Business Context and Reporting Period
Company: Golar LNG Limited (Bermuda-incorporated, listed on NASDAQ Global Select Market and Oslo Stock Exchange).
Reporting Period: Fiscal year ended December 31, 2010.
Business Overview: Golar is a mid-stream LNG company engaged in the transportation, regasification, and trading of LNG. As of December 31, 2010, the fleet consisted of 12 vessels (including 3 operational FSRUs and 1 undergoing conversion) and a 50% equity interest in another vessel. The company operates primarily through time charters and has recently established a new LNG trading subsidiary, Golar Commodities.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 (in thousands) | 2009 (in thousands) |
|---|---|---|
| Total Operating Revenues | $244,045 | $216,495 |
| Operating Income | $60,186 | $31,383 |
| Net Income (Loss) Attributable to Golar LNG Ltd | $384 | $23,082 |
| Net Cash Provided by Operating Activities | $51,710 | $43,763 |
| Cash and Cash Equivalents (End of Period) | $164,717 | $122,231 |
| Total Debt (Current + Long-term) | $797,178 | $782,226 |
| Capital Lease Obligations (Current + Long-term) | $411,875 | $852,943 |
| Stockholders' Equity | $410,588 | $495,511 |
Note: Net financial expenses were $66.961 million in 2010 compared to $1.692 million in 2009, significantly impacting net income.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 13% to $244.0 million, driven by a full year of revenue from the Golar Winter FSRU and the commencement of the Golar Freeze FSRU charter in May 2010.
- Profitability Decline: Despite higher operating income, Net Income attributable to shareholders dropped significantly from $23.1 million to $0.4 million. This was primarily due to a $66.9 million increase in net financial expenses, including a $7.8 million loss on the termination of lease financing arrangements and mark-to-market losses on interest rate swaps.
- Balance Sheet Restructuring: Long-term capital lease obligations decreased by approximately $441 million due to the settlement of five vessel lease obligations ("Five Ship Leases") using restricted cash deposits during 2010.
- Impairment Charges: The company recorded a $4.5 million impairment charge, including a $3.0 million write-down of its investment in TORP Technology AS.
- New Segment: The company launched Golar Commodities, an LNG trading subsidiary, which incurred a net loss of $12.7 million in its first year of operation.
Guidance, Outlook, and Risks
- Expansion Strategy: In April 2011, the company entered into contracts to build six new LNG carriers (total cost approx. $1.2 billion) with Samsung Heavy Industries, with deliveries scheduled for 2013 and 2014. The company also secured an 11-year FSRU project in West Java involving the conversion of the Khannur.
- Liquidity and Financing: The company anticipates needing approximately $900 million in additional cash facilities to fund newbuilding and conversion commitments. In April 2011, Golar Partners (a subsidiary) completed a public offering raising $310.5 million.
- Key Risks:
- Customer Concentration: Five customers (BG, Shell, Pertamina, Petrobras, DUSUP) accounted for the majority of 2010 revenues. Loss of any major charter could materially impact cash flow.
- Market Volatility: Exposure to spot market rates for vessels not on long-term charters and volatility in LNG demand.
- Financing Covenants: Debt and lease agreements contain strict covenants regarding financial ratios and minimum cash levels. Breach could lead to debt acceleration.
- Operational Risks: Risks associated with FSRU conversions, including cost overruns and delays, as well as geopolitical risks in regions where vessels operate.
Investor Verification Checklist
- Debt Service Coverage: Verify the company's ability to service its significant debt load ($797M) and capital lease obligations ($412M) given the sharp decline in net income.
- Financing for Newbuilds: Confirm the status of securing the ~$900 million in additional financing required for the six new LNG carriers and the Khannur conversion.
- Derivative Exposure: Review the impact of interest rate and currency swaps on future earnings, as mark-to-market adjustments caused significant volatility in 2010.
- Charter Expirations: Monitor the status of short-term charters expiring in 2012 (e.g., Golar Viking, Golar Grand, Golar Maria, Golar Arctic) and the company's ability to re-charter at profitable rates.
- FSRU Conversion Progress: Track the timeline and cost adherence of the Khannur conversion to ensure it meets the 2012 delivery schedule for the West Java project.