Golar LNG: ‘Different Growth Strategies’
Bermuda registered Golar LNG — an operator of liquid natural gas carriers – this week [Mar.1] reported decreased fourth-quarter earnings, with a year-over-year drop in revenues and higher financial expenses blamed for the showing.
LNG Shipping company was formed in May 10, 2001 from its predecessor, Osprey Maritime. It is engaged in the acquisition, ownership, operation and chartering of LNG carriers and Floating Storage and Regasification Units [FSRUs] through its subsidiaries.
The company is incorporated under Bermuda laws and maintains its principal executive headquarters at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, Bermuda. LNG’s administrative offices are in London.
Highlights
- Golar LNG reports consolidated net income of $4.7 million and consolidated operating income of $15.0 million for the fourth quarter of 2010
- Golar LNG announces a cash dividend of $0.25 cents per share together with an extraordinary dividend of $0.05 cents per share
- West Java FSRU project progressing well
- FSRU market activity remains strong with Golar short listed for a number of projects.
- Golar Energy charters out four vessels at attractive rates for periods between 12 and 18 months
Financial Review
Golar LNG Limited reports consolidated net income of $4.7 million and consolidated operating income of $15.0 million for the three months ended December 31, 2010.
Revenues in the fourth quarter decreased to $64.6 million as compared to $70.4 million for the third quarter of 2010. The reduction was primarily due to no revenue in the fourth quarter for the Gimi and Khannur the charters for which ended in the third quarter. However, this was partly offset by an improved performance from the vessels operating in the sport market.
Overall utilisation for the fourth quarter has significantly improved up at 95% as compared to 83% for the third quarter. Fourth quarter average daily time charter equivalents (“TCEs”) also increased to $74,206 compared to third quarter TCE of $63,110.
Voyage expenses were $5.4 million lower than the third quarter due to the redelivery of the Ebisu to owners at the end of the third quarter thereby reducing charter-in costs. Operating expenses were increased by $2.6 million from the third quarter partly as a result of costs associated with the one-off cost of changeover to new crewing managers, Golar Wilhelmsen, on some vessels.
The other operating expense of $2.9 million represents realised losses on physical cargo trades, financial derivative contracts and proprietary trades transacted by Golar Commodities that primarily relate to cargo transactions entered into in the third quarter.
The impairment of $4.5 million of long term investments and assets represents a write down of the Company’s cost of investment in TORP LNG AS and a write down in respect of certain FSRU equipment originally acquired in 2007 and prior.
Net interest expense for the fourth quarter at $7.1 million was down slightly from $7.7 million in the third quarter.
Other financial items have decreased to a loss of $8.3 million for the fourth quarter from a loss of $10.8 million in the third quarter. A non-cash gain of $6.5 million on revaluation of interest rate swaps has been partly offset by interest paid in respect of interest rate swaps of $3.3 million not designated as hedging instruments. Other financial items also include expenses, termination costs and the write-off of deferred charges of approximately $13 million associated with restructuring of certain lease arrangements as noted below.
The Company has entered into arrangements during the quarter to end the leasing arrangements in respect of the Freeze, Spirit, Hilli, Gimi and Khannur via the acquisition of the companies that lease the vessels to Golar. The lease obligation and the related restricted cash have therefore been removed from the Company’s balance sheet. The arrangement gave rise to a tax benefit for the group. This benefit has been deferred and will be amortised over the remaining life of the vessels. Fees and expenses associated with the various arrangements together with termination costs have been charged to the income statement and the cost of acquiring the non-controlling interests in the various companies has been charged to stockholders equity as a purchase of non-controlling interests. The overall cash effect is positive to the Company and is expected to result in a net cash benefit of approximately $15 million.
The net gain on sale of investee of $2.4 million represents the sale of Golar Energy’s remaining 7.1 million LNG Limited shares for a total consideration of $4.2 million.
For the twelve months ended December 31, 2010 Golar reports net income of $0.4 million, operating income of $60.2 million and operating revenues of $244 million as compared to, a net income of $23 million, operating income of $31 million and operating revenues of $216 million for the year ended December 31, 2009. The improved operating income is mainly accounted for by increased revenues from the Golar Freeze and Golar Winter offset in part by lower revenues from spot trading vessels.
Financing, corporate and other matters
In line with the Company’s target dividend level the Board has proposed a cash dividend of $0.25 per share in respect of the fourth quarter of 2010. In addition the Board has, based on the Company’s strong financial position, decided to pay an extraordinary dividend in this quarter of $0.05 per share. The record date for the dividend is March 11, 2011, ex-dividend date is March 9, 2011 and the dividend will be paid on or about March 25, 2011.
In the period from November 2010 to January 2011 a total of 546,834 shares have been issued by the Company in respect of share option exercises. After this issuance the Company’s total number of shares outstanding is 68.1 million. The Company currently owns 145.3 million (61.1%) shares in Golar LNG Energy.
The Company’s long-term contracted vessels, two LNG carriers (Golar Mazo and Methane Princess) and 3 FSRU’s (Golar Spirit, Golar Winter and Golar Freeze) all operated without major issue during the quarter. Golar Freeze has been operating well and has progressed through the commissioning process. Final testing is expected to take place in early April.
The Company’s investment in Golar Energy has developed favourably in the fourth quarter. The share price moved from NOK 8.77 to NOK 12.50, taking the value of the investment up to $310 million as at December 31, 2010. The positive development has continued in 2011 and the value of the investment is as of February 25, 2011 was $462 million. It is Golar LNG’s aim to maximise the value of the controlling stake in Golar Energy over time.
Golar LNG Energy
Shipping
Over the last quarter of 2010, the LNG shipping market tightened dramatically. Surplus tonnage was reduced as new production projects started-up. Charterers have therefore opted to declare any available options, due to option period rate advantage and a need to cover forward positions in a tightening market.
Vessel availability has now reached a level of tightness not seen in the market for several years. In the spot market, charterers have had to secure tonnage on a round trip cost basis and are currently chartering on a rate nearly three times more than that which existed for summer spot fixtures.
The bullish shipping sentiment is also apparent in mid-term shipping with rates having improved further and a number of vessels, including some of Golar Energy’s vessels, having been fixed on charters of between 12 and 18 months at attractive rates. For Golar Energy this has been an opportunity to lock in cash flow at good rates whilst maintaining exposure to a further improving market in 2012.
Currently available shipping does not necessarily provide the flexibility required to meet charterers needs. Those parties used to fixing short term shipping deals will struggle, particularly during periods of peak demand and instead have to focus on DES deals.
At the quarter-end the fleet stood at 366 vessels including FSRUs and regas vessels with a further 27 on order. The limited order book and the increased production coming on stream in the next few years supports a tight supply/demand balance with interesting opportunities for open shipping capacity.
Regasification
Negotiations are progressing smoothly between Company and Nusantara Regas to finalize the FSRU time charter party for the West Java FSRU project. The project represents Golar’s fourth FSRU project and is for a period of approximately 11 years with an approximate contract value of $500 million. The project scope involves the conversion of Golar Energy’s 1977 built LNG carrier Khannur into an FSRU with 500 MCFD (million cubic feet per day) regasification capacity (approximately 3.8 MTPA) and the provision of associated mooring infrastructure.
Since being selected for the project in October 2010, the Company has entered into a Letter of Intent and Project Continuation Agreement which provide the Company the financial security from Nusantara Regas to proceed with detailed engineering and procurement activities of long lead items in order to maintain the scheduled delivery date while finalizing charter party negotiations.
FSRU and mooring detailed engineering, procurement and construction related activities are well underway. Detailed engineering is progressing according to schedule. The majority of critical long lead items have been ordered.
In general, activity within the FSRU market is becoming more firm. Over the last quarter Golar Energy has been pre-qualified for the both the Medan LNG FSRU project in Indonesia and the Bahrain Petroleum Company (BAPCO) LNG project.
Additionally, a number of discussions are underway with credible project developers with the possibility of new tenders in the coming quarter. Based on the current market the Company believes that it should be in a good position to secure at least one further FSRU contract over the next 12 months.
Golar Commodities
Golar Commodities spot activity during the fourth quarter was limited to residual transactions from its third quarter cargoes as well as building on existing customer relationships and establishing new ones. Golar Commodities continued to actively pursue spot market trades but poor risk and reward characteristics of opportunities during the period hampered further trades. A number of potential transactions involving short and mid-term LNG supply, short and mid-term off-take as well as asset optimization opportunities are currently being advanced. These opportunities would be under non-standard structures for the industry that create value and/or significantly reduce physical and financial risk for Commodities’ prospective customers.
Given the risks, uncertainties and illiquidity associated with LNG trading, Golar Commodities will take a measured approach to its trading activities; especially during its ramp-up phase. A prudent approach to selecting its initial positions in a highly deliberate manner should ensure more certain success and avoid large risks.
Tremendous expected growth of LNG, though still with significant structural inefficiencies, coupled with the industry achieving a certain critical mass and fungability is providing numerous opportunities to create value and reduce risk for Golar Commodities’ customers. Expected growth of over 60% in LNG volumes over the next decade affords a patient, methodical approach to increasing activity within a highly disciplined framework.
The earnings and prospects of Golar Commodities have been negatively influenced by the tightening of the LNG shipping market. However, the Board still sees good opportunities for solid economics for longer term cargo deals.
Golar Commodities has recently added shipping exposure with the target of using this capacity to secure cargo trades. Results from this activity should be recognisable in the second quarter of 2011.
Market
Qatar completed two additional liquefaction trains during the quarter and now has a total production capacity of 77 million tonnes per annum (MTPA). Qatar is now the world’s largest LNG supplier but by 2015 increasing coal-bed methane (CBM) projects in Australia should lead incremental supply as Qatari volumes stabilise. In late October, approval was given for two CBM projects led by BG and Santos providing for an additional 16 MTPA to be commissioned by 2015.
In 2011 and 2012 the new Qatari trains will continue to ramp up as will new additions in Angola, Australia (Pluto), Peru, Yemen and Tangguh – which are envisaged to reach full production in 2012. Whilst Nigerian volumes will continue their recovery it is anticipated that Algeria, Egypt, and Indonesia will continue to face production difficulties.
Many of the new LNG projects had contracts to supply the U.S., however the rising importance of shale gas in the U.S. has forced these projects to find new markets for their LNG. This is positive for floating regasification as new markets will need regasification solutions. Shale gas is now also driving potential production projects in the U.S. with existing import facilities now being developed as projects offering bi-directional flow using increased domestic reserves to target more lucrative international LNG markets.
Extreme cold weather in both Northwest Europe and Northeast United States and outages at Bonny, Nigeria, and Hammerfest, Norway, have ensured that demand reached high levels during the fourth quarter in the Atlantic Basin. However, Asian buyers continued to resist increasing bids to compete with Atlantic buyers.
Prices at UK NBP rose past $10 per MMBtu in December on the back of a cold spell that broke records for gas demand. UK LNG terminals reached an all time high, but with temperatures easing, prices softened and demand switched to the Far East. Nonetheless, in the first 15 days of January, an unprecedented 15 cargoes arrived in the UK.
Despite the influence of shale gas production in the U.S. going forward North American markets will continue to be the swing destination for LNG due to the size, liquidity and storage capability that allow it to absorb cargoes on short notice. As new LNG projects come on-stream, U.S. markets will be needed to absorb some of the excess production.
However, there are also strong emerging markets (in Asia and South America for example) that continue to underpin future demand growth. Petrobras imported 36 cargoes last year and in Argentina 11 cargoes will be taken over their off-peak period. With the second Argentinean LNG import terminal, Escobar, starting in mid 2011 it is envisaged that ENARSA will need upwards of 50 cargoes for their 2011/12 contract year.
Outlook
The time charter rates achieved for Golar Energy’s four modern LNG vessels will result in a combined annualized EBITDA contribution of all four vessels derived from these time charters of approximately $80 million per annum based on assumed levels of operating cost per year. All four charters have terms which will result in the vessels coming off hire during 2012 when the Company is optimistic that LNG shipping rates will have shown further improvement.
The Company does not foresee any let up in the growth trajectory of potential FSRU projects. Active developments are on-going in literally every corner of the globe. Golar Energy’s FSRU execution model which offers competitive price certainty and fast-track conversions should encourage successful investment decisions for project developers. The strong development in oil prices and the de-linking of oil and gas prices makes gas projects financially very attractive.
In view of the improved market situation Golar has started an evaluation of different growth strategies. This evaluation includes organic growth as well as acquisition of additional capacity. Golar is currently actively looking at several ways to increase the size of the Company. A decision and implementation of this strategy is targeted for the first half of 2011.
The Board is continuously monitoring ways to optimise the financing arrangements of the vessels on long-term charters with the aim of reducing the cost of capital and increasing the return on equity.
One of Golar Energy’s vessels is due to be drydocked in the first quarter of 2011 however earnings from its four modern vessels are expected to be increased from the fourth quarter as they are delivered under their new time charters.
Operating revenues for the five long-term contracted vessels in the first quarter are expected to be in line with the fourth quarter and the Board expects the current dividend rate of $0.25 cents per share per quarter to be sustainable with a potential for possible growth
