're in advanced commercial discussions for Mark II FLNG deployment, and we are also discussing projects with potential for multiple FLNG deployments. On the back of these developments, we have advanced discussions with shipyards for potential fourth FLNG unit development.

We, as previously disclosed, are not planning to order such vessel until we've secured a vessel for the Mark II, but we want to be ready to go with the fourth unit as soon as that's concluded. Turning to Slide 13 and the LNG market outlook. We continue to see strong demand for LNG globally. In the recently published Shell LNG outlook, the LNG demand forecast for 2040 has increased by 10% only since the 2024 report. Demand is driven by increased adoption of LNG globally, driven by LNG's favorable flexibility, environmental attributes and cost competitiveness. China today has more than 2 million LNG fuel trucks on the roads and LNG fuel trucks make up more than a 50% market share of new truck sales. We see further upside potential to LNG demand, subject to the relative price of LNG versus other fuels. This development calls for increased LNG production and the cost competitiveness for FLNG developments drive the strong demand that we currently see for our FLNG projects.

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

[Eduardo Maranhao, executive]

Thank you, Karl, and good morning, everyone. I'm pleased to provide an overview of Golar's financial performance for the fourth quarter of 2024. Moving to Slide 15. Let's go through some of the key financial highlights of the quarter. We achieved total operating revenues of $66 million with FLNG tariffs reaching $86 million in the quarter. Total FLNG tariff reached $350 million for the full year of 2024. We look at these 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 EBITDA reached $59 million in Q4, which is in line with the previous quarter. Total EBITDA for the full year of 2024 was $241 million. This quarter, we reported net income of $15 million. This figure is inclusive of a total of $29 million noncash items, such as adjustments in the value of embedded TTF and Brent derivatives within the Hilli contract, changes to our interest rate swaps and an impairment charge upon the sale of Golar Arctic.

Total net income for the full year of 2024 reached $81 million, a significant improvement from 2023. Our liquidity remains strong with approximately $700 million of cash on hand at quarter end. I'll talk more about this and our initiatives on the financing front in the next slide. Lastly, we are pleased to declare a dividend of $0.25 per share this quarter with a record date of March 11 and payments scheduled for March 18. Turning to Slide 16. Hilli continues to perform, achieving 100% economic uptime and reinforcing its market-leading operational track record. When we look at Q4, Hilli generated approximately $45 million in free cash flow to equity. Total free cash flow generation in 2024 was $170 million. Looking ahead, we expect to have a total debt service for 2025 of around $80 million on the asset level financing that we have on Hilli.

I would like to highlight that we remain exposed to both Brent and TTF prices. If these prices continue to improve in the coming quarters, we can expect to increase the distributions from the Hilli through the duration of its current contract until July 2026. Following the acquisition of the remaining shareholding of Hilli, we have also increased our exposure to TTF and Brent. And now for every dollar per barrel of Brent since or above prices of $60 per barrel, we generated $3.1 million of incremental EBITDA per year. Similarly, the sensitivity of TTF prices has also changed, and we now make $3.7 million for every dollar of TTF price movement on an annual basis. So, moving to Slide 17. You can see that our total gross debt position at the end of the quarter stood at $1.5 billion. When considering our cash position of $700 million, that leaves us with a net debt position of just over $800 million at year-end of last year.

So, following the execution of the 20 years agreement with Southern Energy, we now have a total EBITDA backlog of over $11 billion. This figure doesn't include any further commodity upside and also further inflation adjustments embedded in the contract. That leaves us with ample room to optimize our debt structure and potentially re-leverage our asset level financing for both Gimi, Hilli and soon to our Mark II vessel, which has been fully equity funded until now. We continue to be actively engaged in advanced discussions with potential lenders and credit approvals have been received for the refinancing of Gimi. The deal is now subject to customary closing conditions and third-party stakeholder approvals. Regarding the Mark II project, we have fully equity funded approximately $600 million to date. Both the Dona vessel and all related equipment that we have purchased are currently unencumbered, and we see room to secure asset level debt for this vessel once the charter is secured.

In this case, we would be targeting a financing amount that could equal approximately 4 to 6x its contracted EBITDA. So, with the robust backlog exceeding $11 billion from Gimi and Hilli, coupled with the potential for substantial liquidity release and ongoing discussions for additional debt financing, we see ourselves in a strong position to support our growth ambitions. We have the flexibility to optimize our capital structure, unlock further value and accelerate growth with the development of our FLNG fleet.

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

[Karl Staubo, executive]

Thanks, Eduardo. Turning to the final slide of the deck on Slide 19. In 2024, we saw several key milestones, and we're happy with the development of the company. Gimi arrived at the GTA hub in January. We agreed a commercial reset with BP. We signed definitive agreements for a 20-year charter with Southern Energy with an adjusted backlog of $6 billion before commodity upside. We issued $300 million of unsecured bonds in September. We FID’d the Mark II FLNG shortly thereafter. And we ended the year by acquiring the minority stakes in Hilli and selling noncore assets in Avenir and Golar Arctic. We have a very clear plan and want to maintain the momentum into '25. The first milestone is the refinancing of Gimi. We thereafter conclude the conditions precedent on the 20-year Southern Energy contract in Argentina.

We want then target to secure a charter for the Mark II FLNG under construction, target asset level financing of the Mark II and optimize the debt on Hilli, as I just explained by Eduardo, before targeting additional FLNG growth through a fourth FLNG order. That concludes the presentation today, and we will hand it over to the operator for any questions.

[Operator]

[Operator Instructions] We will now start with our first question, and this is from Ben Nolan from Stifel.

[Benjamin Nolan, analyst]

I wanted to first ask about the Mark II and specifically with respect to the fourth vessel, just trying to understand how you're thinking about the option versus looking at an alternative yard. And just wanted to make sure that I understand is would an alternative yard be instead of exercising the option? Or are we talking about a unit in addition to the option that you have?

[Karl Staubo, executive]

Ben, so basically, the way we see it is that the commercial developments are progressing on multiple fronts. And the reason for the comment that way is that some of those projects are for where Mark I would be more suitable, i.e., returning to order most likely than Seatrium. We obviously have the option for Mark II at CMC. And we're also progressing projects for the Mark III, which we've spent considerable time and effort developing, which is obviously a 5-million-ton unit, which would be by quite a long stretch, the largest FLNG in the world. And therefore, the fourth FLNG may or may not be the Mark II, but subject to the commercial development, either a Mark I or even a Mark III. That's how we see it. But we obviously are not ruling out that it could be a Mark II as well. It's just that the commercial development dictates the size of the fourth FLNG.

[Benjamin Nolan, analyst]

Sure. And it could be -- it's not mutually exclusive. You could do a Mark II and a Mark I just to a different shipyard. Is that sort of the implication there?

[Karl Staubo, executive]

Correct. But as we've alluded to earlier on, we don't plan to have more than one open, but you can obviously build against contracts.

[Benjamin Nolan, analyst]

Sure. Okay. That is very helpful color. The other thing I was curious about is on the Gemi. You show 2.7 million tons of capacity, although still the previous nameplate capacity, which I think was for your 70%, 151 million. But correct me if I'm wrong, I think that's only on 2.4, maybe 2.45 million tons of capacity. Can you maybe walk through how that extra bit works? And if it does operate at 2.7 million, is that something that you would be able to realize soon if there's upside on that?

[Eduardo Maranhao, executive]

So, I think the way it works is that for incremental production above the base capacity of 2.4 MTPA per year, we would then get a proportionate payment, which is in line with the $215 million annual EBITDA. So, for incremental production above the base capacity, that would go proportionate to the $215 million that we make every year. For the 90% utilization. Yes.

[Benjamin Nolan, analyst]

Right. And is that a practical assumption? How should we think about how we model it?

[Eduardo Maranhao, executive]

So, if you were to run the numbers here, so let's assume, for example, that we were to run with 100% utilization, so beyond the base capacity of 2.4 million. So, in that case, instead of a $215 million of annual EBITDA, we would be earning $241 million of annual EBITDA, assuming 100% utilization of the 2.7 MTPA nameplate capacity.

[Operator]

We'll now take our next question. This is from Chris Robertson from Deutsche Bank.

[Christopher Robertson, analyst]

I know in the past that you had talked a bit about having to spend on certain long lead items during Q1 to stay on track to exercise the option for the second Mark II. Could you just clarify whether or not you've spent during the first quarter to date or plan to for the rest of the quarter?

[Karl Staubo, executive]

We have not. It's something we continue to monitor. We're obviously in conversations with all of the critical suppliers given that we're ordering or just have placed order there for the Mark II. So, we monitor the situation both on lead times and costs. So, we currently do not expect to do that within Q1, but it's something we monitor very closely.

[Christopher Robertson, analyst]

Okay. And then turning to Slide 7. You made a comment here. I don't know if you addressed it during the prepared remarks, but it says on schedule for the Mark II FLNG contract commitment. Can you just clarify what you mean by on schedule and kind of give a bigger picture of what that means for expectations?

[Karl Staubo, executive]

I think what we've previously communicated that we target to charter the vessel within '25, and that's what that refers to. So that we have fix that ship within this year, which will then enable us for the fourth unit.

[Operator]

Our next question is from the line of Alexander Bidwell from Webber Research and Advisory.

[Alexander Bidwell, analyst]

So, on the fourth FLNG vessel, have you guys started identifying conversion candidates if you were to do a Mark I or Mark II? And what would be the time line for a conversion candidate acquisition?

[Karl Staubo, executive]

Yes. We have started. We've also inspected vessels. It's something we keep a close eye on. I think if you look at the LNG carrier market, the price of those, it's more downward pressure than upward pressure to put it that way. There are available vessels that would be suitable to our conversion ambitions. Some of them are direct sisters of the Fuji. Others have different characteristics that we may be beneficial. Given the price dynamics in the market, we don't feel a rush to do it, but it's something we keep a very close eye on.

[Operator]

The next question is from Greg Lewis from BTIG.

[Gregory Lewis, analyst]

Karl and Eduardo, I was hoping you could provide maybe a little color around Argentina. I know that it's been discussed that to kind of put a second unit there, some infrastructure needs to go in. And really, my question is around we roughly know that infrastructure needs to go in. Has there been like an official FEED study? As we kind of look forward, do we have -- are we starting to get real time lines of the project? Or is it something where we just know it needs to be done before they can increase their ability to export more natural gas?

[Karl Staubo, executive]

Greg, that's a very relevant question, obviously. So, for the benefit of everyone on the call, Hilli will utilize the spare capacity of the existing pipeline network in Argentina. If you go beyond the Hilli, you need a designated pipeline from the Vaca Muerte resource down to Sardinia gulf where the vessels will be placed. Late last year, there was an FID of an oil pipeline that goes exactly the same direction from the Vaca Muerte to the same site. That FID then creates the right of way to put the gas pipeline just next to it. The construction time line of a gas pipeline would be far shorter than the delivery window of the Mark II if that were to come to Argentina. So, the pipeline investment FID or FEED study is currently not a gating item for the start-up of a potential contract for Mark II in Argentina.

The fact that during the quarter, we saw 3 of the major gas producers in Argentina in Pampa, Harbor and YPF joining the Southern Energy project alongside Pan American, we see as a strong testimony to the economic attractiveness of establishing LNG Argentina as an LNG exporter. The details of the pipeline are something you need to ask the gas producers about. We are an FLNG company, and we provide FLNG infrastructure. That's our business. But we're obviously monitoring the developments. There is no pipeline without further liquefaction capacity, and there's no pipeline without volume commitments from the gas producers. So, it's also sort of codependent.

[Gregory Lewis, analyst]

Okay. Great. And then I'll just change gears here. And we're just kind of curious, obviously, you're looking at building the portfolio. I mean it seems like we have a good line of sight on a couple of new ones. You mentioned the ability to maybe go to Korea to build a larger FLNG. My question has been around, as the new administration has come into the U.S. and they want to be a massive -- they want to, I guess, increase their LNG exports, but of course, there's tariffs. Realizing usually when we're talking, we're talking about areas outside of North America for Golar solution. Has that kind of changed any of your conversations with any of your customers? Or is the natural gas market a global market and not really garnering much attention?

[Karl Staubo, executive]

It's obviously a focus. If you have someone saying that they're going to boost supply, it's obviously part of the discussions that we are taking part of in any discussion. That said, I think if you do increase production in the U.S., it will likely have an impact on the [indiscernible] over time. In addition to that, we see a significant inflationary pressure on the CapEx per ton, in particular for land-based solutions -- well, for any FLNG plant, but in particular, for land-based solutions in the U.S. So, the way we see it, it's something that's part of discussions, but all of the projects we are discussing for should be very competitive to LNG exports because of the cost of the gas elsewhere, our competitive CapEx per ton and the way we structure the contracts with a fixed base tariff to Golar and upside sharing. So, all in all, the projects will be competitive to any project out of the U.S., and it's not a massive driver.

We also see that off takers, i.e., the demand, are looking for diversified sources of LNG. Different places have different shipping advantages. And there's currently no outlet of significant LNG exports in South America. So, to develop local LNG consumption, there's a massive advantage to be closer to end users. And that's another thing that, for example, the Hilli project will bring to the market.

[Operator]

We'll now take our next question. This is from Petter Haugen from ABG Sundal Collier.

[Petter Haugen, analyst]

Firstly, on the other yards capable of building FLNGs, you're now writing about looking beyond Raffles. Could you shed some light on what the upside would be to go to another yard and to the extent that could take CapEx for a fourth unit down?

[Karl Staubo, executive]

As we said, we see inflationary pressure for all of the critical components for liquefaction. So, we don't expect prices to be any lower than we have secured for the Mark II under construction. To the contrary, there is inflationary pressure. We see that both on CapEx and on tolling rates. So at least they go hand in hand. So that's a good thing. For us, the decision is solely down to the commercial opportunities that we're currently in discussions with. So, we need to build the right vessel for the right opportunity.

[Petter Haugen, analyst]

Okay. Understood. And to sort of another element in this, there are, of course, great uncertainties on, well, the future energy markets at large. But perhaps it could be argued that a reversal of sanctions in Europe and potentially then also gas coming back to Europe from Russia could put downward pressure on sort of near-term and medium-term prices here. To sort of elevate the question to this, is there a global LNG price in which the FLNG business case is making more sense than in others? And more specifically, if we come to sort of an oversupplied gas market, to what extent would you find that to carry risk into FLNG units being delivered over the next couple of years?

[Karl Staubo, executive]

Needless to say, higher gas price is better. So, if you have higher revenue, it's obviously better for the project. That kind of goes without saying. As I alluded to in the previous question raised by Greg, we want all of the projects to be competitive to the marginal producers. The way we structure our contracts, we have a base tariff and commodity exposure or upside. So, for us, we try to lock in what we deem to be an attractive base tariff that secures the investment. And then over time, we then grasp the optionality of the LNG price development globally through the upside sharing. That creates alignment and obviously, potential excess profits for the investments we make. So, for us, it's all about making sure that the base tariff and thereby the cash breakeven of the export project is lower than for the incremental producers. We feel confident that the projects we are in today and that we're discussing for development have those characteristics.

And therefore, obviously, we would like to see higher gas prices, but that's not a criterion for our business model. What we do see, though, is that there is significant demand elasticity subject to the relative price of LNG versus other fuels. So, as you're aware, a very large part of new ships ordered are dual fuel. Many of them are currently not going on LNG. But the minute LNG is price competitive to, let's say, low sulfur fuel, there's a massive demand just there. We now see the same on trucking and many other industrial appliances of LNG. So, the price elasticity there. So over time, I don't think that one source of energy will price completely out of parity with the alternatives.

[Operator]

And we'll now take our next question. This is from Fredrik Dybwad from Fearnley Securities.

[Fredrik Dybwad, analyst]

Just are you able to provide some more further color on the prospective fields for the Mark II prospective contracts? By that, I mean, what kind of hallmarks do you look at and size of the fields, et cetera?

[Karl Staubo, executive]

Okay. So, we should have at least 4 Tcf of reserve and then sufficient gas flow to feed the FLNG. There are projects today where you have associated production or stranded reserves that can easily be deployed, the key gating item is obviously that the lead time of developing the resource needs to be at par, if not shorter than the delivery window of Mark II. That said, we think that there are significant or very strong opportunities alongside existing projects either we're in or will be in, in addition to new locations. There are several countries with significant stranded and flared reserves that are seeking to monetize those reserves. Fiscal regimes are now falling into place. So, we see the theme for FLNG development gaining traction, and we're obviously planning to take our share in that development.

[Operator]

And we have no other questions at this time. So, I will now hand the conference back to the speakers for any closing comments.

[Karl Staubo, executive]

Well, thanks for dialing in and for listening to us today. And we look forward to what the rest of '25 will bring and look forward to speak to you on the next quarterly presentation. Have a good day, and thank you all.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.