GLNG

Business Context and Reporting Period

Company: Golar LNG Limited (Golar)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2014
Business Overview: Golar is a mid-stream LNG company engaged in the transportation, regasification, liquefaction, and trading of LNG. As of June 30, 2014, the fleet consisted of eight vessels and nine newbuildings. The company is actively transitioning into floating liquefaction natural gas vessels (FLNGV) through the conversion of existing carriers.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased by 35% ($22.4 million) primarily due to a decline in charter rates, lower utilization of spot market vessels, and newbuildings being mostly off-hire. This was partially offset by revenue from the Golar Igloo prior to its disposal.
• Net Loss: The company reported a net loss of $11.2 million compared to net income of $144.5 million in the prior year. This shift was driven by a $30.3 million decrease in gains on disposals to Golar Partners and a $83.6 million swing in other financial items (primarily interest rate swap losses).
• Financial Items: Other financial items swung from a gain of $45.1 million in 2013 to a loss of $38.5 million in 2014. This was largely due to a $75.1 million decrease in unrealized gains on interest rate swaps caused by falling long-term swap rates.
• Expense Increases: Voyage expenses increased 167% ($5.9 million) due to lower utilization and positioning costs for newbuildings. Depreciation increased 39% due to new vessel deliveries.

Guidance, Outlook, and Material Events

• FLNGV Projects:
  • Hilli Conversion: Contract signed with Keppel Shipyard for conversion to an FLNGV. Estimated total cost is $1.3 billion. Expected delivery in ~31 months. Funded partly by a $660.9 million equity offering closed June 30, 2014.
  • Gimi Conversion: Negotiating definitive documentation with Keppel. Expected initial payment of $150 million to secure long-lead items. Delivery expected Q4 2017 or Q1 2018.
• Equity Offering: Closed a registered offering of 12.65 million common shares on June 30, 2014, raising net proceeds of $660.9 million to fund the Hilli conversion.
• Asset Disposal: Sold the Golar Igloo FSRU to Golar Partners in March 2014 for a net gain of $34.7 million (excluding deferred gain).
• Market Outlook: Management anticipates top-line performance in line with the prior quarter with potential for modest profitability improvement, noting continued softness in LNG spot rates.
• Dividends: Declared a cash dividend of $0.45 per share for the quarter ended June 30, 2014, payable in September 2014.
• Auditor Change: Engaged Ernst & Young LLP as principal accountants in August 2014, dismissing PricewaterhouseCoopers LLP.

Investor Verification Checklist

• FLNGV Funding: Verify the sufficiency of the $660.9 million equity raise against the $1.3 billion estimated cost for the Hilli conversion and the status of the remaining funding sources.
• Interest Rate Risk: Assess the impact of the $33.7 million loss on interest rate swaps and the company's exposure to further rate fluctuations given the $1.5 billion notional swap portfolio.
• Liquidity vs. Commitments: Confirm that the $484.7 million cash balance and undrawn credit facilities ($1.3 billion) are sufficient to cover the $1.2 billion in outstanding newbuilding contractual commitments due in 2014-2015.
• Legal Contingencies: Review the status of the Golar Viking arbitration claim (potential loss up to $31.5 million) and the NR Satu pipeline damage claim (estimated settlement $3.3 million).
• Related Party Transactions: Monitor the terms of the Keppel shareholder agreement regarding the Hilli and the ongoing relationship with Golar Partners for vessel dropdowns.