Golar reports a 1Q 2017 operating loss of $41.4 million as compared to a 4Q loss of $32.7 million.
As expected, the observed improvements in shipping rates and activity levels during the final weeks of 4Q and into January translated into a modest improvement in 1Q 2017 operating revenues. Contrary to expectations, this additional spot market activity together with reduced payments to Golar Partners in respect of the dry-docked Golar Grand did not result in a reduction to reported voyage expenses. Of the $16.9 million 1Q voyage expenses, $9.6 million represents the cost of chartering the Golar Grand from Golar Partners. This compares to a 4Q charge of $4.9 million. Execution of a new charter-party for the vessel in February triggered an additional non-cash accounting provision that will be released to voyage expenses between February and October 31, when the obligation to charter-in the vessel from Golar Partners expires.
Vessel operating expenses increased $0.7 million to $12.9 million in 1Q. Operating costs in 4Q were positively impacted by settlement of an insurance claim in respect of the Golar Viking. Administration costs decreased $2.7 million from $14.1 million in 4Q to $11.4 million in 1Q. Prior quarter costs were negatively impacted by legal and professional fees together with the write off of deferred financing costs. Of this $11.4 million, a total of $5.0 million of fleet management costs and costs directly attributable to affiliates OneLNG, Golar Power and Golar Partners have been recharged. Depreciation and amortisation at $25.2 million is $8.4 million higher than 4Q following a 15-month catch-up charge, equivalent to $9.7 million, in respect of the FSRU Golar Tundra which was not depreciated whilst accounted for as an asset held-for-sale. This was offset by reduced depreciation in respect of the LNG carrier Gimi which reached the end of its accounting useful life in December 2016.
In 1Q the Company generated a net loss of $65.8 million. Notable contributors to this are summarised as follows:
· Interest expense has increased $1.6 million primarily due to the cost of servicing the February issued $402.5 million convertible bond that replaces the balance of a $250 million convertible bond repaid in early March.
· Other financial items reported 1Q income of $14.5 million, most of which was derived from mark-to-market gains on the 3 million Total Return Swap (“TRS”) shares following a $4.99 quarter on quarter increase in the Company’s share price. Swap rates also continued to increase, albeit at a slower pace, resulting in further non-cash mark-to-market interest rate swap gains.
· Gain on loss of control of Golar Power in 4Q pertains to a $3.7 million adjustment to the provisional 3Q $12.2 million non-cash loss recognised on disposal of Golar Power. No further adjustments were recorded in 1Q.
· The loss of $13.9 million 1Q equity in net earnings of affiliates is primarily comprised of the following:
– a $4.1 million loss in respect of Golar’s 50% share in Golar Power;
– a $1.2 million loss in respect of Golar’s 51% share in OneLNG;
– a $8.7 million loss in respect of Golar’s stake in Golar Partners.
This represents a significant fall relative to overall 4Q earnings of $37.8 million. Golar Partners earnings in 1Q declined as a result of scheduled off-hire of the FSRU Golar Igloo and dry-dock off-hire for the carrier Golar Grand. The Golar Partners contribution also includes a non-cash loss on deemed disposal of $17.0 million, being the dilutive impact on our ownership interest due to further issuances of common units by Golar Partners in February 2017.
Despite showing some improvement over the prior quarter, the shipping market remained weak in 1Q. Fleet TCE(1) increased from 10,893 in 4Q to 14,189 in 1Q. The improvement was partly driven by a number of vessels in the Cool Pool that secured short-term charters in the $30k per day range.
The underlying trend remains positive as new liquefaction projects continue to deliver. Gorgon and Cheniere Trains 3 have exported their commissioning cargoes and are now in ramp-up mode, Cheniere T4 remains on track for a 2017 start, Petronas exported the world’s first FLNG cargo from their PFLNG Satu facility in early April, Wheatstone has affirmed the mid-year start-up of T1 to be followed 6-8 months later by T2, and Yamal LNG remains on track for an early October start-up. In addition to this, Malaysia’s T9 and now Gorgon T2 both continue to ramp up production.
Approximately 34 million tons of new LNG is expected to come on line in 2017 representing 13% growth against 2016 global production. Against this, shipping capacity is expected to grow by approximately 9%. This mismatch is expected to have a positive impact on shipping over the same time frame. Consensus among ship-owners of a sustained recovery from 3Q has firmed, aided by a notable increase in inquiries for medium to long-term vessel requirements, particularly for the lifting of open US volumes. With this in mind, and in addition to the charter secured by Golar Partners for the Golar Grand, the Golar group has also fixed a vessel to a Far Eastern utility. Scheduled to start in 1Q 2018, the 12-month charter at rates close to cash break-even, comes with a six-month extension option and flexibility to nominate the closest vessel at the time to the required delivery point.
Golar Spirit, which is scheduled to be redelivered by Petrobras in June, is being marketed for new opportunities. The market for smaller low cost FSRUs is quite active as the cost of significant unutilised capacity on larger FSRUs can undermine the economics of a switch to gas in certain niche markets. Smaller units like the Golar Spirit are therefore able to provide a more economic solution.
During the quarter, Golar Partners secured new business for the LNG carrier Golar Grand. The vessel was removed from lay-up on February 14 for repairs and relocated to Singapore for dry-dock, which completed on April 14. On May 5, the vessel commenced a firm two-year charter with a high quality oil and gas major. Golar will continue to sub-charter the Golar Grand from the Partnership until October 31, 2017, when its obligation expires. Between May 5 and October 31, daily hire from the new charter will accrue to Golar.
The FSRU Golar Tundra remains anchored off the coast of Ghana. Charterer, West Africa Gas Limited, has made no further progress with the construction of supporting land-based infrastructure. Golar has been granted an interim arbitration award of $23.3 million which the company is now actively pursuing. This covers the period up to December 31, 2016. Since then, a further $22.0 million has become due and this will also be pursued through the arbitration process, in addition to amounts accruing thereafter. The Company is now seeking an award against the guarantor.
Golar Partners has now exercised its right (“Put Right”) to require Golar to repurchase the company (“Tundra Corp”), the disponent owner and operator of the FSRU Golar Tundra, at a price equal to the original purchase price (the “Put Sale”) paid by the Partnership in its acquisition of Tundra Corp in May 2016 (the “Purchase Price”).
In connection with the exercise of the Put Right, the Partnership and Golar have entered into an agreement pursuant to which the Partnership has agreed to sell Tundra Corp to Golar on the date of the closing of the Put Sale (the “Put Sale Closing Date”) in return for Golar’s promise to pay an amount equal to approximately $107 million (the “Deferred Purchase Price”) plus an additional amount equal to 5% per annum of the Deferred Purchase Price (the “Additional Amount”). The Deferred Purchase Price and the Additional Amount shall be due and payable by Golar on the earlier of (a) the date of the closing of the acquisition of the Hilli Shares and (b) March 31, 2018. The closing of the Put Sale is expected to occur in June 2017, subject to customary closing conditions. In addition to the Deferred Purchase Price, Golar will be liable for the charterhire payments due under the sale and leaseback financing arrangement.
The Partnership has agreed to accept the Deferred Purchase Price and the Additional Amount in lieu of a cash payment on the Put Sale Closing Date in exchange for Golar granting to the Partnership the option (the “Golar Hilli Episeyo Purchase Option”) to purchase, at fair market value, up to a 25% equity interest (the “Hilli Shares”) in Golar Hilli Corp. (“Hilli Corp”), the owner of the FLNG vessel Hilli Episeyo.
Under the new agreement with Golar, the Partnership has the ability to exercise the Golar Hilli Episeyo Purchase Option at any time on or before March 31, 2018. There can be no assurance that the Partnership will exercise the Hilli Purchase Option or that it will consummate an acquisition of the Hilli Shares. The acquisition by the Partnership of the Hilli Shares will be subject to, among other things, the approval by the Conflicts Committee of the Partnership’s board of directors of the decision to purchase the Hilli Shares, the fair market value to be paid for the Hilli Shares and the other terms of the purchase.
In addition, the purchase agreement for the Hilli Shares will provide that the Partnership will not be required to consummate the purchase of the Hilli Shares if, among other things, the Golar Hilli Episeyo shall not have been delivered to and accepted by Perenco Cameroon SA and Societe Nationale Des Hydrocarbures (“Perenco”) and commenced its commercial operation under the eight year Liquefaction Tolling Agreement with Perenco for the first two of four liquefaction trains of Golar Hilli Episeyo. The purchase price to be paid by the Partnership for the Hilli Shares would be reduced by the sum of the unpaid Deferred Purchase Price plus the unpaid Additional Amounts on the date of the closing of the Hilli Shares.
A 25% interest in the Hilli Shares is effectively 50% of the first two of a total of four liquefaction trains. It is not expected, in the event a purchase is agreed, that the Partnership would be acquiring exposure to any oil price linked elements of the tariff under the Perenco contract or to the potential expansion capacity of Hilli Episeyo. It is expected that Golar Partners can fund the equity component of the purchase without the need for raising additional funds.
Downstream – Golar Power
The Sergipe project that will deliver LNG fuelled power to 26 committed power off-takers from 2020 is proceeding to plan. Site works are substantially complete with foundations for the gas turbines now in place and the General Electric sponsored EPC project continues on schedule and budget. With regards to the required project debt financing credit approvals are also progressing, with financial closing expected before 2017 year-end. Permitting of the regas terminal, which represents the greatest challenge so far, is progressing well.
Construction of the FSRU Golar Nanook, that will support the Sergipe project, is on schedule for delivery towards year-end. In the event that builders Samsung are selected to carry out the requisite modifications, delivery will likely be pushed back by around ten months, limiting the time available for trading prior to its mid-2019 start-up. A decision on this is expected shortly, as is a fully executed 25-year time charter party, both of which will facilitate the FSRU delivery installment financing process.
A significant portion of the 115 mtpa of new LNG supply currently under construction will soon become available in the market. It is expected that much of this will likely end up in frontier markets that favour low cost, flexible, quick delivering FSRUs. Several FSRU projects with award potential over the next two years have been identified, a few of which could potentially be awarded this year and commence operations in 2018. Although gas is becoming an increasingly attractive component of the global energy matrix and the market for FSRUs is growing, most initiatives are being sponsored by private enterprises that require additional technical and financial support. Golar Power is therefore looking to capitalise on and replicate the experience of Sergipe to offer unique support to those developing LNG-to-power projects.
The regas module for the first of its modern LNG carrier conversions is scheduled to deliver in early 2018, positioning it to support any project with a requirement for a 2H 2018 FSRU. Several opportunities are being pursued that fit with this time-frame.
The FLNG Hilli Episeyo conversion is nearing completion. All equipment has been installed and testing and pre-commissioning work is underway and will continue in Singapore until departure from the yard, which is expected to be in around 6 weeks. Seawater trials, storing-up and potentially LNG bunkering in Singapore will follow redelivery from the yard. A naming ceremony has been scheduled for July 2. The mooring has now been completed and is en-route to Cameroon in advance of hook-up and initiation of commissioning and production at the end of September. Perenco are on track with their scope of works.
More than 16 million man hours have been worked by Keppel to date and approximately 4,000 workers are expected to remain on-board the vessel through to completion. Provided that remaining works progress according to current plans and no unforeseen issues arise, the schedule to meet the end-September start in Cameroon is tight but achievable. The FLNG Hilli Episeyo conversion remains within budget.
Upstream – OneLNG
On May 2, Ophir Energy, OneLNG, GEPetrol and The Republic of Equatorial Guinea signed a detailed Umbrella Agreement that defines the full legal and fiscal framework for the 2.6Tcf Fortuna gas reserves, offshore Equatorial Guinea. Concluding this multi-year exercise represents a critical step toward FID. Contingent upon the Umbrella Agreement are two other key milestones, including draw-down against a financing facility and sale of LNG offtake. A third identified milestone, namely the award of upstream EPCIC and midstream EPC contracts, has since been part satisfied following Golar’s execution of an amended EPC contract for the conversion of the LNG vessel Gandria. The effectiveness of the EPC contract executed by Golar does however remain subject to a FID.
Including upstream and midstream development capital expenditure, the Fortuna project is expected to cost approximately $2.0 billion to develop. Of this, approximately $1.5 billion will be needed to convert the FLNG Gandria and $0.5 billion will cover upstream work. Documentation for a midstream facility of up to $1.2 billion with a consortium of Chinese lenders is ongoing and now remains the time-critical input for FID. Should the Equatorial Guinea government elect to invest in up to 30% of the mid-stream as they are entitled to, the ownership structure of the Fortuna joint venture would remain unchanged, however its stake in the FLNG Gandria would reduce.
OneLNG continues to make good progress exploring other projects. On May 29 it entered into a binding Memorandum of Understanding with the Ministry of Mines and Hydrocarbons of Equatorial Guinea to explore the liquefaction and commercialisation of natural gas. Efforts will be focused on Blocks O and I offshore Malabo. Agreement terms place obligations on both parties to find a technical and commercial solution to monetise gas that is either stranded or being re-injected in liquids production. That commercial solution is to include the provision of an FLNG vessel, associated infrastructure and the creation of an LNG sales vehicle. The parties seek to reach definitive agreements to proceed by December 2017 but no later than December 2018. In addition to this, OneLNG is also working on 3-4 additional projects, each involving one or more FLNG unit.
Following last year’s successful barge-based commissioning of identical liquefaction technology to that used on Hilli Episeyo, Petronas have recently exported the world’s first LNG cargo from an FLNG unit offshore Malaysia. Whilst proof of quite different concepts, both examples help build support for FLNG amongst an inherently conservative audience.
FLNG Hilli Episeyo financing
As at March 31, 2017, $710.0 million has been spent on the Hilli Episeyo conversion ($774.8 million including capitalised interest) and $300 million has been drawn against the $960 million CSSCL facility. A material portion of the outstanding capital expenditure is payable upon charterer acceptance of the vessel. This will closely coincide with receipt of a final $260 million tranche of debt which is drawable upon the earlier of vessel acceptance or after three months hire has been received. At this point, likely to be early 2018, the company expects to release approximately $160 million of equity. A further $87 million of the outstanding $232 million letter of credit will be released a year after acceptance.
The $300 million drawn to date against the project financing facility has been reclassified as short-term debt and will be replaced by the pre-arranged $960 million sale and leaseback facility after vessel acceptance, expected within 12-months.
On February 17, the Company closed a new $402.5 million senior unsecured five-year 2.75% convertible bond with an initial conversion price of $37.69. To mitigate the dilution risk of conversion to common equity, the Company also entered into capped call transactions costing approximately $31.2 million. The capped call transactions have an initial strike price of $37.69 and an initial cap price of $48.86, the cap price of $48.86 being a proxy for the revised conversion price and representing a 75% premium. The conversion price will be adjusted for future dividends paid. Bond proceeds, net of fees, and the cost of the capped call amounted to $360.2 million.
On March 4, the company drew down on a three-year $150 million margin loan secured by 20.9 million Golar Partners common units and, on March 7, the outstanding $220 million balance of the 2012 five-year $250 million convertible bond was repaid.
Golar Crystal refinancing
On March 14, Golar drew down $112 million against a ten-year sale and leaseback facility agreed with a subsidiary of COSCO Shipping in respect of the LNG carrier Golar Crystal. Concurrent to this, an existing 2019 maturing $101 million Korean ECA backed facility was repaid. This transaction released approximately $18.9 million including restricted cash to 1Q liquidity.
Golar’s unrestricted cash position as at March 31, 2017 was $456.7 million. This will be used to fund the Company’s initial equity participation in the Fortuna FLNG project, expected to be approximately $47 million in 2017, to meet its remaining commitments to Golar Power, expected to be approximately $75 million in 2017, and for general corporate purposes.
Corporate and Other Matters
As at March 31, there are 101 million shares outstanding including 3.0 million TRS shares that have an average price of $42.03 per share. There are also 3.9 million outstanding stock options in issue. The dividend will remain unchanged at $0.05 per share for the quarter.
The conversion of Hilli Episeyo is progressing to a tight but achievable schedule. Transit to Cameroon and commissioning will be the next milestones. The mooring is expected to be ready for connection to Perenco’s onshore processing facilities during July and Perenco are on track with their infrastructure responsibilities.
Recent discussions with key stakeholders in Cameroon represent grounds for optimism that train three will be utilised soon after the vessel has been accepted and demonstrated itself to be operationally stable.
Good progress has been made with the Fortuna project. Execution of an Umbrella Agreement that provides for government participation in the LNG mid-stream ensures the crucial alignment of key stakeholder interests. This together with progress on financing and offtake agreements provides the belief that a mid-2017 FID is an achievable objective. Further co-operation with the government of Equatorial Guinea to commercialise gas reserves elsewhere in the country via an additional FLNG unit is cause for optimism and further underscores the benefits of good stakeholder alignment.
Having raised gross proceeds of approximately $119.4 million in February and exchanged its interest in the FSRU Golar Tundra, Golar Partners now has the capital it needs to acquire one train, approximately 50% of currently contracted fixed cashflows of the Hilli Episeyo. Associated operating income over 8 years will add significant revenue backlog and substantially mitigate the Partnerships current re-contracting risk.
Although the shipping business is expected to remain disappointing in 2Q, the increased term charter activity and additional volumes arriving in 2H17 represent grounds for cautious optimism.
Recent financing exercises have strengthened the balance sheet. Golar’s liquidity position will be strengthened further if the Hilli Episeyo transaction with Golar Partners is executed as planned. Having strategically positioned itself as a low cost provider of infrastructure solutions to an increasingly cost sensitive industry with significant growth prospects, the foundations are now in place to deploy this competitive strength.