Business Context and Reporting Period
Company: Golar LNG Limited
Filing Type: Form 6-K (Interim Results)
Reporting Period: Second Quarter ended June 30, 2019
Business Overview: Golar LNG operates in LNG shipping, Floating Liquefied Natural Gas (FLNG), and downstream power generation (Golar Power). The quarter focused on simplifying the capital structure, improving liquidity, and managing a seasonally weak shipping market.
Key Financial Metrics
| Metric (in thousands) | 2Q 2019 | 1Q 2019 | 1H 2019 | 2Q 2018 |
|---|---|---|---|---|
| Total Operating Revenues | $96,745 | $114,287 | $211,032 | $59,374 |
| Operating (Loss)/Income | $(23,435) | $28,864 | $5,429 | $78,405 |
| Net (Loss)/Income Attributable to Golar | $(112,682) | $(41,741) | $(154,423) | $36,319 |
| Adjusted EBITDA | $39,663 | $62,897 | $102,560 | $4,162 |
| Adjusted Net Debt | $2,258,824 | $2,197,384 | $2,258,824 | $2,193,451 |
| Cash & Cash Equivalents (Unrestricted) | $139,834 | $212,673 | $139,834 | $375,067 |
| Total Cash Position (incl. Restricted) | $545,420 | $690,271 | $545,420 | $827,385 |
Dividend: Suspended for two quarters (2Q and 3Q 2019) to fund a share buyback.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 15% quarter-over-quarter (from $114.3M to $96.7M) due to a seasonally weak shipping market, lower vessel utilization rates, and four vessels undergoing dry-docking.
- Operating Loss: The company reported an operating loss of $23.4M in 2Q, compared to an operating income of $28.9M in 1Q. This swing was driven by lower shipping revenues and a $7.3M impairment charge on an equity interest in OLT Offshore LNG Toscana.
- Net Loss Expansion: Net loss attributable to Golar widened to $112.7M from $41.7M in 1Q. Key drivers included a $14.7M loss on derivative instruments (largely related to the Total Return Swap), a $27.0M equity loss from affiliates (Golar Partners and Golar Power), and the aforementioned impairment.
- Derivative Volatility: A $27.6M unrealized loss on the oil derivative instrument (linked to FLNG Hilli Episeyo) was recognized due to a decrease in Brent Crude prices, offset by a $5.2M realized gain.
Guidance, Outlook, and Management Commentary
Strategic Initiatives
- Capital Structure Simplification: Management intends to buy back 3 million shares underlying the Total Return Swap (TRS) at a net cash cost of approximately $31 million. This will reduce the share count from 101 million to 98 million and eliminate the cash collateral requirement.
- Liquidity Enhancement: Post-period, the company executed new financing facilities adding $180 million in immediate liquidity. Discussions are ongoing to reduce the Letter of Credit requirement for Hilli Episeyo, potentially releasing $75 million in restricted cash.
- Spin-off: The company intends to complete the spin-off of its 8 Tri-Fuel Diesel-Electric (TFDE) carriers by the end of 2019, subject to market conditions. This is expected to reduce contractual debt and adjusted net debt by approximately $1.0 billion.
Operational Outlook
- LNG Shipping: Earnings are expected to improve in H2 2019 due to new term contracts, a tighter supply-demand balance, and seasonally stronger rates. The market faces a structural shortage with demand growth outpacing supply in 2019 and 2020.
- FLNG: Hilli Episeyo maintained 100% commercial uptime. The Gimi conversion project remains on budget and schedule with $700 million in underwritten financing secured.
- Golar Power: The Sergipe power station is on track for commercial operations in January 2020. Downstream LNG distribution projects in Brazil are progressing with initial customer commitments.
Risks and Contingencies
- Market Conditions: Low LNG prices eliminate arbitrage opportunities, reducing transportation demand to the Far East.
- Project Execution: Risks include the inability to consummate financing for the Gimi project, delays in the TFDE spin-off, and challenges in commissioning the Sergipe power station.
- Counterparty Risk: Dependence on charterers and joint venture partners (e.g., Perenco, BP) to meet obligations.
Investor Verification Checklist
- TRS Buyback Execution: Verify the completion of the 3 million share buyback and the associated reduction in share count and collateral requirements.
- Liquidity Release: Confirm the actual release of restricted cash from the Hilli Episeyo Letter of Credit negotiations and the utilization of new financing facilities.
- TFDE Spin-off Timeline: Monitor progress on the spin-off of the 8 TFDE carriers, as this is critical for the projected $1.0 billion debt reduction.
- Shipping Rates: Track spot and time charter rates in H2 2019 to validate management's expectation of an earnings upturn.
- Derivative Exposure: Assess the impact of Brent Crude price fluctuations on the unrealized gains/losses of the Hilli Episeyo oil derivative.