Introduction to Golar LNG
Golar LNG is a $2.5bn market cap company focused on the LNG sector. It owns and operates FLNG (Floating Liquefaction Natural Gas) units and rent them to third parties (BP, Perenco…). It provides Golar with stable cash flows linked to long-term contracts. As a result of its recently finished simplification process, Golar also has ownership in other countries such as New Fortress Energy, Coolco, and Avenir,..
Currently, Golar has 1 FLNG in operation (Hilli) and another (Gimi) coming online in 2H23. However, the most interesting aspect of this company is the enormous interest that the market has in its FLNG units at this moment due to the energy crisis. Golar was a pioneer in this type of solution and it is expected to sign several FLNG projects in the next months.
The investment thesis of Golar LNG was published in August
Golar LNG 3Q22 Results
As expected, Golar LNG results have not surprised the market. As an infrastructure company, revenues and cash flows are quite predictable. Nevertheless, it has ownership of other companies (New Fortress Energy, Coolco, Avenir) and derivative contracts linked to Brent & TTF. Consequently, there are unrealised / realised earnings that can alter the results, as has just happened in 3Q22.
Also, as a legacy of its previous business, Golar still has a couple of vessels (FRSU Tundra and LNGC Artic) that are producing revenue for Golar until their sale is completed.
Regarding 3Q22 results, Revenues were $68MM, Adjusted EBITDA was $85MM and Net income was $141MM. We know that it is a weird setup. But FLNG Hilli has a bonus linked to the price of Brent and TTF which does not account for Revenues otherwise EBITDA (realised gain on derivative instruments). Moreover, unrealised gains due to derivatives & ownership of other companies go directly to Net income. The main responsible for the elevated net income was unrealised gains of the 12.4MM shares of NFE (30th Sept, after that Golar sold 6.3MM of them). Also, It is important to highlight that Hilli had the scheduled maintenance this quarter.
On the corporate side, Golar sold 8MM shares of Coolco and 6.3MM shares of NFE, raising $430MM. $GLNG also bought back 0.4MM shares (average price $23.25). Also, they cancelled the undrawn $200MM RCF Facility. Currently, they have a net cash position of around $0.5bn. There are no significant maturities until 2025. We understand that the current balance sheet will allow Golar to execute its FLNG ambitions. Furthermore, as soon as Gimi starts operations, it will be able to refinance it and obtain more financial flexibility.
Another relevant point from the 3Q22 press release was the fact that the LNGC Artic has secured a 12 months contract before its conversion to an FRSU (sold to an Italian company) and will obtain $16MM EBITDA.
Gimi (2º FLNG) construction is 90% completed and it is expected to start operations in 2H23. It will generate $151MM each of the next 20 years (inflation-adjusted)
Comments about the FLNGs prospects
The environment for FLNG growth has never been more favourable. The natural gas crisis that Europe is going through and expected to last for years is the trigger for the new wave of liquefaction capacity.
Golar has an advantageous position as it is a pioneer and world leader in FLNG solutions. It has Hilli working from 2018 and Gimi coming online in 2023. Moreover, Golar is working on three different models (Mark I, II & III), each with different liquefaction capacities.
Based on our previous conversation with IR, and our best understanding of the current situation, they are in advanced negotiations for 3 FLNG projects.
First, the Great Tortue phase II. It would be the same project that Gimi is starting in 2023 with BP and Kosmos. We expected this FID to be signed long ago. The latest information that we have is that it would be a Mark II model and FID arrive later this year/beginning of 2023. The FLNG would be operative at the end of 2026 / beginning of 2027. Probably, and based on our conversations, the contract would have a similar structure to the Gimi one.
Second, the integrated project. We believe that it can be the Fortuna project. Golar (30%) would partner with New Fortress Energy (30%), Kosmos (20%) and the Equatorial Guinean government (20%) to rescue the Fortuna project that it intended to launch in 2018 partnering with Schlumberger. We suspect that it would also be a Mark II and it is the reason they have ordered $300MM long-lead items to secure this vessel in 2025. We believe that this is the most interesting project for Golar. An integrated project would allow it to gain exposure not only to the tolling fees of the FLNG but also to the high natural gas prices. We would need to analyse the economics of the project when the information is published, but we think that the value for Golar can be north of $10 per share only in a Mark II integrated project (conditional to economics).
About the third one, we can only speculate based on the information Golar has published and news regarding potential projects for FLNGs. It should be one of the development agreements (independent E&P company as we believe that the order with a supermajor is BP) that Golar refers to in the 3Q22 results. However, if we had to guess, we would point out Energean as the company (independent E&P) and Cyprus as the location. As it is a small gas discovery, we believe they would use a Mark I design. Also, Chevron should take a decision soon about it using an FLNG for its Leviathan natural gas field in Israel.
Our thoughts about Golar LNG
We like a lot what we are reading and seeing from Golar in the last months. Obviously, we would love to have already the first FLNG FID announced. However, we are very positive about the prospects and we think they will materialise in 1-2 FLNG in the next 6-9 months.
The simplification process has been completed. They have disinvested the New Fortress and CoolCo stacks at good valuations. The Balance Sheet is very healthy and TTF hedges for 2023 and 2024 (at $50 mmBtu) entail that Golar will be printing money.
We are so optimistic about the next 12 months of Golar LNG that we are increasing our position again for the first time in 18 months (Since the CEO Substitution in April 2021). As we explained in the last quarterly letters, Golar was the main position of our portfolio and we started to reduce positions in the last months to invest in Kistos and other ideas we thought had more potential.
Patient is required to invest in Golar, as FLNG FID timings are a bit frustrating. However, the macroeconomic situation cannot be better, the balance sheet is healthy, the first steps are done and we believe that the time for Golar FLNG is just around the corner.
Note: We usually analyse the quarterly results of the companies in our portfolio, publish macroeconomic articles, investment thesis and quarterly letters about the evolution of the portfolio. You would help us a lot by sharing the article on other websites or social media
