Business Context and Reporting Period
Company: Golar LNG Limited
Filing Type: Form 6-K (Interim Results)
Reporting Period: Second Quarter ended June 30, 2014
Filing Date: August 26, 2014
Golar LNG Limited operates in the LNG shipping and floating liquefaction sectors. The quarter was marked by the delivery of the LNG carrier Golar Crystal and a significant equity raise to fund the company's first Floating Liquefaction Vessel (FLNGV) project, the conversion of the Hilli.
Key Financial Metrics
| Metric | Q2 2014 (Company) | Q2 2014 (Group-wide*) | Q1 2014 (Company) |
|---|---|---|---|
| Net Income (Loss) | $(24.2) million | N/A | $13.0 million |
| EBITDA | $1.1 million | $84.3 million (Pro-forma) | $1.1 million |
| Operating Revenue | $21.1 million | $119.9 million | $21.0 million |
| Operating Expenses | $31.7 million | $25.7 million | $37.1 million |
| Depreciation & Amortization | $12.1 million | $31.1 million | $12.3 million |
| Interest Expense | $1.4 million | $12.4 million | $2.2 million |
| Cash & Equivalents (End of Period) | $484.7 million | N/A | $158.6 million |
| Dividend Per Share | $0.45 | N/A | $0.45 |
*Group-wide results include the consolidation of Golar LNG Partners LP.
Material Changes vs. Prior Period
- Net Loss vs. Profit: The Company reported a net loss of $24.2 million in Q2, compared to a net profit of $13.0 million in Q1. This reversal was primarily driven by a non-cash loss of $13.6 million on interest rate swaps due to falling long-term interest rates and the absence of a one-time gain on the disposal of the Golar Igloo to Golar Partners (which occurred in Q1).
- Revenue Stability: Company operating revenue remained flat at $21.1 million, consistent with Q1. However, Group-wide revenue increased to $119.9 million from $106.2 million, driven by a full quarter of revenue from the Golar Igloo and improved utilization of the Golar Seal and Golar Viking.
- Cost Reductions: Voyage costs decreased significantly from $6.1 million in Q1 to $3.2 million in Q2. Vessel operating costs fell by $2.0 million to $11.8 million due to optimized crewing levels and the layup of the Golar Gimi.
- Liquidity Surge: Cash and cash equivalents increased from $158.6 million at the end of Q1 to $484.7 million at the end of Q2, following a $661 million equity raise in June.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Market Conditions: Management expects the chartering market to remain weak for the next 12-18 months due to a 1.6% contraction in LNG production over the last two years versus a 6% increase in vessel supply. However, recent spot rates have shown short-term strength due to storage plays exploiting the contango in LNG prices.
- Q3 Expectations: Operating results for Q3 are expected to show minor improvement over Q2 due to improved utilization of spot vessels, though overall results for the balance of the year are anticipated to be generally in line with the first half of 2014.
- FLNG Strategy: The Company has made a Final Investment Decision (FID) on the conversion of the Hilli to an FLNGV, with delivery expected in February 2017. The Board aims to secure a deployment contract before year-end.
- Dividend Policy: The Board maintains the quarterly dividend at $0.45 per share, citing a strong financial position and the need for stable shareholder returns during a period of rapid growth investment.
Risks and Contingencies
- Market Volatility: Spot and short-term chartering markets remain challenging. Low effective utilization remains a major concern despite rate stabilization.
- Project Execution: The aggressive FLNG strategy is dependent on successful project execution, solid operations, and overall demand. The first employment of the Hilli may initially cover only 2-3 of the 4 planned trains, dampening initial income.
- Interest Rate Sensitivity: The Company faces non-cash mark-to-market losses on interest rate swaps when long-term rates decrease, as seen in Q2.
Investor Verification Checklist
- Equity Raise Utilization: Verify the deployment of the $661 million raised in June 2014, specifically regarding milestone payments for the Hilli FLNG conversion.
- FLNG Contract Status: Monitor progress on securing a final employment contract for the Hilli FLNGV, with a target of year-end 2014.
- Utilization Rates: Track the effective utilization of the fleet, particularly the newly delivered Golar Crystal and the Golar Viking, as low utilization remains a primary risk.
- Interest Rate Swaps: Review the impact of fluctuating interest rates on non-cash financial items and net income volatility.
- Dividend Sustainability: Assess the ability to maintain the $0.45 per share dividend given the capital-intensive nature of the new FLNG project and weak market conditions.