Business Context and Reporting Period
This Form 6-K filing by Golar LNG Limited, dated November 26, 2014, reports interim results for the third quarter ended September 30, 2014. The company is a global provider of LNG shipping and floating regasification services, currently expanding into floating liquefaction (GoFLNG). Key strategic developments during the period included the commencement of converting the LNG carrier Hilli into a floating liquefaction vessel, the delivery of new-build carriers Golar Penguin and Golar Bear, and a significant change in corporate governance with Sir Frank Chapman replacing John Fredriksen as Chairman.
Key Financial Metrics
| Metric | Q3 2014 | Q2 2014 | YTD 2014 |
|---|---|---|---|
| Operating Revenue | $28.8 million | $21.1 million | $70.9 million |
| EBITDA | $5.9 million | $1.6 million | N/A |
| Net Income (Loss) | $7.8 million | ($24.2 million) | ($3.5 million) |
| Vessel Operating Expenses | $11.2 million | $11.8 million | $36.8 million |
| Voyage Costs | $6.1 million | $3.2 million | $15.5 million |
| Cash and Equivalents | $390.0 million | $484.7 million | $390.0 million |
| Total Debt (Current + Long-term) | $1.07 billion | N/A | $1.07 billion |
| Dividend per Share | $0.45 | $0.45 | $0.45 |
Note: Q3 Net Income includes a $7.3 million non-cash gain on interest rate swaps. Operating revenue increased 37% quarter-over-quarter driven by improved fleet utilization (56% vs 47% in Q2).
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue rose $7.8 million (37%) to $28.8 million, primarily due to a 41% increase in fleet commercial on-hire days and the full quarter availability of the Golar Crystal.
- Profitability Turnaround: The company moved from a Q2 net loss of $24.2 million to a Q3 net profit of $7.8 million. This swing was significantly influenced by a $7.3 million non-cash mark-to-market gain on interest rate swaps and improved operating performance.
- Expense Fluctuations: Voyage costs increased $2.9 million due to winter-related LNG pricing contango requiring vessel repositioning and the positioning of new vessels. Conversely, vessel operating expenses decreased $0.6 million as high repair costs in Q2 were not recurring.
- Depreciation: Depreciation expenses fell $0.9 million to $11.2 million as depreciation on the Hilli was suspended during its conversion to a floating liquefaction vessel.
- Balance Sheet: Total assets increased to $3.6 billion from $2.7 billion year-over-year, driven by newbuildings and assets under development. Cash reserves decreased by $94.7 million in Q3 due to heavy capital expenditures on new vessels and the Hilli conversion.
Guidance, Outlook, and Risks
Outlook: Management expects Q4 operating results to improve over Q3 due to continued positive market dynamics. However, the first half of 2015 is anticipated to be challenging as seasonal LNG pricing contango unwinds and Far East spot prices weaken. Long-term, the company expects sustained improvement in rates and utilization as incremental LNG production comes online through 2015-2016.
Strategic Initiatives:
- GoFLNG: The Hilli conversion is on budget and schedule for delivery in H1 2017. Discussions for a second vessel (Gimi) are progressing toward an investment decision.
- FSRU: The Golar Eskimo is expected to complete construction in early 2015 for service in Jordan. The Ghana FSRU project aims for a Final Investment Decision in early 2015.
- Fleet Expansion: All ten new-build carriers are expected to be delivered and operational by Q1 2015.
Risks and Contingencies:
- Market Volatility: Short-term profitability remains unsatisfactory and is highly sensitive to spot charter rates and LNG pricing dynamics.
- Project Execution: Floating LNG projects involve complex commercial and technical agreements; opportunities cannot be considered firm until binding contracts are signed.
- Financing: While the current new-building program is fully funded, additional financing is being discussed for the Golar Tundra FSRU.
Investor Verification Checklist
- Non-Cash Gains: Verify the impact of the $7.3 million non-cash gain on interest rate swaps on the reported net profit of $7.8 million.
- Capital Expenditure: Confirm the $320 million already paid toward the Hilli conversion and the remaining funding requirements for the project.
- Debt Structure: Review the $1.07 billion total debt load and the terms of the $1.125 billion syndicated term facility used for new-builds.
- Dividend Sustainability: Assess the ability to maintain the $0.45 per share dividend given the expectation of a challenging chartering market in H1 2015 and increased G&A costs.
- Project Timelines: Monitor the progress of the Ghana FSRU and West Africa GoFLNG opportunities, noting that these are not yet binding contracts.