Introduction

Golar is probably the company most known for the MORAM project and one of our best investments ever since our first acquisition on 15th May 2020 (with its entries, exits, derivatives…). Now that its transformation has finally concluded (it has sold two out of the three legs the company had), and its second major project has just arrived at the place where it will begin its 20-year contract, we believe it is the right time to re-evaluate the company, assess how to navigate the situation, and try to maximize the potential of the two outcomes that seem to be presenting themselves today: the signing of a new FLNG or the sale of the company to a third party.

Before we begin, and to provide context for those who have arrived in recent months, Golar LNG is a natural gas infrastructure company whose main business is FLNG, which, due to the costly construction process, are usually subject to stable long-term contracts. (FLNGs are a special type of ship that operates as an offshore LNG terminal, allowing access to gas reserves that would otherwise be inaccessible and producing LNG on the same ship),

The past three years have been quite eventful as, of the company’s three segments, two have been sold off.

  • The shipping segment, which was its core since 2014, was sold through an IPO in 2022 (the company is listed on the Nasdaq and Oslo exchanges under the name CoolCo), and they have already disposed of the 31% of shares they retained after the IPO process.

  • The downstream part, where they had a power plant in Brazil and were developing a pipeline of projects, was sold to New Fortress Energy (after a failed IPO under a rockstar name $Hygo).

There are still some loose assets left behind in the sales processes, minority interests in some companies (Avenir), and new ventures in the making like Macaw Energies (we review them in detail and evaluate in the asset section).

However, after the entire transformation process carried out in the last two years (which also included capital increases, force majeure in their main project, and the rise to the heavens and descent to the depths of the natural gas price), we find ourselves with a simplified company mostly focused on a single segment, with cash of more than seven hundred million, and two highly valued infrastructure assets in the market. On the other hand, they have not signed a new FLNG contract since 2018 not due to lack of opportunities but because of their greater demand in the pie to be shared.

Today, our goal is to analyse in detail the company we know best, conduct a comprehensive valuation of it – sharing its model, and explain our thoughts and strategy regarding the two outcomes we see as most likely today.

Business model

Golar operates in the LNG industry, which is poised to be a key sector in the economy for the next 20 years as natural gas has become the “transition fuel” when shifting from coal/oil to renewable energy. To transport this gas from one continent (producers – North America, Africa, ME & Oceania) to another (consumers – Europe, Asia & South America), it needs to be converted into LNG.

Within the LNG industry, Golar specializes in the necessary infrastructure (a special type of ship) to liquefy offshore natural gas and store it until another transport ship picks it up. The distinctive aspect of this process is that it allows access to offshore gas reserves that would otherwise be very costly or unfeasible to access due to the need to install a pipeline to transport the gas to the mainland, etc.

Additionally, a significant advantage of this technology is that by being located closer to demand areas (Europe / Asia / South America), the cost of the LNG conversion and delivery process is cheaper than the traditional onshore terminal in the United States, partly due to lower shipping costs. For example, taking the example of current project located in West Africa and sending LNG to Europe, the cost can be reduced from $9/MMBtu to $5 (compared to onshore US terminal).

FLNGs in the world

Golar has three types of designs for its FLNG:

  • Mark I design (Golar Gimi). It has 2.4 MTPA capacity and comes from the reconversion of an existing LNG carrier. Both the Golar Hilli and the Golar Gimi are of the Mark I design, so that concept is fully proven.

  • The Mark II design also comes from the conversion of an LNGC and has a liquefaction capacity of up to 3.5MTPA – This is the one Golar is set to build from the conversion of Fiji LNGC -. Capex required is around $550-600MM per MTPA, so total Capex around $2Bn – expected structure is $1.2MM debt & $800MM equity. It can be built in around 3 years.

  • Mark III has 5MPTA, it would take 4 years to be built and it is not a conversion of an existing vessel (Initially discussed for the second phase of Great Tortue, but later discarded. It would be designed for larger gas fields and 20-year contracts (due to construction costs).

Golar currently has two of these units, one in operation since 2018 and another in commissioning to start this year. Both contracts are unrelated and were signed in years when market conditions were very different. This is the problem delaying the signing of a third FLNG, as there are several alternatives under negotiation (they have been negotiating for years), but Golar is much more demanding now than it was with Gimi (both because it is a proven concept and it want to avoid Gimi economics in a new model).

Golar Hilli

Golar Hilli is a floating liquefied natural gas (FLNG) unit that was commissioned in 3Q18, being the second FLNG unit in the world. It has worked 100% uptime since then. Golar Hilli is located in Cameroon and its customers are Perenco and Cameroon’s national oil firm Société des Hydrocarbures (SNH). It’s current contract last until July 2026. It has four terminals and it is able to produce 2.4MTPA. Golar owns 94.55% of Terminals 1 and 2 and 89.1% of terminals 3 and 4.

Its contract is a little tricky, as it is contracted for only for 58% of its capacity (Terminals 1 and 2 at 100% plus 33% of the third one) and it receives a fixed $74MM EBITDA/year plus a Bonus of $2.7MM/dollar if the price of Brent is higher than $60 (capped at $100 Brent), plus $3.2MM/year times the average price of TTF in MMBtu (the TTF part is simplified as it only applies to the third terminal)

The key point here is that although it is a contract with a fixed price, there is significant upside if Brent is above $60 or if the TTF (European gas) rises (calculations and sensitivity analysis in the financial model section).

Despite being a very good contract if commodity prices are high, the fundamental issue is that it is only operating at 58% of its capacity because the gas field it is on is small. Therefore, the most likely option is for Hilli to be relocated to another location when its contract expires in just over 25 months – main assumption is Hilli’s new utilisation would rank anywhere between 2-2.2MPTA (85-90% utilisation). The relocation process would involve between 6 and 12 months of downtime, which would include the transportation legs to the new site and any potential vessel upgrades. CapEx could be anywhere from $50 million to $200 million depending on new location & contract.

Not a member... yet?