GLNG

Business Context and Reporting Period

Company: Golar LNG Limited (Golar)
Filing Type: Form 6-K (Unaudited Condensed Interim Financial Report)
Reporting Period: Nine months ended September 30, 2019
Business Overview: Golar is a midstream LNG company engaged in the transportation, regasification, and liquefaction of natural gas. As of November 2019, Golar and its affiliates (Golar Partners and Golar Power) operate a combined fleet of 27 vessels, including 18 LNG carriers, 8 FSRUs, and 1 FLNG. Golar directly owns 12 LNG carriers, 1 FSRU, and the Hilli Episeyo FLNG.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Shift: Total operating revenue increased 24% to $309.7 million, driven primarily by the FLNG segment. The Hilli Episeyo FLNG generated $163.6 million in liquefaction services revenue (up from $73.1 million in 2018). Conversely, the Vessel Operations segment revenue declined 17% to $146.1 million due to lower utilization, increased drydocking days (156 days vs. 28 days in 2018), and lower charter rates.
• Net Loss: The company reported a net loss of $166.8 million compared to a net income of $142.0 million in the prior year. This reversal was primarily caused by:
  • Impairment Charges: A $41.6 million non-cash impairment charge, including $34.3 million on the Golar Viking (triggered by a future sale agreement) and $7.3 million on an investment in OLT-O.
  • Derivative Losses: A $38.0 million loss on derivative instruments, largely due to a $30.6 million unrealized loss on the Total Return Swap (equity swap) and a $43.4 million unrealized loss on the oil derivative instrument embedded in the Hilli contract.
  • Affiliate Losses: Equity in net losses of affiliates increased to $47.6 million (from a loss of $3.5 million), driven by losses in Golar Partners and Golar Power.
• Cost Reductions: Voyage, charterhire, and commission expenses decreased 43% to $36.1 million due to reduced vessel utilization and lower bunker consumption during drydocking.

Guidance, Outlook, and Risks

• FLNG Projects: The Gimi conversion to an FLNG is underway with an expected completion in 2022. A $700 million financing facility was secured in October 2019, with the first drawdown of $65 million completed in November 2019. The Gandria is also earmarked for FLNG conversion.
• Liquidity and Dividends: The company suspended dividends for two quarters to fund the buy-back of shares underlying the Total Return Swap. In November 2019, 1.5 million shares were repurchased at a cash cost of $69.5 million. Management asserts sufficient liquidity for the next 12 months based on stress testing and ongoing financing discussions.
• Key Risks:
  • Financing: Inability to secure additional financing for vessel conversions or operations on acceptable terms.
  • Counterparty Performance: Risks related to the BP Greater Tortue / Ahmeyim Project and the ability of joint venture partners to meet obligations.
  • Market Conditions: Volatility in LNG carrier rates, FSRU/FLNG demand, and commodity prices.
  • Tax and Regulatory: Potential challenges to UK tax lease benefits (HMRC litigation) and compliance with economic substance laws in Bermuda and the Marshall Islands.

Investor Verification Checklist

• Impairment Validity: Verify the fair value assumptions used for the $34.3 million impairment on the Golar Viking and the $7.3 million write-down of the OLT-O investment.
• Derivative Exposure: Assess the impact of the $30.6 million unrealized loss on the Total Return Swap and the $43.4 million unrealized loss on the oil derivative instrument on future earnings.
• Debt Covenants: Review compliance with financial covenants (tangible net worth, working capital) given the significant net loss and high debt load ($2.55 billion).
• FLNG Financing: Confirm the status of the remaining $635 million drawdown on the Gimi facility and the timeline for the 2022 commissioning.
• UK Tax Lease: Monitor the status of HMRC inquiries regarding the Methane Princess lease, with a potential exposure range estimated at £0 to £115 million.