Golar LNG – $GLNG Investment thesis

Golar LNG Assets

Hilli Episeyo: It is a Floating Liquefied Natural Gas vessel producing for Perenco in Cameroon. It has a contract until the 3Q26 for 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. Hilli is not fully utilised (now there are only 2 terminals out of for plus a 33% of the third one – out of for with 2.4MTPA total capacity). However, apart from the Brent Bonus, it has the 33% of the T3 (0.2MTPA) linked to TTF prices Namely, at current prices (TTF=200€/MWh and Brent = $95) Hilli is producing an EBITDA of = $350MM (74 + 95 + 180) per year. 
After finishing its current contract, in 2026, there are several options for Hilli: to continue working in the same field for Perenco (We believe that it is very unprobable, but if Perenco manages to find more gas from its new fields acquires in the area, we cannot discart it). It is also possible than Golar buys some gas fields and produces & commercialise the gas itself. Another option is to realocate Hilli to Cyprus, where the government is very interested in offer Hilli full utilisation and a long-term contract. 
Gimi: It is an underconstruction FLNG expected to enter in operation in 4Q23. It will produce $151MM annually of EBITDA until 2043. The counterparty in this case will be BP-Kosmos.
New Fortress Energy: Golar owns 12.4MM shares of NFE (5.9% of the company). Currently, NFE trades at $60, making the Golar LNG stake worth around $740MM
CoolCo: Golar spinned out its LNG fleet. It retained a 31% ownership of the new company. Currently, it trades in the Oslo OTC market and it is expected to be listed in the US later this year. At current prices, Golar’ stake in Coolco is worth around $140MM
Awilco: They have 23.6% ownership of this LNG shipping company, representing around $50MM. Management has told us that they are looking for an opportunistic sale of this non-strategic asset
Tundra: It has recently been sold to an Italian entity (Snam). It has received $350MM for the FRSU. After the repayment of vessel debt, Golar will receive net proceeds of $193.1MM. Golar will trade the carrier as a LNGC until November.
Golar Artic: The last ship of the Golar shipping fleet, the old steamer. It has also been sold to the same Italian entity in the 2Q22 for $269MM. However, Golar needs to cover the cost of transforming the carrier into a FRSU. Golar has recognised a $76MM impairment on this vessel in 2Q22

Golar FLNG segment

Golar LNG was a pioneer in this segment with Hilli in 2018 which has been operating 100% uptime since then. This vessel is a Mark I design, as well as Gimi. It means that it has 2.4 MTPA capacity and comes from the reconversion of an existing LNG carrier. Golar LNG has been working on new designs for several years. It has resulted in the release of the Mark II and Mark III designs. 
The Mark II design also comes from the conversion of an LNGC and has a regasification capacity of up to 3.5MTPA. It can be built in 2.5-3 years. In fact, Golar is talking about having one of these operating at the end of 2025.
Mark III has 5MPTA, it would take 4 years to be built and it is not a conversion of an existing vessel.

Golar’s current situation (August 2022) is that it expects to announce 2-3 FLNG in the coming months, one of each design. We understand that the first one should be the Mark II, which Golar said that a suitable conversion candidate vessel has already been identified and inspected. It also confirms that Golar LNG is thinking about starting the construction now and finishing the contract later (build on a speculative order to strengthen its position for the deal). The Gandria Vessel would fit into the Mark I design. Both of them could be delivered within 2025 if ordered during 2H22.
Golar LNG has also confirmed the Capex needed for both investments, which would be between $500-600 million/ton of liquefaction capacity
The Mark III design was expected to be announced for the Great Tortue phase II project with BP & Kosmos (the second phase of the project where Gimi is assigned). Golar has been waiting for this announcement for years, but now, it is really expected to happen in September (Kosmos confirmed in their 2Q22 CC that they will take a decision this September) what we do not know if it finally will be a Mark III or it will be a Mark II instead due to the specifics of the field and Tortue project.

Golar LNG $GLNG Valuation

We have valued Golar LNG ( $GLNG ) by two different methods, the sum of parts and DCF, reaching a similar target price. We need to note that we have used for our calculations a far more conservative current forward curves of TTF and Brent than the current ones.

On the Sum of the parts method, we have applied a multiple of 8x for Gimi, 6x for Hilli and -8x for Corporate on the 2024 EBITDA.

DCF modelling has been calculated based on the following assumptions:

• Capex and debt repayment on schedule
• 3% Free Risk, 7.01% Risk Premium, 1.4 Beta and 5% cost of debt, resulting in a 10.97% WACC (which we believe is also conservative)
• TTF prices: €240/MWh in 4Q23, €160/MWh in 2023,  €70/MWh in 2024 and €40/MWh thereafter
• Brent Prices: $92 in 2H22, $80 IN 2023, $70 in 2024 and $60 thereafter
• TTF hedges: Only taken into account those put in place at the moment
• $1 = 1€
• $100MM EBITDA for Hilli ten years after the end of its current contract with Perenco

We obtain a target price for $GLNG of $25.9 and $27.37 respectively. However, we have not included in the calculations the effect of any new contract, which we believe are imminent. We believe each of them will add $5-9 to the target price. But it depends on the type of FLNG (Mark I, II or III) and also if it is linked or not to TTF/Brent or any commodity price (which we are not 100% sure about after talking with the Golar IR). This last point has critical importance as contracts usually last 15-20 years and inflation would take an important bite on benefits if they are not linked.

Risks

Operational: At the moment, they only have one FLNG operating, so if Hilli stop working for a failure, the impact to its finance would be high. Moreover, Golar is going to be able to sign new contracts on much better conditions it did will Hilli thanks to its 100% uptime record. So it has a critical importance to maintain this record.
Credit Risk has improved sustancially in the last 18 months, but we should not forget the huge amount of debt needed to finance the FLNG on top the amount they have now.
Inflation: Either by rising the FLNG building costs (short-term inflation) or by raising the costs in the long term making the fixed EBITDA of Gimi less attractive (long-term inflation). Once the new contracts are announce, it will be a key point to know if the FLNGs are linked to Brent/TTF or some type of commodity prices to diminish this long-term effect.
Commodity prices: Hilli has an important bonus related to the Brent and TTF price, if Brent price falls, Golar would be in risk of losing its $2.7MM per $ Brent is higher to $60. Also,  the business of Golar is to produce cheap LNG (around $4) to be sold higher, if the margin decrease, it will be difficult to sell new projects (It is far from be the case at the moment)

Conclusion about Golar LNG

If we only have a look at the share price graph since we started the position in Golar LNG in May-20, it is scary. However, the reality is that Golar LNG is at its brightest moment ever right now. Gas prices in Europe are at all-time highs and the geopolitical consequences of what is happening in Ukraine have changed this market forever. Consequently, we believe that TTF is going to remain high for a foreseeable future, as well as the rest of the natural gas market across the world following a domino effect. This entails the aim of rising natural gas supply, and Golar has positioned uniquely in the offshore segment thanks to its unpolluted track record with the FLNG Hilli.

As a consequence of that, Hilli has become a cash machine and we expect up to three new FLNG announcements in the next twelve months. Especially, 2 in the next 6 months.
On top of that, Golar has negative net debt thanks to its simplification process where it has achieved unveiling the real value of its Hygo and shipping assets while maintaining exposition to a further increment in value thanks to its stake in New Fortress and Coolco.

For all the reasons highlighted here, we believe that in spite of the surge in the share price during the last year, Golar LNG has a lot of potential and the share will perform better than the market in the near future.