GLNG

Business Context and Reporting Period

Company: Golar LNG Limited (Golar)
Filing Type: Form 6-K (Preliminary Fourth Quarter and Financial Year 2017 Results)
Reporting Period: Quarter ended December 31, 2017 (4Q 2017) and Full Year 2017.
Business Overview: Golar operates in LNG shipping, floating storage and regasification units (FSRU), and floating liquefaction natural gas (FLNG). Key developments include the commissioning of the FLNG Hilli Episeyo in Cameroon and a recovery in the LNG shipping market.

Key Financial Metrics

Note: EBITDA is a non-GAAP measure defined as operating income before interest, tax, depreciation, and amortization.

Material Changes vs. Prior Period

• Profitability Turnaround: The Company reported a 4Q 2017 operating income of $2.8 million, a significant improvement from a $22.9 million loss in 3Q 2017. Net income attributable to Golar swung from a $43.9 million loss to a $3.8 million profit.
• Revenue Growth: Total operating revenues increased 77% quarter-over-quarter to $57.6 million, driven by improved vessel utilization, higher hire rates, and the expiry of the obligation to charter the Golar Grand from Golar Partners.
• Non-Cash Gains: A $15.1 million unrealized gain on an FLNG derivative instrument (linked to Brent crude prices) was recognized in 4Q 2017, compared to zero in 3Q 2017. Additionally, $24.1 million in "Other financial items" was recorded due to mark-to-market gains on Total Return Swap (TRS) shares and interest rate swaps.
• Expense Increases: Vessel operating expenses rose $3.2 million due to repairs and reactivating the Gandria from layup. Administrative expenses increased $5.8 million due to legal, professional, and FEED study costs.

Guidance, Outlook, and Risks

Outlook and Management Commentary

• FLNG Hilli Episeyo: Commissioning is on track for completion in late March 2018, with customer acceptance expected in mid-April 2018. The vessel is now a cash-generating asset with commissioning hire accruing. Management expects the Brent-linked cash flows to generate approximately $15 million in additional annual cash flows at $65/bbl.
• Shipping Market: The market is structurally short by 30-35 vessels over the next 2-3 years. While rates softened seasonally in early 2018, management expects returns to increase over the course of 2018 due to supply-demand imbalances.
• Joint Ventures:
  • Golar Power: The Sergipe power project financing is on track to close in 1Q 2018, with cash flow generation expected in 2020.
  • OneLNG: Financing for the Fortuna project remains outstanding, but the Company is mobilizing the Gandria to Singapore, indicating confidence in reaching a Final Investment Decision (FID).
• Restructuring: The Company is investigating options to restructure its shipping business to capture more upside from the market recovery.

Risks and Contingencies

• Financing: The Fortuna project financing is not yet secured. The Hilli Episeyo pre-delivery facility ($525 million drawn) must be replaced by a sale and leaseback facility upon acceptance.
• Market Volatility: Results are sensitive to LNG carrier rates, Brent crude prices (affecting the FLNG derivative), and commodity prices.
• Project Execution: Delays in commissioning or acceptance of the Hilli Episeyo or delays in FID for OneLNG projects could materially impact results.

Investor Verification Checklist

• Derivative Valuation: Verify the $94.7 million FLNG derivative asset value and its sensitivity to Brent crude price fluctuations.
• Debt Refinancing: Confirm the status of the $341.3 million VIE financing due by end of 2018 and the $525 million Hilli Episeyo facility rollover.
• Project Timelines: Monitor the April 2018 customer acceptance date for Hilli Episeyo and the 1Q 2018 financing close for the Sergipe project.
• Non-GAAP Reconciliation: Review the reconciliation of EBITDA and the impact of the $24.1 million non-cash financial items on net income.
• Liquidity: Assess the $214.9 million unrestricted cash position against upcoming capital expenditures and debt maturities.